The judge ruling over Elon Musk’s ~$55 billion CEO pay package, which some Tesla shareholders claimed was obtained without following proper governance rules, has decided to reject Tesla’s attempt to reinstate it with a shareholder vote.
Delaware Supreme Court could be next.
In 2018, Tesla shareholders voted for Elon Musk to get a historic new CEO compensation package that could be worth $55 billion for the executive if Tesla achieved remarkable growth in valuation and profits, which it did.
However, some shareholders argued that Musk unfairly secured this extremely generous compensation plan by misleading shareholders about the fact that the plan was being put together by an independent board and negotiated in good faith.
They filed a complaint in court in Delaware. The case went to trial in 2022, but it took a long time for the judge to give her decision.
Earlier this year, Delaware Chancery Court Chief Judge Kathleen St. J. McCormick sided with the shareholders after testimonies from everyone involved in the pay package negotiations, or lack of negotiations, and a thorough investigation of how it came about.
She determined that Musk was in control of the board during the time it granted him the pay package while the board members who approved the package were also granted historically large compensations, which they ended up partly reimbursing as part of a settlement from a separate lawsuit for excessive compensation.
McCormick found many governance irregularities, including the fact that the board members who supposedly negotiated the package were not independent of Musk, and even his personal lead on the compensation was his own divorce lawyer, who he had recently hired to be general counsel at Tesla.
The judge rescinded the compensation package, which included over $50 billion worth of Tesla stock options that the CEO had yet to exercise. She asked Tesla to go back to the drawing board, renegotiate the pay package in good faith, and present it properly to shareholders.
Instead, Tesla disagreed with the judge’s findings around governance issues and decided to present the same package while including the judge’s decision in the updated proposal and having Tesla’s shareholders vote on it again.
In June, Tesla shareholders voted to reapprove the package, albeit at a lower percentage than the original vote.
Tesla’s legal team believed the vote would “ratify” the compensation package and force the judge to vacate her decision to void the pay package. However, both Tesla’s lawyers and most corporate law scholars agreed that this would require a completely new way to address ratification.
McCormick listened to both sides this August, and we were awaiting her decision by the end of the year.
Today, the judge released her decision and she sided against Tesla’s argument again:
“The large and talented group of defense firms got creative with the ratification argument, but their unprecedented theories go against multiple strains of settled law.”
Beyond the ratification problem, the judge also said that she believes Tesla again misrepresented the situation to shareholders in the statements made around the new vote:
“Even if a stockholder vote could have a ratifying effect, it could not do so here due to multiple, material misstatements in the proxy statement.”
On top of her ruling on the compensation, she also ruled against the lawyers for the shareholders, who were asking for a ridiculous $5 billion in Tesla stock as their legal fee. Instead, she awarded them $345 million.
Tesla is likely to contest the ruling, which could move the case to the Delaware Supreme Court.
Electrek’s Take
As I wrote last summer, Elon Musk’s compensation package case will haunt Tesla for years. Even if you believe Musk deserves this package, Tesla’s approach to reinstating it was boneheaded and didn’t follow the law as I, and seemingly the judge and most Delaware corporate law experts, understand it.
Tesla, and more specifically Elon Musk, it’s hard to differentiate the two lately, which is part of the problem, are showing no intention to address their governance issues.
Let’s be clear: Elon could get paid somewhat easily here. Even as much or close to this amount. However, it needs to do it through the proper governance and respect the process.
Instead, Elon prefers to lie to shareholders and present the situation as politically motivated lawfare. It’s nonsense.