In a groundbreaking verdict, a Delaware judge has ruled against Elon Musk, the CEO of Tesla, mandating the relinquishment of his colossal record-breaking $56 billion Tesla pay package. The decision, issued on Tuesday, is the culmination of a shareholder lawsuit initiated over five years prior, which accused Musk and Tesla’s board members of squandering corporate assets and unjustly enriching Musk.
The legal battle saw shareholders’ attorneys argue that Musk’s compensation package was the result of sham negotiations and was ratified by shareholders who were misled. In contrast, defense attorneys defended the integrity of the pay plan, highlighting its ambitious performance benchmarks and its endorsement by shareholders through a vote that wasn’t even obligatory under Delaware law.
The ruling by Chancellor Kathaleen St Jude McCormick sheds light on the flawed process behind the approval of Musk’s pay package, emphasizing his close connections with the individuals tasked with the negotiations on behalf of Tesla.
During his November 2022 court testimony, Musk refuted claims that he orchestrated the terms of his compensation package or was present at any board, compensation committee, or working group discussions regarding the plan.
Nonetheless, Chancellor McCormick ruled that Musk’s position as a dominant shareholder with potential conflicts necessitated a stricter scrutiny of the compensation package.
In her detailed 200-page judgment, McCormick expressed, “The process leading to the approval of Musk’s compensation plan was deeply flawed,” pointing out Musk’s significant connections with those negotiating on behalf of Tesla.
She highlighted Musk’s established relationships with compensation committee leaders Ira Ehrenpreis and Antonio Gracias, and the involvement of general counsel Todd Maron, previously Musk’s divorce lawyer, in the working group.
McCormick observed, “In fact, Maron was a primary go-between Musk and the committee, and it is unclear on whose side Maron viewed himself,” indicating that many documents presented as evidence of fairness were actually prepared by Maron.
Ultimately, McCormick decided that revoking Musk’s compensation package was the appropriate course of action. She remarked, “In the final analysis, Musk launched a self-driving process, recalibrating the speed and direction along the way as he saw fit,” concluding that the process led to an unjust outcome, prompting the plaintiff to seek a reversal through the lawsuit.
Musk’s reaction
Following the court’s decision, Musk voiced his disapproval on X (formerly known as Twitter), criticizing Delaware as a corporate domicile and suggesting Nevada or Texas as more favorable options.
“Never incorporate your company in the state of Delaware,” Musk said.
He underscored that even with a 25% stake in Tesla, he wouldn’t have controlling power, though it would grant him substantial influence.
Implications and reactions
The ruling has had significant repercussions, with Tesla’s stock value experiencing a 3% decline in extended trading. Analyst Dan Ives from Wedbush Securities labeled the decision as “unprecedented,” marking it as a significant legal setback for both Tesla and Musk. The verdict not only questions the judgment of Tesla’s board but also establishes a new benchmark for executive compensation practices in the corporate sector.
The ruling has set the stage for Tesla’s forthcoming compensation negotiations with Musk. Given the court’s critical view of the board’s decision-making process, as described in the testimonies of the directors, it appears highly improbable that Musk’s recent demand for a 25% stake will be approved. This landmark decision not only scrutinizes the largest compensation package in corporate America but also signals a shift in how executive compensations might be structured and scrutinized in the future.
(With inputs from agencies)
The legal battle saw shareholders’ attorneys argue that Musk’s compensation package was the result of sham negotiations and was ratified by shareholders who were misled. In contrast, defense attorneys defended the integrity of the pay plan, highlighting its ambitious performance benchmarks and its endorsement by shareholders through a vote that wasn’t even obligatory under Delaware law.
The ruling by Chancellor Kathaleen St Jude McCormick sheds light on the flawed process behind the approval of Musk’s pay package, emphasizing his close connections with the individuals tasked with the negotiations on behalf of Tesla.
During his November 2022 court testimony, Musk refuted claims that he orchestrated the terms of his compensation package or was present at any board, compensation committee, or working group discussions regarding the plan.
Nonetheless, Chancellor McCormick ruled that Musk’s position as a dominant shareholder with potential conflicts necessitated a stricter scrutiny of the compensation package.
In her detailed 200-page judgment, McCormick expressed, “The process leading to the approval of Musk’s compensation plan was deeply flawed,” pointing out Musk’s significant connections with those negotiating on behalf of Tesla.
She highlighted Musk’s established relationships with compensation committee leaders Ira Ehrenpreis and Antonio Gracias, and the involvement of general counsel Todd Maron, previously Musk’s divorce lawyer, in the working group.
McCormick observed, “In fact, Maron was a primary go-between Musk and the committee, and it is unclear on whose side Maron viewed himself,” indicating that many documents presented as evidence of fairness were actually prepared by Maron.
Ultimately, McCormick decided that revoking Musk’s compensation package was the appropriate course of action. She remarked, “In the final analysis, Musk launched a self-driving process, recalibrating the speed and direction along the way as he saw fit,” concluding that the process led to an unjust outcome, prompting the plaintiff to seek a reversal through the lawsuit.
Musk’s reaction
Following the court’s decision, Musk voiced his disapproval on X (formerly known as Twitter), criticizing Delaware as a corporate domicile and suggesting Nevada or Texas as more favorable options.
“Never incorporate your company in the state of Delaware,” Musk said.
He underscored that even with a 25% stake in Tesla, he wouldn’t have controlling power, though it would grant him substantial influence.
Implications and reactions
The ruling has had significant repercussions, with Tesla’s stock value experiencing a 3% decline in extended trading. Analyst Dan Ives from Wedbush Securities labeled the decision as “unprecedented,” marking it as a significant legal setback for both Tesla and Musk. The verdict not only questions the judgment of Tesla’s board but also establishes a new benchmark for executive compensation practices in the corporate sector.
The ruling has set the stage for Tesla’s forthcoming compensation negotiations with Musk. Given the court’s critical view of the board’s decision-making process, as described in the testimonies of the directors, it appears highly improbable that Musk’s recent demand for a 25% stake will be approved. This landmark decision not only scrutinizes the largest compensation package in corporate America but also signals a shift in how executive compensations might be structured and scrutinized in the future.
(With inputs from agencies)
