The court upheld its earlier ruling from January, which called the compensation plan excessive and rescinded it, despite Tesla shareholders voting in June to reinstate it.
According to Reuters, Tesla CEO Elon Musk has faced yet another setback. A Delaware court rejected his $56 billion pay package for the second time.
The court upheld its earlier ruling from January, which called the compensation plan excessive and rescinded it, despite Tesla shareholders voting in June to reinstate it.
The decision, issued by Chancellor Kathleen McCormick of the Delaware Court of Chancery, has left Tesla and Musk considering an appeal to the Delaware Supreme Court. This process could take up to a year.
THE COURT’S DECISION
Chancellor McCormick maintained that Tesla’s attempt to reinstate Musk’s pay package through a shareholder vote was not legally valid. “Were the court to condone the practice of allowing defeated parties to create new facts to revise judgments, lawsuits would become interminable,” said McCormick, as quoted in the report.
The court also ruled that Musk improperly influenced Tesla’s 2018 board negotiations over the pay package. Furthermore, McCormick found that Tesla’s proxy statements to shareholders contained multiple misstatements, invalidating the June vote as a remedy for the initial ruling.
Tesla’s board argued that the pay package was justified by Musk’s achievements in meeting Tesla’s ambitious goals, which included gains in market value, revenue, and profitability. However, the judge disagreed, describing the pay package as ‘the biggest compensation plan ever’ and an ‘unfathomable sum.’
TESLA AND MUSK RESPOND
Musk expressed his frustration on X (formerly Twitter), and said, “Shareholders should control company votes, not judges.”
Tesla also criticised the ruling, calling it “wrong” and confirming plans to appeal. The company argued that the court’s decision undermined the will of shareholders, who had approved the package.
In after-hours trading following the ruling, Tesla’s stock fell 1.4%, highlighting investor concerns over the decision and its potential impact on the company.
THE PAY PACKAGE: AN OVERVIEW
Musk’s 2018 pay package tied his compensation to Tesla’s performance, granting him stock options if the company achieved specific operational and financial targets. The package originally had a value of $56 billion but has since grown to an estimated $101 billion due to Tesla’s soaring stock price.
Unlike most executives, Musk does not receive a guaranteed salary. Instead, the package rewards him with stock worth around 1% of Tesla’s equity for each milestone achieved. However, critics argue that the goals were not as challenging as they appeared, raising concerns about transparency during the shareholder approval process.
LEGAL BATTLE AND FUTURE IMPLICATIONS
This legal dispute began when a Tesla shareholder, Richard Tornetta, challenged the package in 2018, claiming it was improperly awarded and overly generous. McCormick’s January ruling sided with Tornetta, asserting that Musk exerted undue influence over the board.
Monday’s ruling reinforced that position, rejecting Tesla’s argument that the June shareholder vote justified reinstating the package. The court also ordered Tesla to pay $345 million in legal fees to the attorneys who brought the case, marking one of the most significant fee awards in securities litigation history.
Tesla and Musk are expected to file an appeal once the court’s final order is issued. According to legal experts, the Delaware Supreme Court could take a more pragmatic view, potentially altering the outcome.
