Delaware Judge Invalidates Musk Pay Package For The Second Time

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The fight over Elon Musk’s pay package at Tesla is still going on. More than five years ago, the Tesla board of directors approved a plan that paid Musk no salary, but allowed him to purchase shares in the company at prices well below current market value if he achieved certain targets. In total, Musk stood to receive a $56 billion payday — an extraordinary amount of money by any standard. Amit Batish at Equilar, an executive pay research firm, estimated in 2022 that Musk’s package was around six times larger than the combined pay of the 200 highest paid executives in 2021, according to The Guardian.

Richard Tornetta, a Tesla shareholder, sued the company, claiming the package was outrageous and an affront to shareholders like himself. The rights of shareholders in a publicly held corporation were the subject of his complaint. The shibboleth we hear all the time is that the sole duty of a corporation is to maximize shareholder value. That implies all shareholders, Tornetta argued, not just a few or a certain individual. In his lawsuit, he alleged the package was excessive to the point that it was a waste of corporate assets and constituted unjust enrichment for Musk to the detriment of other shareholders such as himself.

Tornetta alleged that Musk had too much influence over the board of directors, most of whom were handpicked by him. He suggested the board was just a rubber stamp for Musk’s wishes and breached its fiduciary duty to act independently and in the best interests of all shareholders. Tesla directors last July agreed to return $735 million to the company to settle shareholder allegations brought in a separate lawsuit filed in 2020 that they overpaid themselves.

Lawyers for Tornetta also argued the Tesla board never told shareholders that the goals were easier to achieve than the company was acknowledging and that internal projections showed Musk was quickly going to qualify for large portions of the pay package. They also claimed the board had a duty to offer a smaller pay package or look for another CEO and that they should have required Musk to work full-time at Tesla instead of allowing him to focus on other projects.

Elon Musk Pay Package Ruled Invalid

On January 30, 2024, Chancellor Kathaleen St. Jude McCormick in Delaware agreed and invalidated the compensation package. In her ruling, she wrote, “Swept up by the rhetoric of ‘all upside,’ or perhaps starry-eyed by Musk’s superstar appeal, the board never asked the $55.8 billion question — Was the plan even necessary for Tesla to retain Musk and achieve its goals?” She ruled that because Musk was a controlling shareholder with a potential conflict of interest, the pay package must be subject to a rigorous standard. “The process leading to the approval of Musk’s compensation plan was deeply flawed,” McCormick wrote in her 200-page decision. “Musk had extensive ties with the persons tasked with negotiating on Tesla’s behalf.”

McCormick specifically cited Musk’s long business and personal relationships with compensation committee chairman Ira Ehrenpreis and fellow committee member Antonio Gracias. She also noted that the group working on the pay package included general counsel Todd Maron, who was Musk’s former divorce attorney. “In fact, Maron was a primary go-between for Musk and the committee, and it is unclear on whose side Maron viewed himself,” the judge wrote. “Yet many of the documents cited by the defendants as proof of a fair process were drafted by Maron.”

McCormick concluded that the only suitable remedy was for Musk’s compensation package to be rescinded. “In the final analysis, Musk launched a self-driving process, recalibrating the speed and direction along the way as he saw fit,” she wrote. “The process arrived at an unfair price. And through this litigation, the plaintiff requests a recall.” She then ruled in favor of Tornetta.

Musk Moves To Texas

That sent shockwaves through the Tesla ecosphere. In response, Musk quickly moved Tesla’s corporate headquarters to Texas, claiming Delaware was unfriendly to corporations. In practice, however, virtually every major corporation in America has its corporate headquarters in Delaware because its laws and court system are expressly designed to provide a stable platform for the orderly transaction of business. Chancellor McCormack is an experienced professional with a deep appreciation for the rules and policies of that state.

Following the Chancellor’s ruling, Tesla appealed and the company organized an elaborate campaign to get its shareholders to reauthorize the Musk pay package. In a vote earlier this year, the shareholders did exactly that. But Chancellor McCormick was unimpressed. On December 2, 2024, she ruled that Tesla’s board of directors was improperly influenced by Musk when it adopted the billionaire’s plan in 2018. It was the second time she rejected the pay package as excessive, sticking with her original finding in January even after shareholders backed the plan and Musk asked her to reconsider, according to Bloomberg.

“There were undoubtedly a range of healthy amounts that the board could have decided to pay Musk,” McCormick wrote in her 101-page decision. “Instead, the board capitulated to Musk’s terms.” But shortly after Monday’s ruling, the Tesla board said it will appeal the decision to the Delaware Supreme Court, a process that could take many months. Musk, with his usual flair, posted on antisocial media that the Chancellor’s latest ruling is “absolute corruption.” If this decision is upheld, it effectively means the Tesla board would have to come up with a new proposal. And there is a new wrinkle in the legal proceedings. Now that Tesla has pulled out of Delaware and re-incorporated in Texas, whose laws will ultimately prevail — Delaware or Texas? This thing could wind up in the US Supreme Court before it gets finally resolved.

Fair Is Fair

Tornetta’s legal team also took their lumps in the latest ruling. They had asked the court to award them $5.6 billion in attorney fees. “In a case about excessive compensation, that was a bold ask,” McCormick wrote. According to ABC News, while she found the methodology used to calculate the plaintiff’s fee request was sound, she deferred to rulings by the Delaware Supreme Court that fee award guidelines “must yield to the greater policy concern of preventing windfalls to counsel.” Based on that standard, “The fee award here must yield in this way, because $5.6 billion is a windfall no matter the methodology used to justify it,” McCormick wrote. A fee award of $345 million, she said, was “an appropriate sum to reward a total victory.”

The Chancellor is well aware of the rulings by the Delaware Supreme Court and based her decision on them, which makes it seem unlikely her ruling will be reversed on appeal. Musk’s remark that her behavior amounts to “absolute corruption” appears to reflect his view that he is immune from the legal strictures that apply to mere mortals. Now we will find out whether or not he is right about that. Perhaps the larger question is whether the Tesla board of directors will ever begin acting like a real board, or continue to roll over like trained seals every time Musk snaps his fingers. Given how lucrative those positions are and how opposing Musk might kill the goose that laid the golden egg, expecting any of them to do the right thing is probably too much of a stretch.