In a significant legal development, a Delaware judge ruled on Tuesday that Tesla chief executive Elon Musk is not entitled to a compensation package awarded by Tesla’s board of directors worth nearly $56 billion. The ruling favored a shareholder who claimed that Musk was overpaid.
The judge in Delaware Chancery Court determined that the plaintiff, a Tesla shareholder, was “entitled to rescission,” approving the annulment of Musk’s 2018 compensation agreement. Judge Kathaleen McCormick emphasized that the parties must now “confer” and then submit a joint letter “identifying all issues, including fees, that need to be addressed to bring this matter to a conclusion at the trial level.”
The decision sheds light on the controversial 2018 compensation plan, which was valued at a maximum of $55.8 billion. This plan allowed Musk to receive Tesla shares in 12 tranches based on hitting certain performance criteria. The judge’s opinion, spanning 201 pages, questioned the necessity of such an exorbitant compensation plan and criticized the board’s oversight.
“Swept up by the rhetoric of ‘all upside,’ or perhaps starry-eyed by Musk’s superstar appeal, the board never asked the $55.8 billion question: Was the plan even necessary for Tesla to retain Musk and achieve its goals?” wrote Judge McCormick. She added, “The incredible size of the biggest compensation plan ever — an unfathomable sum — seems to have been calibrated to help Musk achieve what he believed would make ‘a good future for humanity’.”
In response to the ruling, Musk posted a message on X (formerly Twitter), stating, “Never incorporate your company in the state of Delaware.” As of now, a lawyer for Musk has not provided an immediate response to the ruling.
The aftermath of the decision saw Tesla’s share price dropping more than three percent in after-hours trading. The impact on the market reflects the significance of the ruling, indicating investors’ concerns about the company’s leadership and compensation practices.
Greg Varallo, who represented the shareholders, expressed gratitude for the court’s decision, stating, “We are enormously grateful for the court’s thorough and extraordinarily well-reasoned decision in turning back the Tesla board’s absurdly outsized pay package for Musk.” He emphasized that the court’s decision would directly benefit Tesla investors by eliminating the dilution resulting from the substantial pay package.
Elaborating on Musk’s 2018 compensation plan, Judge McCormick described it as “the largest potential compensation opportunity ever observed in public markets by multiple orders of magnitude.” The plan allowed Musk to receive Tesla shares based on specific performance criteria, making it an unprecedented and controversial arrangement.
During the trial in Delaware, Musk defended the compensation plan, highlighting the challenging financial position Tesla faced at the time it was approved. He stated that investors “thought we would fail and go bankrupt,” and the company was in a precarious financial situation. However, since the announcement of the compensation plan, Tesla’s share price has surged, making it the world’s most valuable car maker by market capitalization.
In her ruling, Judge McCormick criticized the flawed process leading to the approval of Musk’s compensation plan, citing Musk’s “extensive ties” to the people negotiating the deal. The chair of the compensation committee, Ira Ehrenpreis, had a 15-year relationship with Musk, and another committee member, Antonio Gracias, had a business relationship spanning over two decades and regularly vacationed with Musk’s family. Judge McCormick emphasized that given these relationships, meaningful negotiation over the terms of the plan was lacking.
The ruling against Musk’s compensation package raises questions about executive compensation practices and the role of boards in overseeing such arrangements. As the legal battle continues, it remains to be seen how this decision will impact Tesla’s corporate governance and the broader landscape of executive compensation in the business world.