Elon Musk cannot keep Tesla pay package worth more than $55 billion, judge rules

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Elon Musk is not entitled to a landmark compensation package awarded by Tesla’s board of directors that is potentially worth more than $55 billion (€50.7 billion), a Delaware judge ruled Tuesday.

The ruling by Chancellor Kathaleen St Jude McCormick comes more than five years after a shareholder lawsuit targeted Tesla CEO Musk and directors of the company. They were accused of breaching their duties to the maker of electric vehicles and solar panels, resulting in a waste of corporate assets and unjust enrichment for Musk.

The shareholder's lawyers argued that the compensation package should be voided because it was dictated by Musk and was the product of sham negotiations with directors who were not independent of him. They also said it was approved by shareholders who were given misleading and incomplete disclosures in a proxy statement.

Defence attorneys countered that the pay plan was fairly negotiated by a compensation committee whose members were independent, contained performance milestones so lofty that they were ridiculed by some Wall Street investors, and blessed by a shareholder vote that was not even required under Delaware law. They also argued that Musk was not a controlling shareholder because he owned less than one-third of the company at the time.

An attorney for Musk and other Tesla defendants did not immediately respond to an email seeking comment.

But Musk reacted to the ruling on X, the social media platform formerly known as Twitter that he owns, by offering business advice. “Never incorporate your company in the state of Delaware,” he said. He later added, “I recommend incorporating in Nevada or Texas if you prefer shareholders to decide matters.”

Musk, who as of Tuesday topped Forbes’ list of the world’s richest people, had earlier this month challenged Tesla’s board to come up with a new compensation plan for him that would give him a 25 per cent stake in the company. On an earnings call last week, Musk, who currently holds 13 per cent, explained that with a 25 per cent stake, he can’t control the company, yet he would have strong influence.

In trial testimony in November 2022, Musk 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 the colourfully written 200-page 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 working 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."

Greg Varallo, a lead attorney for the shareholder plaintiff, praised McCormick's decision to reverse the “absurdly outsized" Musk pay package.

“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.”