A Delaware judge found that Tesla CEO Elon Musk’s $55.8 billion compensation package created by the company’s board of directors in 2018 was the result of a “deeply flawed” process conducted by people with inappropriately close ties to Musk and nixed the deal.
Chancery Court Judge Kathaleen McCormick used an autonomous vehicle metaphor Tuesday to underscore her decision in the case, which was brought by Tesla shareholder Richard Tornetta in 2018.
“Was the richest person in the world overpaid?” McCormick wrote in her 200-page ruling.
“The stockholder plaintiff in this derivative lawsuit says so. He claims that Tesla, Inc.’s directors breached their fiduciary duties by awarding Elon Musk a performance-based equity-compensation plan.
“In the final analysis, Musk launched a self-driving process, recalibrating the speed and direction along the way as he saw fit. The process arrived at an unfair price. And through this litigation, the plaintiff requests a recall.”
Musk’s compensation, the highest on record for the chief executive of a publicly owned company, came in the form of deeply discounted stock options, awarded in 12 tranches or portions, that were distributed based on meeting certain company valuation and production criteria.
While Tornetta’s lawyers argued the benchmarks were easy targets, Tesla directors claimed the goals were stringent enough to require Musk to keep his attention and efforts focused on Tesla amid his other business endeavors which include SpaceX, X (formerly Twitter), Neuralink and others.
McCormick found merit in the plaintiff’s claims, writing that the Tesla board of directors, instead of conducting itself as an independent third party when structuring Musk’s compensation package, instead “worked alongside him, almost as an advisory body.”
“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?” McCormick wrote.
Musk has so far declined to comment on the ruling but did send out a tweet directing X users to “Never incorporate your company in the state of Delaware.” Musk also posted a poll question in a separate tweet asking if Tesla should move its state of incorporation from Delaware to Texas.
In trial testimony last November, Musk denied that he exerted control over how his compensation plan was structured or attended any meetings at which the pay plan was discussed by the board or its compensation committee, according to The Associated Press reports.
But McCormick determined that because of the power Musk wields as a major Tesla shareholder, the procedures behind determining his compensation as chief executive must be held to rigorous standards.
“The process leading to the approval of Musk’s compensation plan was deeply flawed,” McCormick wrote. “Musk had extensive ties with the persons tasked with negotiating on Tesla’s behalf.”
Wedbush Securities analyst Dan Ives said the decision, which can be appealed to the Delaware Supreme Court, would reverberate throughout the business realm.
“The fact that they lost this in Delaware court, it’s a jaw dropper,” Ives told AP. “It’s unprecedented, a ruling like this. I think going in, investors thought it was just typical legal noise and nothing was going to come out about it. The fact that they went head to head with Tesla and Musk and the board and voided this, it’s a huge legal decision.”