A Delaware judge ruled Tuesday that Elon Musk’s $56 billion pay package is unfair, voiding the largest compensation deal in corporate history.
The ruling, handed down Tuesday in Delaware District Court by Judge Kathaleen McCormick, means Musk, the world’s richest man, cannot keep his 2018 compensation package. The decision can be appealed. Chancery Daily, which follows and reports on the Delaware Court of Chancery, first reported the Threads decision.
The decision does not provide a tidy end for Musk or the Tesla board. How Musk is compensated and what happens to his wealth, which is largely tied up in his many companies, are unanswered questions.
In her ruling, McCormick wrote that Tesla “had the burden of proving that the compensation plan was fair and they failed to meet their burden.”
Musk shared his displeasure with the decision by turning to X, the social networking site formerly known as Twitter that he owns in part thanks to an earlier decision by McCormick. The judge oversaw Twitter’s lawsuit against Musk that resulted in him agreeing to close the $44 billion deal. Musk largely funded the Twitter acquisition by selling his Tesla stock.
“Never incorporate your company in the state of Delaware,” Musk later posted on X. Musk published a poll asking whether Tesla should change its state of incorporation in Texas.
That question of “fairness” was central to the case, which began in 2019 when Tesla shareholder Richard Tornetta filed a lawsuit to void Musk’s 2018 pay deal, alleging at the time that the package was unfairly paid to Musk without demand that the automotive industry be fully concentrated.
The compensation plan approved by shareholders in 2018 included 20.3 million stock option awards divided into 12 tranches of 1.69 million shares. Under the agreement, the options vested in 12 increments if Tesla achieved certain milestones in terms of market capitalization, revenue and adjusted earnings (excluding certain one-time charges such as stock compensation).
While many may argue that it was fair because the vast majority of shareholders approved, McCormick was unmoved. He wrote because the “defendants were cannot prove that the shareholder vote was fully informed because the proxy statement inaccurately described the key directors as independent and misleadingly omitted details about the process.”
McCormick described the process that led to approval of Musk’s compensation plan as “deeply flawed,” largely because of his deep ties to people, including board members, who were supposed to be negotiating on Tesla’s behalf. He also noted that the testimony showed that this was less of a negotiation and more of a collaborative venture.
McCormick also weighed in on the law of “honor.” HeyThe defendants urged the court to compare what Tesla “gave” with what Tesla “got.” Her estimate was not enough. She writes:
“The compensation plan was not conditioned on Musk devoting any specific time to Tesla because the board never proposed such a term. Lured by its “everything upside down” rhetoric or perhaps star struck by Musk’s superstar appeal, the board never asked the $55.8 billion question: Was the plan still necessary for Tesla to keep Musk and achieve its goals?’
He agreed that the The defendants (Tesla) proved that Musk was “uniquely motivated by ambitious goals and that Tesla desperately needed Musk to succeed in its next stage of development.” However, he added, “these facts do not justify the largest compensation plan in the history of mass markets.”
