A Delaware state court judge has invalidated the 2018 pay package that contributed to Elon Musk’s immense wealth, making him one of the richest individuals globally. Delaware Chancery Court Chancellor Kathaleen McCormick ruled that Musk and the Tesla board failed to prove the fairness of the compensation plan.
The stock options Musk received as part of the package, initially valued at 303 million split-adjusted shares, are now worth $51 billion. However, the court’s decision nullifies their validity. The case was argued in Delaware, where Tesla and numerous other major US corporations are incorporated. In response to the ruling, Musk tweeted, “Never incorporate your company in the state of Delaware.”
Shareholders who filed the lawsuit contended that the stock options package was excessive and that Tesla’s board members lacked independence, being too closely aligned with Musk to safeguard shareholders’ interests. They also argued that the financial targets set for Musk to qualify for each tranche of stock were not as challenging as the company had portrayed them to be. Instead, they claimed that these milestones were similar to internal growth projections shared with banks and rating agencies.
The court’s decision is seen as a victory for Tesla investors, as it eliminates the dilution caused by the enormous pay package. Greg Varallo, one of the plaintiff’s attorneys, expressed gratitude for the court’s well-reasoned decision.
Musk and the Tesla board defended the pay package, citing its approval through a shareholder vote. Excluding Musk and his brother’s votes, 73% of the shares supported the package. They also argued that shareholders had significantly benefited from the surge in Tesla’s stock value since the package was granted. The company’s market capitalization rose from $54 billion to $607 billion, with Musk playing a crucial role in this growth.
Additionally, Musk’s legal team claimed that if the package was invalidated, he would be left uncompensated. However, McCormick dismissed this argument, highlighting Musk’s preexisting equity stake, which had already provided him with billions of dollars.
Musk has previously expressed the importance of increasing his stake in Tesla to protect against outside investors gaining control of the company. He stated that he wanted to have at least 25% voting control to maintain influence but avoid being overruled.
The decision can be appealed to the Delaware Supreme Court, leaving room for further legal proceedings. Some investors and analysts suggest that Tesla should offer Musk a new pay package to ensure his continued focus on the company’s success and prevent distractions from his other ventures, such as SpaceX, X (formerly Twitter), the Boring Company, xAI, and Neuralink.
Robyn Denholm, the chair of Tesla’s board, testified that the pay package aimed to keep Musk dedicated to Tesla’s goals and prevent his attention from being diverted to other interests. Denholm emphasized that she was not aware of the costs associated with Musk’s other ventures, as they were not her hobbies.
In conclusion, a Delaware judge’s ruling has nullified Elon Musk’s 2018 pay package, which would have been worth $51 billion today. The court found that Musk and the Tesla board failed to prove the fairness of the compensation plan. The decision can be appealed, and suggestions have been made for Tesla to offer Musk a new pay package to maintain his focus on the company’s success.