Elon Musk’s $55B Tesla Pay Package Crashes and Burns in Court, Again

Justice Prevails: Delaware Court Rejects Tesla CEO Pay Package

A Delaware judge has ruled for the second time that Tesla's board failed to prove the fairness and reasonableness of Elon Musk's $55 billion compensation package, even after a new shareholder vote. The case now appears headed to the Delaware Supreme Court, potentially establishing crucial precedents for how corporate boards must handle and justify executive compensation packages.

by
December 2, 2024

In a much-anticipated decision, a Delaware judge once again rejected Elon Musk’s record-breaking 2018 Tesla compensation plan, even after the company held a new shareholder vote in 2024 attempting to ratify the $55 billion package.

The ruling comes after the judge originally found in January 2024 that the Tesla board breached its duties in approving the pay plan, ordering it rescinded. Rather than negotiate a new package, Musk and the board decided to put the same plan up for another shareholder vote, which it won.

However, the judge declined to overturn her prior decision based on this vote, finding it was too little, too late to cure the plan’s defects. This sets the stage for a likely appeal to Delaware’s Supreme Court in this closely-watched case.

Key Takeaways from the Latest Ruling

    • Judge Stands By Original Decision: Despite the new shareholder vote, the judge held firm that the Tesla board failed to prove the pay plan was fair and reasonable when approved in 2018.
    • Shareholder Vote Too Late to Fix Flaws: The court found the 2024 vote couldn’t retroactively cure the plan’s defects, as fairness is judged at the time of the original deal.
    • Musk Remains World’s Richest Without Pay Plan: Even with the plan rescinded, Musk’s Tesla stock holdings still make him the world’s wealthiest person by far.
    • Potential Impact on CEO Pay Remains to Be Seen: Some say the ruling may rein in excessive CEO compensation, while others argue it was a unique case unlikely to broadly impact pay practices.
    • Appeal to Delaware Supreme Court Likely: Given the unprecedented size of the pay plan and novelty of the post-trial shareholder vote issue, many expect the case to be appealed.

Case Background & Procedural History

    • The Tesla board approved a 10-year compensation plan for Musk in 2018 consisting of 12 tranches of stock options, each vesting upon achieving market cap and operational milestones. At stake was about $55B in compensation.
    • A Tesla shareholder sued, alleging the board breached its fiduciary duties and wasted corporate assets in rubberstamping Musk’s plan.
    • After a trial in 2022, the judge issued a post-trial opinion in Jan. 2024 finding the board failed to prove the deal was fair and reasonable. She ordered the plan’s rescission.
    • Rather than negotiating a new plan, Musk and the board decided to put the original $55B package up for another shareholder vote, which it won in June 2024.
    • With the new vote in hand, they asked the judge to vacate her prior decision and let the plan stand. She declined in her latest ruling.

Key Aspects of the Court’s Analysis

    • Entire Fairness Review Still Applied: The judge held the more stringent “entire fairness” standard of review still applied despite the shareholder vote, given that Musk was Tesla’s controlling shareholder.
    • Shareholder Vote Didn’t Cure Original Sins: While shareholders approved the plan in 2024, the judge noted the vote came years after the deal was negotiated and didn’t fix the original flaws in the process.
    • Informational Problems with New Vote: The court also found the disclosures made to shareholders before the 2024 vote were lacking in key ways.
    • Comparing to Other Mega-Grants but Still Unique: While referencing some other large executive pay plans, the court emphasized the unprecedented size and structure of Musk’s deal.
    • Appeal Seems Likely Given Stakes, Novelty: With the huge dollar values at stake and relatively untested issues around ratification votes, the judge acknowledged the case seems ripe for appeal to Delaware’s Supreme Court to weigh in.

The Road Ahead

With the Chancery Court reaffirming its original decision, attention now shifts to a potential appeal to the Delaware Supreme Court.

This sets up a possible battle royale between Musk, the world’s richest person and a formidable litigant, and Tesla shareholders aiming to claw back what they see as an unprecedented corporate giveaway.

In the meantime, all eyes are on Tesla to see if the board will attempt to negotiate a new pay package with Musk to keep him content, even with his massive existing stake, or if he may turn his attention further to his other ventures like X and SpaceX.

However the situation ultimately resolves, this case seems destined to shape the executive compensation landscape and be studied in boardrooms and law school classrooms for years to come.

Also See

Musk v. OpenAI: Injunction Challenges Company’s Pivot from Non-Profit to For-Profit

JPMorgan Drops $162 Million Lawsuit Over Musk’s Infamous $420 Tweet

Blade Robber 2049? Tesla, Musk, and Warner Bros. Discovery Sued for AI Heist of ‘Blade Runner 2049’

Facebooktwitterredditpinterestlinkedinmail