Delaware Judge Invalidates Elon Musk’s Tesla Pay Package

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Five years ago, the board of directors of Tesla approved a compensation package for Elon Musk that far exceeded any executive pay plan in the history of the world. If Musk hit certain targets, he would be entitled to total compensation of $56 billion. Richard Tornetta, a Tesla shareholder, sued claiming the package was outrageously large and an affront to shareholders like himself.

At issue are the rights of shareholders in a publicly held corporation. The shibboleth we hear all the time is that the sole duty of a corporation is to maximize shareholder value. That implies all shareholders, not just a few or a certain individual. In his lawsuit, Tornetta alleged that the package was excessive to the point that it was a waste of corporate assets and constituted unjust enrichment for Musk.

Musk Awarded Stock Options Instead Of A Salary

The compensation package includes stock options that allow Musk to buy Tesla stock at steeply discounted prices as escalating financial and operational goals were met. Once shares were purchased by exercising the options, he must hold the acquired stock for five years. Musk has qualified for all 12 tranches or performance targets in the plan. The package did not guarantee Musk any salary.

Tornetta certainly had reason to believe the pay package was excessive. Amit Batish at Equilar, an executive pay research firm, estimated in 2022 that Musk’s package was around six times larger than the combined pay of the 200 highest paid executives in 2021, according to The Guardian.

As a shareholder, Tornetta believed that Musk had too much influence over the board of directors, most of whom were hand picked by him. He suggested the board was just a rubber stamp for Musk’s wishes, and breached its fiduciary duty to act independently and in the best interests of all shareholders. Tesla directors last July agreed to return $735 million to the company to settle shareholder allegations brought in a separate lawsuit filed in 2020 that they overpaid themselves.

Lawyers for Tornetta also argued the Tesla board never told shareholders that the goals were easier to achieve than the company was acknowledging and that internal projections showed Musk was quickly going to qualify for large portions of the pay package. They also claimed the board had a duty to offer a smaller pay package or look for another CEO and that they should have required Musk to work full time at Tesla instead of allowing him to focus on other projects. In 2022, he bought the social media company Twitter, which he renamed X, and he has founded several startups, including the brain implant company Neuralink, tunneling enterprise the Boring Co, and SpaceX.

A Ruling Against Musk And Tesla

On January 30, 2024. Chancellor Kathaleen St. Jude McCormick in Delaware agreed and invalidated the compensation package. In her ruling, she wrote, “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?”

MSN News reports that in testimony Musk gave in November of 2022, he 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 her 200 page long decision. “Musk had extensive ties with the persons tasked with negotiating on Tesla’s behalf.”

McCormick specifically cited Musk’s long business and personal relationships with compensation committee chairman Ira Ehrenpreis and fellow committee member Antonio Gracias. She also noted that the group working on the pay package included general counsel Todd Maron who was Musk’s former divorce attorney. “In fact, Maron was a primary go-between Musk and the committee, and it is unclear on whose side Maron viewed himself,” the judge wrote. “Yet many of the documents cited by the defendants as proof of a fair process were drafted by Maron.”

McCormick concluded that the only suitable remedy was for Musk’s compensation package to be rescinded. “In the final analysis, Musk launched a self-driving process, recalibrating the speed and direction along the way as he saw fit,” she wrote. “The process arrived at an unfair price. And through this litigation, the plaintiff requests a recall.”

Musk Responds — Sort Of

McCormick’s ruling prompted Musk to complain on the social media site he owns, “Never incorporate your company in the state of Delaware. I recommend incorporating in Nevada or Texas if you prefer shareholders to decide matters.”

The timing of the decision is interesting. The Guardian reports that during a Tesla earnings call last week, Musk said he wanted the board to award him enough shares to bring him up to a 25 percent ownership stake in the company. At the present time, he owns about 13 percent of the outstanding shares of the company. He explained that with a 25% stake, he wouldn’t be able to control the company but he would have strong influence over how it is run.

Some may find his claim that he doesn’t control the company now to be disingenuous. As we learned in the latest Musk biography by Walter Isaacson, he has personally delayed work on a more affordable car for years while he pursued his dream of producing a fleet of robotaxis. There are few if any shareholders in the world who exert more control over how a corporation operates than Musk.

Musk may be critical of the corporate laws of Delaware, but the state has been the most business friendly in America for generations, which is why virtually every major corporation makes it their legal home. “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.”

The judge has ordered the parties to attempt to negotiate a new compensation package that is not so one sided, but how that will play out when Musk wants more shares, not less, is unclear. And of course Tesla will appeal the judge’s decision, which is why it is 200 pages long. An experienced judge knows appellate courts can only overturn a decision if they find the trial judge made significant errors of law or fact. The judge has made certain that her findings are amply supported by the record, making a reversal on appeal unlikely.

The Takeaway

Opinions are like noses — everybody has one. Some people think Elon Musk is a god. Others think just the opposite. Here at CleanTechnica, we have members of the team on both sides of the fence. Nevertheless, the fact that a judge in a business friendly state like Delaware ruled in favor of the plaintiff suggests that something about the compensation package offered to Musk was too much for the court to swallow.

Defense attorney Evan Chesler argued at trial that the compensation package was a “high-risk, high-reward” deal that benefitted not just Musk, but Tesla shareholders. After the plan was implemented, the value of the company climbed from $53 billion to more than $800 billion, having briefly hit $1 trillion. He said Tesla made sure the $55 billion compensation figure was included in the proxy statement because the company wanted shareholders to know that “this was a heart-stopping number that Mr. Musk could earn.” Heart stopping it may be, but in the final analysis it gave the judge heartburn.

The problem for Musk is he wants the money from investors that a publicly traded corporation makes possible but wants to run the company as his own private fiefdom. He can’t have it both ways, which the judge’s ruling makes abundantly clear.

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