Delaware Judge Denies Elon Musk’s $56 Billion Tesla Pay Package
In a recent ruling, a Delaware judge has rejected Elon Musk’s hefty $56 billion compensation package for Tesla. The decision came after a trial that centered around Musk’s 2018 pay plan, which offered no salary but substantial stock options based on performance. The lawsuit was filed by a Tesla shareholder named Richard Tornetta, who argued that the company violated its fiduciary duties by granting Musk the package. Tornetta claimed that Tesla failed to provide proper disclosures and that the board had conflicts of interest.
Delaware’s Court of Chancery Judge Kathaleen McCormick agreed with the shareholder, concluding in a 200-page ruling that the board was swayed by Musk’s superstar appeal and did not consider whether the pay plan was necessary for Tesla’s success. McCormick described Musk as a paradigmatic ‘Superstar CEO’ with significant influence over the board members negotiating his compensation. She emphasized that Musk dominated the process that led to the plan.
The judge stated that Musk’s self-directed process resulted in an unfair price and called for a recall of the plan through litigation. As a result of the ruling, Tesla will need to reconsider its approach to Musk’s compensation.
Musk’s enormous pay package played a significant role in his ascent to becoming the world’s richest man. However, he has been fluctuating between the first and second positions due to his investments in Twitter and Tesla, which are linked to the performance of Tesla’s stock. The majority of Musk’s wealth is tied up in Tesla shares.
Upon hearing the ruling, Greg Varallo, the plaintiff’s attorney, praised the decision, highlighting the benefit to Tesla investors as the dilution caused by the colossal pay package would be erased.
Judge McCormick’s ruling detailed Musk’s connections with several board members, including Todd Maron, Musk’s former divorce attorney, and long-time friends and investors Ira Ehrenpreis and Antonio Gracias. She noted that the process involved collaborative efforts with Musk, which none of the board members viewed as an arm’s length negotiation. Tesla did not provide sufficient justification for the magnitude of the pay package.
Musk argued that the extensive compensation was necessary to fund his ambitious goal of colonizing Mars, which the judge acknowledged. However, she stated that this objective was not directly linked to Tesla’s goals as outlined in the compensation plan.
Judge McCormick highlighted that the pay package for Musk was the largest in public corporate history, surpassing the median peer compensation plan by 250 times in 2017 and Musk’s own plan at that time by 33 times. She also noted that while Tesla relied heavily on Musk’s involvement for its next stage of development, the board provided no safeguards to ensure that Musk dedicated sufficient time to the company. It was revealed that Musk divided his time between Tesla, his other ventures such as SpaceX, and Twitter, now known as X.
The ruling can be appealed in Delaware Chancery Court, and it remains to be seen whether Tesla plans to challenge the decision.
Following the ruling, Musk took to X, formerly Twitter, to express his frustration, advising against incorporating companies in the state of Delaware. He suggested Nevada or Texas as alternatives, allowing shareholders to have a say. Musk conducted a poll asking if Tesla should be incorporated in Texas.
While several of Musk’s companies, including SpaceX and The Boring Company, are incorporated in Delaware, others like xAI and X have chosen Nevada. It is worth noting that this ruling comes as Musk has been advocating for more control over Tesla, requesting at least 25% of shares to lead the company’s efforts in AI and robotics.
Elon Musk presently owns approximately 13% of Tesla’s stock, making him the largest shareholder. In recent years, he has sold a significant portion of his stock to fund his purchase of Twitter.
