hard no
Judge once again rejects Texas-based Tesla's multi-billion-dollar pay package for Elon Musk — now what?
For a second time, a Delaware judge has nullified a pay package that Tesla had awarded its CEO, Elon Musk, that once was valued at $56 billion.
Last week, Chancellor Kathaleen St. Jude McCormick turned aside a request from Musk's lawyers to reverse a ruling she announced in January that had thrown out the compensation plan. The judge ruled then that Musk effectively controlled Tesla's board and had engineered the outsize pay package during sham negotiations.
Lawyers for a Tesla shareholder who sued to block the pay package contended that shareholders who had voted for the 10-year plan in 2018 had been given misleading and incomplete information.
In their defense, Tesla's board members asserted that the shareholders who ratified the pay plan a second time in June had done so after receiving full disclosures, thereby curing all the problems the judge had cited in her January ruling. As a result, they argued, Musk deserved the pay package for having raised Tesla's market value by billions of dollars.
McCormick rejected that argument. In her 103-page opinion, she ruled that under Delaware law, Tesla's lawyers had no grounds to reverse her January ruling “based on evidence they created after trial.”
What will Musk and Tesla do now?
On Monday night, Tesla posted on X, the social media platform owned by Musk, that the company will appeal. The appeal would be filed with the Delaware Supreme Court, the only state appellate court Tesla can pursue. Experts say a ruling would likely come in less than a year.
“The ruling, if not overturned, means that judges and plaintiffs' lawyers run Delaware companies rather than their rightful owners — the shareholders,” Tesla argued.
Later, on X, Musk unleashed a blistering attack on the judge, asserting that McCormick is “a radical far left activist cosplaying as a judge.”
What do experts say about the case?
Legal authorities generally suggest that McCormick’s ruling was sound and followed the law. Charles Elson, founding director of the Weinberg Center for Corporate Governance at the University of Delaware, said that in his view, McCormick was right to rule that after Tesla lost its case in the original trial, it created improper new evidence by asking shareholders to ratify the pay package a second time.
Had she allowed such a claim, he said, it would cause a major shift in Delaware’s laws against conflicts of interest given the unusually close relationship between Musk and Tesla’s board.
“Delaware protects investors — that’s what she did,” said Elson, who has followed the court for more than three decades. “Just because you’re a ‘superstar CEO’ doesn’t put you in a separate category.”
Elson said he thinks investors would be reluctant to put money into Delaware companies if there were exceptions to the law for “special people.”
What will the Delaware Supreme Court do?
Elson said that in his opinion, the court is likely to uphold McCormick's ruling.
Can Tesla appeal to federal courts?
Experts say no. Rulings on state laws are normally left to state courts. Brian Dunn, program director for the Institute of Compensation Studies at Cornell University, said it's been his experience that Tesla has no choice but to stay in the Delaware courts for this compensation package.
Tesla has moved its legal headquarters to Texas. Does that matter?
The company could try to reconstitute the pay package and seek approval in Texas, where it may expect more friendlier judges. But Dunn, who has spent 40 years as an executive compensation consultant, said it's likely that some other shareholder would challenge the award in Texas because it's excessive compared with other CEOs' pay plans.
“If they just want to turn around and deliver him $56 billion, I can't believe somebody wouldn't want to litigate it,” Dunn said. “It's an unconscionable amount of money.”
Would a new pay package be even larger?
Almost certainly. Tesla stock is trading at 15 times the exercise price of stock options in the current package in Delaware, Morgan Stanley analyst Adam Jonas wrote in a note to investors. Tesla's share price has doubled in the past six months, Jonas wrote. At Monday’s closing stock price, the Musk package is now worth $101.4 billion, according to Equilar, an executive data firm.
And Musk has asked for a subsequent pay package that would give him 25 percent of Tesla's voting shares. Musk has said he is uncomfortable moving further into artificial intelligence with the company if he doesn't have 25 percent control. He currently holds about 13 percent of Tesla's outstanding shares.
