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A judge in Delaware has ruled that Elon Musk’s $56 billion pay package is deemed unfair, effectively voiding the largest compensation deal in corporate history.
A recent ruling by Judge Kathaleen McCormick in the Delaware Court of Chancery has determined that Elon Musk, currently the world’s wealthiest individual, will not be able to retain the 2018 compensation package. An appeal can be made against the ruling. Chancery Daily, a source that frequently updates information on the Delaware Chancery Court, first reported the decision regarding Threads.
The ruling does not offer a neat conclusion for Musk or the Tesla board. There remain unanswered questions regarding Musk’s compensation and the fate of his wealth, which is predominantly invested in his various companies.
In her ruling, McCormick stated that Tesla had the responsibility to demonstrate the fairness of the compensation plan, but they were unable to fulfill this requirement.
Musk expressed his dissatisfaction with the ruling by using X, the social media platform formerly referred to as Twitter that he possesses due to a prior decision made by McCormick. The judge presided over the legal dispute between Twitter and Musk, which ultimately resulted in his agreement to terminate his $44 billion deal. Musk funded the Twitter acquisition primarily through the sale of his Tesla stock.
“It is not advisable to incorporate your company in the state of Delaware,” Musk posted on X. Following the initial announcement, Musk took to social media to conduct a poll, seeking public opinion on whether Tesla should alter its state of incorporation in Texas.
The issue of fairness played a crucial role in the case, which began in 2019 when Tesla shareholder Richard Tornetta filed a lawsuit to invalidate Musk’s 2018 compensation agreement. Tornetta argued that the package was unfairly awarded to Musk without requiring him to prioritize the carmaker.
The compensation plan that received approval from shareholders in 2018 included a total of 20.3 million stock option awards, which were divided into 12 tranches, each consisting of 1.69 million shares. The agreement stipulated that the options would vest in 12 increments, contingent upon Tesla achieving specific milestones related to market capitalization, revenue, and adjusted earnings (excluding certain one-time charges like stock compensation).
Despite the approval of a significant number of shareholders, McCormick remained unconvinced of its fairness. The author expressed her concerns regarding the defendants’ failure to provide sufficient evidence that the stockholder vote was well-informed. This was due to inaccuracies in the proxy statement, which falsely portrayed certain directors as independent and omitted crucial details about the process.
McCormick criticized the process that led to the approval of Musk’s compensation plan, citing concerns about potential conflicts of interest due to his close relationships with the individuals involved in the negotiations, including board members. Additionally, she pointed out that the testimony clearly demonstrated that this was not just a negotiation, but rather a collaborative endeavor.
McCormick also provided an analysis of the fairness of the “price.” The defendants requested the court to evaluate the exchange between Tesla’s contributions and the benefits it received. The evaluation provided was insufficient. I am writing:
The compensation plan was not contingent on Musk dedicating a specific amount of time to Tesla, as the board did not suggest such a requirement. Caught up in the persuasive language of “all upside,” or perhaps captivated by Musk’s charismatic appeal, the board failed to consider the fundamental question: Was the plan truly essential for Tesla to keep Musk and accomplish its objectives?
She acknowledged that the defendants (Tesla) demonstrated Musk’s strong drive for ambitious goals and the crucial role he played in Tesla’s future development. However, she noted that these facts do not support the extensive compensation plan, which happens to be the largest in the history of public markets.
