“Landmark Ruling: Judge Strikes Down Elon Musk’s Record $56 Billion Tesla Pay Package.
A Delaware judge has ruled on Elon Musk’s substantial $56 billion pay package from Tesla. The judge has expressed concerns about the size of the compensation and its fairness to the company’s shareholders.
The drop in Tesla’s shares suggests that investors are reacting to the news of the judge’s ruling on Elon Musk’s $56 billion pay package. The market often responds to significant legal decisions that can impact a company’s leadership and financial outlook.
The judge’s findings indicate that the pay package, which is considered the largest in corporate America, might be invalidated due to concerns about the negotiation process.
Kathaleen McCormick, from Delaware’s Court of Chancery, criticized Tesla’s board for not questioning whether Elon Musk’s $55.8 billion pay package was necessary for retaining him and achieving Tesla’s goals. The judge suggested the board may have been influenced by Musk’s charisma rather than objectively evaluating the plan’s essentiality.
Kathaleen McCormick’s opinion instructs the Tesla shareholder challenging the pay plan to collaborate with Elon Musk’s legal team in drafting an order to implement the decision. After reaching an agreement on the final order and attorney fees for the shareholder, which Tesla will cover, the decision can be appealed.
Elon Musk advises against incorporating in Delaware in a post on X, a platform he acquired in 2022. After buying Twitter, which was initially incorporated in Delaware, Musk shifted its state of incorporation to Nevada.
In response to an email seeking comment, Musk’s lawyer did not immediately reply.
Attorney Greg Varallo, representing Tesla shareholder Richard Tornetta who initiated the 2018 lawsuit, expressed optimism, stating, “Good day for the good guys.”
The ruling is subject to appeal, with the option to bring the case before the Delaware Supreme Court.
In her 201-page opinion, Judge McCormick noted the extraordinary size of the compensation plan, describing it as “an unfathomable sum” seemingly designed to align with Musk’s vision for “a good future for humanity.”
Elon Musk testified in November 2022 that the substantial compensation package was intended to finance interplanetary travel, specifically stating, “It’s a way to get humanity to Mars, so Tesla can assist in potentially achieving that.”
The ruling on Elon Musk’s compensation is significant as it contributes a substantial part of his fortune, estimated at $210.6 billion by Forbes. This places him just ahead of LVMH CEO Bernard Arnault. The decision will draw attention to Tesla’s upcoming compensation negotiations with Musk.
In a January post on X, Musk expressed discomfort leading Tesla without 25% voting control. He owned around 13% at that time, and negotiations were set to begin after the ruling by McCormick.
Legal expert Brian Quinn, a professor at Boston College Law School, believes that Elon Musk’s recent demand for 25% voting control is unlikely to be approved in light of the way the board process was described during the trial. He stated, “It’s dead on arrival.”
Tesla directors, defending the compensation package during the trial, argued that the substantial payment was necessary to ensure Elon Musk, one of the world’s most dynamic entrepreneurs, remained dedicated to the electric-vehicle maker. Antonio Gracias, a Tesla director from 2007 to 2021, characterized the package as “a great deal for shareholders,” attributing it to the company’s extraordinary success.
Tornetta’s legal team argued that Tesla’s board failed to disclose to shareholders that the compensation goals were more attainable than portrayed, with internal projections suggesting Musk would rapidly qualify for substantial portions of the pay package.
They contended that the board had a duty to propose a smaller pay package or seek an alternative CEO. Additionally, they argued that the board should have insisted on Musk working full-time at Tesla rather than allowing him to divert attention to side projects such as SpaceX and X.
Elon Musk’s compensation package includes stock option awards tied to achieving financial and operational goals, allowing him to purchase Tesla stock at discounted prices. To receive the benefits, he must hold the acquired stock for a period of five years. Musk successfully qualified for all 12 tranches or performance targets outlined in the plan, and it’s noteworthy that he was not guaranteed any salary.
The value of Tesla soared from $50 billion to briefly surpass $1 trillion in 2021, reflecting the company’s remarkable growth since the negotiation of the compensation package. Amit Batish from Equilar, an executive pay research firm, estimated in 2022 that Musk’s package was approximately six times larger than the combined pay of the 200 highest-paid executives in 2021.
In a separate legal development, Tesla’s directors agreed in July to return $735 million to the company to settle shareholder allegations from a lawsuit filed in 2020. The lawsuit contested claims of overpayment to the directors, particularly in relation to options granted starting in June 2017.
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