A Delaware judge issued a ruling on Tuesday favoring investors who contested billionaire Elon Musk’s $56 billion compensation package at Tesla, deeming it excessive. The court decision, revealed in a court filing, determined that the electric-vehicle maker’s board had improperly set Musk’s compensation and invalidated the package. Should the ruling withstand any potential appeal, Tesla’s board will need to devise a new compensation plan for Musk.
Responding on Twitter, Musk remarked, “Never incorporate your company in the state of Delaware.”
The lawsuit, initiated by Tesla shareholder Richard Tornetta five years ago, accused Musk of unduly influencing negotiations surrounding the compensation package and alleged that the board lacked independence in its decision-making. The court’s verdict directed Tornetta to collaborate with Musk’s legal team on implementing the judge’s ruling, which remains subject to appeal to the Delaware supreme court.
Tesla’s arrangement with Musk stands as the largest compensation deal ever for an executive, significantly contributing to his vast fortune, one of the world’s largest. Musk testified during the compensation trial in November 2022, stating that the funds would be allocated towards financing interplanetary travel. “It’s a way to get humanity to Mars,” he testified. “So Tesla can assist in potentially achieving that.”
Tesla directors contended during the trial that the compensation package was essential to ensure Musk’s continued dedication to the company, characterizing it as “a great deal for shareholders” contributing to the company’s remarkable success.
However, the judge opined that the defense failed to demonstrate the necessity of the “historically unprecedented compensation plan” to retain Musk’s commitment to Tesla. She instructed the parties to collaborate on a final order to implement her decision.
“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?” Judge Kathaleen St J McCormick wrote in her decision.
Tornetta’s legal team argued that the Tesla board failed to disclose to shareholders that the goals were easier to attain than acknowledged and that internal projections indicated Musk would swiftly qualify for significant portions of the pay package.
Additionally, they contended that the board had a duty to propose a smaller compensation package or seek another CEO and should have required Musk to work full-time at Tesla rather than pursuing other ventures, such as his acquisition of the social media company Twitter, renamed X, and his involvement in various startups, including Neuralink, the Boring Co, and SpaceX.
The compensation package comprises stock option awards enabling Musk to purchase Tesla stock at heavily discounted prices as specified financial and operational milestones are achieved, with a requirement to hold the acquired stock for five years. Musk qualified for all 12 tranches or performance targets outlined in the plan, without any guaranteed salary.
The ruling will prompt renewed focus on Tesla’s forthcoming compensation negotiations with Musk. Tesla’s valuation skyrocketed to briefly surpass $1 trillion in 2021, up from $50 billion when the compensation package was negotiated. The ruling also follows Musk’s reiterated desire for 25% voting control of Tesla, underscoring his intent to maintain influence over the company.
