In a groundbreaking decision, a Delaware Chancery Court judge has invalidated Elon Musk’s record-breaking 2018 Tesla pay package. Shareholders who sued the board over the compensation agreement claimed it was “the largest in human history.” Chancellor Kathaleen McCormick, who previously presided over Musk’s legal battle with Twitter, ruled that the process leading to the approval of Musk’s compensation plan was deeply flawed and ordered the contract to be voided.
Following the ruling, Musk expressed his dissatisfaction, stating, “Never incorporate your company in the state of Delaware.” This decision comes as a blow to the Tesla CEO, who now faces the consequences of a compensation plan that has been deemed inappropriate.
The lawsuit, brought by Tesla stockholder Richard Tornetta, aimed to invalidate the grant worth up to $56 billion if the electric automaker achieved certain market cap and financial milestones. Tornetta accused the Tesla board of being “conflicted” and “supine” to Musk, alleging that he designed the package himself and pushed it through without fully informing shareholders.
Compensation cases like this one are rare and have a high bar to meet. One notable case was the unsuccessful lawsuit against the board of Walt Disney in 2005, which involved a $140 million severance payment to Michael Ovitz. Shareholders claimed that the board was stacked with friends and associates of CEO-chairman Michael Eisner.
In this case, the plaintiffs argued that the Tesla directors were close friends and business associates of Musk and his family, creating a conflict of interest. They also claimed that Musk effectively controlled the company and the board as Tesla’s founder and largest shareholder, even without a majority stake.
Directors of Tesla, however, argued that the board was independent and carefully studied the compensation package with advice from outside experts. This lawsuit raises important questions about CEO pay and the justification for high compensation packages.
Musk’s 2018 package consisted of 12 tranches of 100 million stock options, each requiring Tesla’s market cap to increase by $50 billion, up to $650 billion, and meet specific financial milestones. The first tranche vested in May 2020, and Musk has achieved 11 of the 12 tranches. At the time, achieving these milestones was uncertain, as Tesla faced challenges and was not yet sustainably profitable. However, as Tesla’s shares skyrocketed, Musk became the richest person in the world.
Following the court’s ruling, Tesla shares fell in after-market trading. The defendants acknowledged that the 2018 plan was designed specifically for Musk and was not a typical pay package for an ordinary executive overseeing a mature company.
Judge Kathaleen concluded that the plaintiff is entitled to rescission, and the parties will work together to implement the court’s decision and address any remaining issues, including fees, to bring this matter to a conclusion at the trial level. This decision marks a significant development in the ongoing debate over executive compensation and the role of boards in approving such packages.
