In a landmark decision that has sent shockwaves through the corporate world, a Delaware judge has voided the colossal $56 billion compensation package of Tesla CEO Elon Musk. The ruling, which emerged from a lawsuit filed by shareholder Richard Tornetta, has led to a 3% slide in Tesla’s share price in after-hours trading. The Delaware Chancery Court’s decision, delivered by Chancellor Kathaleen McCormick, has raised critical questions about the fairness of executive compensation and corporate governance standards.
The 2018 compensation plan, which was the largest in public corporate history, was intended to offer Musk 12 tranches of Tesla stock options contingent on the company achieving certain market capitalization and revenue targets. This plan not only made Musk a centi-billionaire but also the richest person on the planet. However, Chancellor McCormick’s 200-page ruling questioned, ‘Was the richest person in the world overpaid?’ and concluded that the process leading to the board’s approval of Musk’s compensation was ‘deeply flawed.’
The court found that Musk had ‘extensive ties’ with those negotiating on Tesla’s behalf, including General Counsel Todd Maron, Musk’s former divorce attorney, which raised concerns about the independence of the board’s decision-making process. The judge’s decision pointedly noted that neither the Compensation Committee nor the Board acted in the best interests of the Company when negotiating Musk’s compensation plan, and there was ‘barely any evidence of negotiations at all.’
The ruling has significant implications for Tesla’s governance, with the judge stating that Musk, rather than the board of directors and shareholders, controlled Tesla when it came to setting his compensation. This was evidenced by Musk’s 21.9% equity stake and his influential roles within the company. The court’s decision also highlighted the misleading nature of the proxy statement used to inform the stockholder vote, which inaccurately described key directors as independent.
In response to the ruling, Musk took to social media, suggesting that Tesla should change its state of incorporation to Texas, where its physical headquarters are located. His tweet, ‘Never incorporate your company in the state of Delaware,’ reflects his dissatisfaction with the court’s decision.
The plaintiff’s attorney, Greg Varallo, expressed gratitude for the court’s decision, emphasizing the benefits it would bring to Tesla investors by erasing the dilution from Musk’s ‘gargantuan pay package.’ The court has directed the parties to confer on a final order to implement the decision, which could include Musk returning the compensation he has received under the plan.
This decision comes at a time when Musk has expressed a desire to increase his voting control over Tesla to approximately 25%, citing his ambition to lead the company in AI and robotics. Currently, Musk owns about 13% of Tesla’s stock and runs the social media site X, which he purchased in late 2022.
The fallout from this ruling is likely to have far-reaching consequences for Tesla and its governance structure. It underscores the need for corporate boards to exercise independent judgment and robust negotiation when determining executive compensation, especially when it involves figures as prominent as Elon Musk. The case also serves as a cautionary tale for companies incorporated in Delaware, a state known for its business-friendly laws but also for its rigorous legal scrutiny of corporate governance practices.
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