In a surprising turn of events, a Delaware judge has invalidated Elon Musk’s pay package from Tesla, which has played a significant role in elevating him to one of the wealthiest individuals in history. The judge, responding to a lawsuit from Tesla shareholders, deemed the pay package excessive and called for Musk to return the unwarranted compensation.
The controversial pay package was devised in 2018 by Musk and the Tesla board, entailing lucrative stock options contingent on the company achieving specific revenue, profit, and sharing objectives. The package allowed Musk to acquire approximately 304 million Tesla shares at a preset price of $23.34 per share if the outlined goals were met. With the objectives successfully achieved, Musk was entitled to $51.1 billion worth of stock by the end of Tuesday’s trading, issued in 12 separate grants linked to specific performance goals. Per the agreement, Musk was required to retain the stock for a minimum of five years.
Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery, in a ruling unexpected by many, sided with Tesla shareholders who had challenged the pay package. The judge highlighted concerns about the company’s board, consisting of individuals closely associated with Musk, including his brother Kimbal. This proximity to Musk, who holds immense influence over these board members due to their financial ties, led the judge to conclude that Musk could essentially dictate the terms of the package. Additionally, Chancellor McCormick criticized the package as unnecessary to motivate or retain Musk, considering his existing ownership of tens of billions of dollars worth of Tesla stock. She also noted deficiencies in the information provided to shareholders when they voted to approve the plan.
“The process leading to the approval of Musk’s compensation plan was deeply flawed,” commented Chancellor McCormick.
Following the ruling, Musk took to his social media platform, X, to express his discontent, suggesting that companies should avoid incorporating in Delaware. He shared a Wall Street Journal op-ed titled “Delaware Is Trying to Drive Away Corporations.” Tesla, however, did not provide an immediate response to requests for comments. It’s noteworthy that Tesla disbanded its media relations team in the fall of 2020.
As a result of the ruling, subject to likely appeals, Musk’s shares are set to be canceled, impacting both his personal fortune, currently valued at $181.4 billion, and his stake in Tesla, currently standing at 13 percent. This reduction in shares is attributed to his prior sale of shares to fund the acquisition of X, formerly known as Twitter.
The ruling raises intriguing questions about Musk’s recent assertion that he needs to own 25 percent of Tesla to advance its artificial intelligence (AI) initiatives. Musk hinted that, if not allowed, he would “prefer” to undertake such projects outside the company. The board’s response to this claim, given the recent legal setback, remains uncertain.
