In a landmark decision, a Delaware judge has nullified Elon Musk’s colossal $56 billion pay package from Tesla, deeming it an “unfathomable sum” that unfairly disadvantaged shareholders. The ruling, which can be subject to appeal, marks the dismantling of the largest pay package in corporate America.
Tesla’s board faced severe criticism for its perceived lack of oversight over Musk, a CEO known for his confrontational style and involvement in multiple ventures simultaneously. The judge, Kathaleen McCormick, questioned the necessity of the $55.8 billion compensation plan, highlighting the board’s failure to scrutinize its implications for Tesla’s goals and Musk’s retention.
McCormick directed a Tesla shareholder, who initiated the legal challenge, to collaborate with Musk’s legal team to implement the court’s decision. The ruling could be further appealed to the Delaware Supreme Court once the parties reach a consensus on the final order and attorney fees, which Tesla will be responsible for covering.
This decision comes amid Tesla’s warnings of slowing growth and a broader reassessment of demand in the electric vehicle industry. While Tesla’s market value surged under Musk’s leadership, much of it relies on optimistic expectations for future developments such as self-driving technology.
In response to the ruling, Musk, who also owns the social media platform X, expressed his dissatisfaction, humorously stating, “Never incorporate your company in the state of Delaware.” Musk’s lawyer did not provide an immediate comment on the decision.
“The incredible size of the biggest compensation plan ever – an unfathomable sum – seems to have been calibrated to help Musk achieve what he believed would make ‘a good future for humanity,'” wrote McCormick in her extensive opinion.
During the compensation trial, Musk testified that the money would fund interplanetary travel, emphasizing his vision of advancing humanity’s reach to Mars. The nullification of the 10-year pay agreement, reached in 2018, could impact approximately a quarter of Musk’s estimated $210.6 billion fortune.
As Tesla prepares for further compensation negotiations with Musk, experts believe that the recent ruling may pose challenges for the CEO’s demand for 25% voting control. McCormick criticized several board members, including Musk’s brother and media mogul Rupert Murdoch’s son, for lacking independence, calling for the infusion of independent directors into the board.
In the aftermath of the ruling, Tesla investors and experts suggest a substantial overhaul of the company’s corporate structure, emphasizing the need for independent board members. The court’s decision raises questions about the appropriateness of Tesla’s governance for a public company.
The legal battle between Tesla shareholders and the board exposed conflicting views on Musk’s compensation, with critics arguing that the board failed to inform shareholders about the ease of achieving set goals and the rapid qualification of Musk for substantial portions of the pay package.
As Tesla faces this pivotal moment, the outcome could potentially reshape the dynamics of executive compensation and governance within the company, triggering a reevaluation of its corporate structure and decision-making processes.
