A Delaware judge ruled Tuesday that Elon Musk is not entitled to a landmark compensation package awarded by Tesla’s board of directors that could be worth more than $55 billion.
Chancellor Katherine St. Jude McCormick made the ruling more than five years ago in a shareholder lawsuit against Tesla CEO Musk and company directors. They are accused of violating their duties to the electric car and solar panel maker, causing the company’s assets to be wasted and unfairly benefiting Musk.
“The compensation plan should be scrapped”
Lawyers for shareholders argued that the compensation package should be invalid because it was determined by Musk and was the result of sham negotiations with directors who were not independent of him. They also said the proposal was approved by shareholders who disclosed misleading and incomplete information in their proxy statements.
Musk’s counter
Defense attorneys countered that the pay plan was fairly negotiated by a compensation committee whose members are independent and contained performance milestones so lofty that they were derided by some Wall Street investors and were met with trepidation. Washington law doesn’t even require support from a shareholder vote. They also argued that Musk was not a controlling shareholder because he owned less than a third of the company at the time.
Musk reacted to the ruling by offering business advice on X, the social media platform he owns, formerly known as Twitter.
“Never register your business in Delaware,” he said.
He later added, “If you want shareholders to decide things, I recommend registering in Nevada or Texas.” As of Tuesday, Musk topped Forbes’ list of the world’s richest people, and earlier this month he told Trump that Tesla’s board of directors challenged it to create a new compensation plan for him that would give him 25% of the company’s shares.
During last week’s earnings call, Musk, who currently owns 13% of the shares, explained that with a 25% stake, he would have no control over the company, but he would have strong influence.
background
In trial testimony in November 2022, Musk denied that he determined the terms of the compensation package or that he participated in any meetings of the board of directors discussing the plan, the compensation committee, or the working group that helped develop the plan.
However, McCormick argued that since Musk is the controlling shareholder, there is a potential conflict of interest and the compensation package must adhere to stricter standards.
“The process by which Musk’s compensation plan was approved was deeply flawed,” McCormick wrote in the 200-page color decision. “Musk has extensive contacts with people negotiating on behalf of Tesla.”
“Personal relationship with the Compensation Committee”
McCormick specifically cited Musk’s long-standing business and personal relationships with compensation committee chair Ira Ehrenpreis and committee member Antonio Gracias. She also noted that the working group responsible for the compensation package includes general counsel Todd Maron, Musk’s former divorce lawyer.
“In fact, Malone served as the primary intermediary between Musk and the committee, and it is unclear whose side Malone believed he was on,” the judge wrote. “However, many of the documents cited by the defendants as evidence of fair process were drafted by Malone.”
McCormick concluded that the only appropriate remedy was to eliminate Musk’s compensation package.
“The bottom line is that Musk initiated the self-driving process, readjusting speed and direction along the way as he saw fit,” she wrote. “This process has come at an unfair cost. And with this lawsuit, plaintiffs seek a recall.” Greg Varallo, lead attorney for the shareholder plaintiffs, praised McCormick’s decision to reverse the “ridiculously huge” Musk Compensation package.
“It’s really jaw-dropping that they lost in Delaware court,” said Dan Ives, an analyst at Wedbush Securities. “A ruling like this is unprecedented. I think the investors who got involved thought it was just typical. The legal noise, nothing will come of it. The fact that they went head-to-head with Tesla, Musk and the board and invalidated this decision is a huge legal decision.”
In trial testimony, Musk downplayed the idea that his friendships with some Tesla board members, including sometimes vacationing together, meant they might do his bidding.
The plan calls for Musk to receive billions of dollars in revenue if Austin, Texas-based Tesla reaches certain market capitalization and operating milestones.
For each event in which both market capitalization and operating milestones are met, Musk (who owned about 22% of Tesla when the plan was approved) will receive shares equal to 1% of the shares outstanding at the time of the grant.
If the company’s market value grows by $600 billion, his stake in the company will increase to about 28%.
Each milestone includes adding $50 billion to Tesla’s market value and achieving ambitious revenue and pretax profit growth targets. As long as he leads Tesla to a market value of $650 billion and unprecedented revenue and earnings within ten years, Musk will receive the full benefits of the $55.8 billion compensation plan.
Tesla has achieved all 12 market capitalization milestones and 11 operating milestones, providing Musk with nearly $28 billion in stock option proceeds, according to a post-trial brief filed by plaintiffs’ attorneys in January. However, stock option grants have a five-year holding period.
(Institutional investment)
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