In a significant legal setback for Tesla CEO Elon Musk, a Delaware judge has invalidated the colossal $56 billion compensation package granted by the electric vehicle manufacturer in 2018. Ironically, the judge characterized the discussions surrounding Musk’s pay as a “self-driving process,” alluding to Musk’s struggles in delivering on the promise of self-driving cars.
According to CNBC, Delaware Chancery Court Judge Kathaleen McCormick ruled on Tuesday that Elon Musk’s Tesla compensation plan, the most substantial ever bestowed upon a CEO, was deemed unfair. The ruling highlighted the failure to demonstrate that Tesla’s board adequately negotiated the package with Musk.
Judge McCormick observed that Musk, who held a 21.9 percent stake in Tesla at the time, wielded control over the process leading to the board’s approval of the plan. She noted that neither the compensation committee nor the board “acted in the best interests of the company” during the negotiation, citing a lack of substantial evidence of genuine negotiations.
In her decision, McCormick asked: “Was the richest person in the world overpaid? The stockholder plaintiff in this derivative lawsuit says so. He claims that Tesla, Inc.’s directors breached their fiduciary duties by awarding Elon Musk a performance-based equity-compensation plan.”
McCormick continued: “In the final analysis, Musk launched a self-driving process, recalibrating the speed and direction along the way as he saw fit. The process arrived at an unfair price. And through this litigation, the plaintiff requests a recall.”
Elon Musk had the opportunity to acquire 12 tranches of Tesla stock options contingent on the company achieving specific financial and operational milestones, propelling him to the position of the world’s wealthiest individual as Tesla’s valuation surged.
Nonetheless, McCormick’s ruling acknowledged shareholder Richard Tornetta’s successful demonstration that the compensation package was deemed “unfair,” and the approval process was deemed “deeply flawed.” Following the ruling, Tesla’s stock price experienced a roughly 3 percent decline.
McCormick stated: “Put simply, neither the Compensation Committee nor the Board acted in the best interests of the Company when negotiating Musk’s compensation plan. In fact, there is barely any evidence of negotiations at all. Rather than negotiate against Musk with the mindset of a third party, the Compensation Committee worked alongside him, almost as an advisory body.”
Following the ruling, Musk expressed his dissatisfaction with Delaware’s legal system through a tweet and hinted at the possibility of relocating Tesla’s incorporation to Texas. The decision might necessitate Musk to return billions of dollars in compensation already received. Both parties have the option to appeal the verdict.
Never incorporate your company in the state of Delaware
— Elon Musk (@elonmusk) January 30, 2024
