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Elon Musk is not entitled to the historic compensation package awarded by Tesla’s board potentially worth more than $55 billion, a Delaware judge ruled Tuesday.
Chancellor Kathaleen St. Jude McCormick’s ruling comes more than five years after a shareholder lawsuit targeting Tesla CEO Musk and the company’s directors. They were accused of breaching their duties to the electric vehicle and solar panel maker, resulting in a waste of corporate assets and unjust enrichment for Musk.
The shareholder’s lawyers argued that the compensation package should be vacated 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 information in a proxy statement.
Defense attorneys countered that the pay plan was negotiated fairly by a compensation committee whose members were independent, contained performance milestones so lofty they were ridiculed by some Wall Street investors, and blessed by a shareholder vote that didn’t even it was required by Delaware law. They also argued that Musk was not a majority shareholder because he owned less than a third of the company at the time.
A lawyer 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 business in the state of Delaware,” he said.
In trial testimony in November 2022, Musk denied dictating the terms of the compensation package or attending meetings in which the board of directors, his compensation committee or a task force that helped develop it discussed the plan.
McCormick determined, however, that because Musk was a majority shareholder with a potential conflict of interest, the pay package should be held to a more rigorous standard.
“The process that led to the approval of Musk’s compensation plan was deeply flawed,” McCormick wrote in the colorful 200-page decision. “Musk had extensive ties to the people charged with negotiating on behalf of Tesla.”
McCormick specifically cited Musk’s long business and personal relationships with compensation committee chairman Ira Ehrenpreis and committee member Antonio Gracias. He also noted that the task force working on the pay package included general counsel Todd Maron, Musk’s former divorce attorney.
“In fact, Maron was the primary intermediary between Musk and the committee, and it is not clear which side Maron saw himself on,” the judge wrote. “However, many of the documents cited by defendants as evidence of a fair process were drafted by Maron.”
McCormick concluded that the only appropriate remedy was to terminate Musk’s compensation package. “In the final analysis, Musk launched a process of autonomous driving, recalibrating speed and direction along the way as he saw fit,” he wrote. “The process came at an unfair price. And through this litigation, the plaintiff requests a withdrawal.”
Greg Varallo, lead attorney for the plaintiff shareholder, praised McCormick’s decision to reverse Musk’s “absurdly outsized” pay package.
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“The fact that they lost this in Delaware court is surprising,” said Dan Ives, an analyst at Wedbush Securities. “A ruling like this is unprecedented. I think investors thought this was just typical legal noise and nothing was going to come out of it. “The fact that they went toe-to-toe with Tesla, Musk and the board and overturned this is a huge legal decision.”
During his trial testimony, Musk downplayed the idea that his friendships with certain members of Tesla’s board of directors, including sometimes going on vacation together, meant they were likely to do his bidding.
The plan called for Musk to reap billions if Tesla reached certain operational and market capitalization milestones. For each occurrence of simultaneously reaching a market capitalization milestone and an operating milestone, Musk, who owned about 22% of Tesla when the plan was approved, would get shares equal to 1% of the shares outstanding at the time of the grant. . His interest in the company would grow to approximately 28% if the company’s market capitalization grew by $600 billion.
Each milestone included increasing Tesla’s market capitalization by $50 billion and meeting aggressive pre-tax profit and revenue growth targets. Musk could receive the full benefit of the pay plan, $55.8 billion, only if he led Tesla to a market capitalization of $650 billion and record revenues and profits in a decade.
Tesla has reached twelve market capitalization milestones and eleven operating milestones, providing Musk with nearly $28 billion in stock option proceeds, according to a post-trial brief filed in January by the plaintiff’s attorneys. However, stock option grants are subject to a five-year holding period.
Defense attorney Evan Chesler argued at trial that the compensation package was a “high-risk, high-reward” deal that benefited not only Musk, but also Tesla shareholders. After the plan was implemented, the value of the company, based in Austin, Texas, rose from $53 billion to more than $800 billion, having briefly reached $1 trillion.
Chesler also said that Tesla made sure the $55 billion compensation figure was included in the proxy statement because the company wanted shareholders to know that “this was an impressive figure that Mr. Musk could earn.”