Elon Musk attends a House Republicans Conference meeting at the Hyatt Regency on Capitol Hill on November 13. A federal judge this week ruled that Musk’s $50 billion pay package from Tesla cannot be reinstated.
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A judge has again rejected a more than $50 billion compensation package for Tesla CEO Elon Musk, granting a victory to the shareholder who opposed the pay amount.
In a ruling on Monday, Delaware Court of Chancery Chancellor Kathaleen McCormick said Musk and his attorneys had “no procedural ground for flipping” her previous decision in January that struck down his pay package.
Here is what you need to know about the case.
This started in 2018
Monday’s decision was just the latest twist in a long-running saga over Musk’s pay at Tesla. It’s a legal fight that dates back to 2018, when Tesla shareholders approved a 10-year performance-based pay package for Musk.
The compensation package was set up as a series of 12 milestones, each unlocking more compensation as Tesla continued to grow. Under the plan, Musk wouldn’t earn a salary, but would instead receive additional Tesla shares the more the company grew.
At the time, many thought it was absurd that Musk would ever hit the targets spelled out in the plan, as the package effectively required Musk to supercharge Tesla’s valuation more than 10 times over.
Still, the plan drew pushback from at least some Tesla shareholders, including Richard Tornetta, who objected to the compensation package and filed a lawsuit against Musk and Tesla in 2018.
In his suit, Tornetta alleged that Musk exercised outsized influence with the board when it crafted the plan and that investors were misled when they were asked to approve it.
Musk has pushed back against those allegations, denying at trial that he dictated terms of the pay package or attended meetings where it was discussed.
Lawyers for Tornetta on Monday praised McCormick’s decision and said the ruling “declined Tesla’s invitation to inject continued uncertainty into Court proceedings.”
Why so much money?
Attorneys for Musk have argued that the massive pay package was approved by shareholders and that his extraordinary compensation was tied to “extraordinarily ambitious” performance targets. According to the compensation plan that was announced in 2018, in order for Musk to meet the first milestone, Tesla’s market cap had to go up to $100 billion.
“For each of the remaining 11 milestones, Tesla’s market cap must continue to increase in additional $50 billion increments. Thus, for Elon to fully vest in the award, Tesla’s market cap must increase to $650 billion,” the company said.
Since then, the company has faced a number of setbacks, including slowing growth in EV sales and increasing scrutiny from regulators. But Tesla has also grown significantly. Today, the company is valued at over $1 trillion.
But the company’s accomplishments were not enough to sway McCormick, who in January ruled that Musk was not entitled to the pay package. In her opinion, McCormick called the process leading to the plan’s approval “deeply flawed,” citing Musk’s role as a controlling shareholder at Tesla as a potential conflict of interest.
A CEO’s superstar status can make even a truly independent director “likely to be unduly deferential” and creates a “‘distortion field’ that interferes with board oversight,” she wrote in her January opinion.
What the judge says about why she has struck down the pay package
Hoping to sway the judge, Tesla’s board took the pay package back to shareholders for a second time this past June — winning that vote with a whopping 72% majority.
But it was still not enough to change McCormick’s mind.
Not only did McCormick strike down the compensation plan for a second time on Monday, she awarded Tornetta $345 million for legal fees that can be paid with either cash or Tesla shares. Plaintiffs had asked for $5.6 billion, but the judge called that a “bold ask.”
McCormick has invited Tesla to create a new package for Musk, but the June vote did not represent a new plan, but rather ratification of the original agreement.
As with her earlier ruling, McCormick again expressed concern about Musk’s control and influence over the company, including its board.
“There were undoubtedly a range of healthy amounts that the Board could have decided to pay Musk,” McCormick wrote, but she said the board instead “capitulated to Musk’s terms and then failed to prove that those terms were entirely fair.”
McCormick also said no Delaware court had ever reversed its judgment based on a stockholder vote that took place after a trial and noted that if companies could “create” new facts after a judgment was reached that “lawsuits would become interminable.”
What will happen next?
Attorney’s for Musk did not respond to a request for comment, but writing on X, the social media platform he owns, Musk said, “shareholders should control company votes, not judges.”
Tesla also called the court’s decision “wrong” in a post on X and said it would appeal. That appeal would likely be filed in the Delaware Supreme Court.
“This ruling, if not overturned, means that judges and plaintiffs’ lawyers run Delaware companies rather than their rightful owners – the shareholders,” the company wrote Monday evening.
Attorneys for the Tesla shareholders who opposed Musk’s pay said they would defend the court’s “thoughtful and well-grounded opinions” if the ruling is appealed.
