Delaware Chancery Court Chancellor Kathaleen McCormick ruled against Tesla CEO Elon Musk's monumental 2018 compensation plan. This ruling, resulting from a bench trial concluded in November 2022, found that Musk and the Tesla board failed to demonstrate the fairness of the compensation package.
Comprising 303 million split-adjusted stock options now valued at $51 billion, the package has been a subject of intense scrutiny and debate. Tesla, like many major U.S. corporations, is incorporated in Delaware, a state known for its corporate-friendly laws.
However, Musk's reaction to the ruling was swift and pointed, as he advised against incorporating companies in Delaware in a recent tweet.
Shareholders vs. Musk's Compensation
Shareholders who filed the suit contested the package's excessiveness, highlighting the lack of independence among Tesla’s board members and their close ties to Musk.
They argued this relationship failed to protect the interests of shareholders effectively. Furthermore, they challenged the financial targets set for Musk to earn each block of stock, claiming these were not the "stretch performance goals" the company portrayed but rather aligned with Tesla's internal growth projections.
Greg Varallo, representing the plaintiffs, praised the court's decision for its thoroughness and reasoned approach. According to Varallo, Tesla investors stand to benefit as the "dilution from this gargantuan pay package" will now be erased.
In defense, attorneys for Musk and Tesla’s board insisted the package, approved by a shareholder vote, was justified. They emphasized the significant increase in Tesla's market value, from $54 billion at the time of the package’s approval to $607 billion, attributing this success largely to Musk's leadership.
The Outcome and Its Implications
Chancellor McCormick, however, dismissed the defense's argument that Musk would be left uncompensated without the package, pointing to Musk's substantial preexisting equity stake. Musk, who owns about 13% of Tesla's shares, had expressed his desire to increase his stake to around 25% as a safeguard against external control.
With the loss of these options, his control is significantly reduced. This ruling could have far-reaching implications for Tesla and Musk, who juggles several other ventures, including SpaceX, Twitter (rebranded as X in 2023), the Boring Company, xAI, and Neuralink.
There is speculation about whether Tesla might offer Musk a new pay package to ensure his continued focus on the company. Robyn Denholm, Tesla’s board chair, testified that the pay package aimed to keep Musk's attention on Tesla, rather than his other interests.
The decision is open to appeal to the Delaware Supreme Court, and the coming months will reveal how Tesla and Musk navigate this significant legal setback.