Delaware judge has ruled that Tesla’s colossal $56 billion pay package awarded to Elon Musk could be nullified. The judge characterized the compensation as an “unfathomable sum” and deemed it unfair to shareholders, potentially marking the demise of the largest pay package in corporate America.
Tesla’s shares experienced a 3% drop in after-hours trading following the judge’s ruling, signaling the potential impact of the decision on the electric vehicle maker’s financial landscape.
The judge’s decision challenges the validity of the pay package, asserting that it was negotiated by directors seemingly influenced by Musk’s celebrity status and the allure of allowing him to share in Tesla’s substantial growth.
Kathaleen McCormick of Delaware’s Court of Chancery criticized the board, stating, “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?”
The judge directed the Tesla shareholder who challenged the pay plan to collaborate with Elon Musk’s legal team on implementing the decision. The ruling can be appealed once the parties reach an agreement on a final order and attorney fees, which will be covered by Tesla.
“Never incorporate your company in the state of Delaware,” Musk commented on X, the social media platform he acquired in 2022, expressing his discontent with the state where Tesla is incorporated.
Despite the potential setback for Musk, the ruling received positive feedback from Greg Varallo, an attorney for the Tesla shareholder Richard Tornetta, who initiated the lawsuit in 2018, stating, “Good day for the good guys.”
The decision is subject to appeal to the Delaware Supreme Court.
McCormick’s opinion underscored the extraordinary size of the compensation plan and questioned its necessity, noting Musk’s testimony during the trial in November 2022, where he stated the funds would be used for interplanetary travel, specifically, “It’s a way to get humanity to Mars, so Tesla can assist in potentially achieving that.”
Tesla’s agreement with Musk constitutes a significant portion of his fortune, estimated at $210.6 billion by Forbes, making him one of the wealthiest individuals globally.
The ruling now shifts attention to Tesla’s upcoming compensation negotiations with Musk, who had previously expressed discomfort leading the company without obtaining 25% of the voting control. Analysts speculate on the impact of the judge’s description of the board process on Musk’s recent demand.
During the trial, Tesla directors argued that the compensation aimed to secure Musk’s dedication to the electric-vehicle maker, while Tornetta’s lawyers contended that shareholders were not adequately informed about the ease of achieving the set goals and internal projections.
The controversial compensation package grants Musk stock options to buy Tesla stock at discounted prices as financial and operational goals are met, with a mandatory five-year holding period. Musk qualified for all 12 tranches or performance targets in the plan, without a guaranteed salary.
Tesla’s value surged from $50 billion to briefly surpass $1 trillion in 2021 when the package was negotiated. Amit Batish at Equilar estimated in 2022 that Musk’s package was around six times larger than the combined pay of the 200 highest-paid executives in 2021.
In a separate lawsuit settled in July, Tesla’s directors agreed to return $735 million to the company, resolving shareholder allegations that they overpaid themselves. The lawsuit challenged options granted to directors starting in June 2017.
By Reuters Edited by Digpu Staff