Tesla Ends Controversial Indemnification Agreement With Elon Musk

Tesla Inc TSLA has ended a controversial practice where it paid its CEO Elon Musk to provide Directors and officers (D&O) liability insurance, the electric vehicle maker revealed in a filing with the U.S. Securities and Exchange Commission.

What Happened: The automaker said it paid Musk $3 million for 90 days worth of coverage — up to a total of $100 million — but didn't further extend the agreement.

"Following the lapse of the 90-day period, we did not extend the term of the indemnification agreement with our CEO and instead bound a customary directors’ and officers’ liability insurance policy with third-party carriers," Tesla said in a statement.

The Palo Alto-based company didn't reveal which carrier it has opted for to provide coverage, or the premium it was paying for the D&O policy.

Why It Matters: It is “highly unusual” for a company to replace a D&O policy with a guaranty from a company officer “for any period of time,” Kevin Hirzel, a managing member of the Detroit-based Hirzel Law firm, told CNBC, which earlier reported the news.

“Tesla’s board did the right thing in obtaining a traditional directors’ and officers’ liability insurance policy from a third-party insurer,” said Hirzel.

Charles Elson, a professor of corporate governance, said that the personal indemnification by a CEO “linked the directors too closely to the CEO.”

“Such a linkage would make it more difficult for board members to exercise good oversight on behalf of all shareholders,” Elson told CNBC.

Price Action: Tesla shares traded 0.9% lower at $416.50 in the after-hours session Monday after closing mostly unchanged at $420.28.

Photo by TED Conference on Flickr