Musk Cannot Keep Tesla Pay Package Worth More Than $55 Billion, Judge Rules

DOVER, Del. — Elon Musk is not entitled to a landmark compensation package awarded by Tesla’s board of directors that is potentially worth more than $55 billion, a Delaware judge ruled Tuesday.

The ruling by Chancellor Kathaleen St. Jude McCormick comes more than five years after a shareholder lawsuit targeted Tesla CEO Musk and directors of the company. They were accused of breaching their duties to the maker of electric vehicles and solar panels, resulting in a waste of corporate assets and unjust enrichment for Musk.

The shareholder’s lawyers argued that the compensation package should be voided because it was dictated by Musk and was the product of sham negotiations with directors who were not independent of him. They also said it was approved by shareholders who were given misleading and incomplete disclosures in a proxy statement.

Defense attorneys countered that the pay plan was fairly negotiated by a compensation committee whose members were independent, contained performance milestones so lofty that they were ridiculed by some Wall Street investors, and blessed by a shareholder vote that was not even required under Delaware law. They also argued that Musk was not a controlling shareholder because he owned less than one-third of the company at the time.

An attorney for Musk and other Tesla defendants did not immediately respond to an email seeking comment.

But Musk reacted to the ruling on X, the social media platform formerly known as Twitter that he owns, by offering business advice. “Never incorporate your company in the state of Delaware,” he said. He later added, “I recommend incorporating in Nevada or Texas if you prefer shareholders to decide matters.”

Musk, who as of Tuesday topped Forbes’ list of the world’s richest people, had earlier this month challenged Tesla’s board to come up with a new compensation plan for him that would give him a 25% stake in the company. On an earnings call last week, Musk, who holds 13%, explained that with a 25% stake, he can’t control the company, yet he would have strong influence.

In trial testimony in November 2022, Musk denied that he dictated terms of the compensation package or attended any meetings at which the plan was discussed by the board, its compensation committee, or a working group that helped develop it.

McCormick determined, however, that because Musk was a controlling shareholder with a potential conflict of interest, the pay package must be subject to a more rigorous standard.

“The process leading to the approval of Musk’s compensation plan was deeply flawed,” McCormick wrote in the colorfully written 200-page decision. “Musk had extensive ties with the persons tasked with negotiating on Tesla’s behalf.”

McCormick concluded that the only suitable remedy was for Musk’s compensation package to be rescinded.

Greg Varallo, a lead attorney for the shareholder plaintiff, praised McCormick’s decision to reverse the “absurdly outsized” Musk pay package.

“The fact that they lost this in Delaware court, it’s a jaw dropper,” said Wedbush Securities analyst Dan Ives. “It’s unprecedented, a ruling like this. I think going in investors thought it was just typical legal noise and nothing was going to come out about it. The fact that they went head-to-head with Tesla and Musk and the board and voided this, it’s a huge legal decision.”

During his trial testimony, Musk downplayed the notion that his friendships with certain Tesla board members, including sometimes vacationing together, meant that they were likely to do his bidding.

The plan called for Musk to reap billions if Tesla, which is based in Austin, Texas, hit certain market capitalization and operational milestones. For each incidence of simultaneously meeting a market cap milestone and an operational milestone, Musk, who owned about 22% of Tesla when the plan was approved, would get stock equal to 1% of outstanding shares at the time of the grant. His interest in the company would grow to about 28% if the company’s market capitalization grew by $600 billion.

Tesla has achieved all 12 market capitalization milestones and 11 operational milestones, providing Musk nearly $28 billion in stock option gains, according to a January post-trial brief filed by the plaintiff’s attorneys. The stock option grants are subject to a five-year holding period, however.

Defense attorney Evan Chesler argued at trial that the compensation package was a “high-risk, high-reward” deal that benefited not just Musk, but Tesla shareholders. After the plan was implemented, the value of the company, based in Austin, Texas, climbed from $53 billion to more than $800 billion, having briefly hit $1 trillion.

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