March 4, 2024

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Elon Musk can't keep Tesla's $55 billion-plus compensation package, judge rules

Elon Musk can't keep Tesla's $55 billion-plus compensation package, judge rules

DOVER, Delaware – Elon Musk is not entitled to a historic compensation package awarded by Tesla's board of directors that will likely be worth more than $55 billion, a Delaware judge ruled Tuesday.

Chancellor Kathleen St. Jude McCormick's ruling comes more than five years after a shareholder lawsuit targeted Tesla CEO Musk and the company's directors. They were accused of breaching their duties to the maker of electric cars and solar panels, resulting in the waste of company assets and unjust enrichment of Musk.

Lawyers for the shareholders argued that the compensation package should be canceled because it was dictated by Musk and was the product of sham negotiations with directors who were not independent from him. They also said it was approved by shareholders who received misleading and incomplete disclosures in the proxy statement.

Defense attorneys countered that the pay plan was negotiated fairly by a compensation committee whose members were independent, included performance milestones so high that it was ridiculed by some Wall Street investors, and was blessed by a shareholder vote that was not even required under Delaware law. They also argued that Musk was not a controlling shareholder because he owned less than a third of the company at the time.

An attorney for Musk and other Tesla defendants did not immediately respond to an email seeking comment.

But Musk responded to the ruling regarding the social media platform X, which he owns and was formerly known as Twitter, by offering business advice. “Never incorporate your company in Delaware,” he said.

In his trial testimony in November 2022, Musk denied that he dictated the terms of the compensation package or attended any meetings in which the plan was discussed by the board, its compensation committee, or a working group that helped develop it.

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However, McCormick decided that because Musk was a controlling shareholder with a potential conflict of interest, the pay package should be subject to more stringent standards.

“The process that led to approval of Musk’s compensation plan was deeply flawed,” McCormick wrote in the brightly written, 200-page decision. “Musk had extensive relationships with the people tasked with negotiating on behalf of Tesla.”

McCormick specifically cited Musk's long-standing business and personal relationships with Compensation Committee Chairman Ira Ehrenpres and fellow committee member Antonio Gracias. She also noted that the working group working on the pay package included general counsel Todd Marrone, who was Musk's previous divorce attorney.

“In fact, Maron was the primary intermediary between Musk and the committee, and it is unclear whose side Maron saw himself on,” the judge wrote. “However, many of the documents cited by the defendants as evidence of the fairness of the trial were drafted by Maron.”

McCormick concluded that the only appropriate remedy was to cancel Musk's compensation package. “In the final analysis, Musk launched the self-driving process, re-adjusting speed and direction along the way as he saw fit,” she wrote. “The process reached an unfair price. Through this lawsuit, the plaintiff is requesting reinstatement.”

Greg Varallo, lead counsel for the shareholder plaintiff, praised McCormick's decision to eliminate Musk's “absurdly large” pay package.

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“The fact that they lost this case in a Delaware court is astonishing,” said Dan Ives, an analyst at Wedbush Securities. “It's unprecedented, a ruling like this. I think investors coming in thought it was just typical legal noise and nothing was going to happen about it. And the fact that they went up against Tesla and Musk and the board and overturned this decision, is a huge legal decision.”

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During his testimony during the trial, Musk played down the idea that his friendships with some Tesla board members, including occasionally spending vacation together, meant they were likely to do his bidding.

The plan called for Musk to make billions if Tesla achieved a certain market value and certain operational milestones. For each case of achieving a market capitalization milestone and an operational milestone at the same time, Musk, who owned about 22% of Tesla when the plan was approved, will receive shares equivalent to 1% of the shares outstanding at the time of the grant. His interest in the company will grow to about 28% if the company's market capitalization increases by $600 billion.

Each milestone included increasing Tesla's market capitalization by $50 billion and meeting revenue growth and pre-tax profit goals. Musk only got the full benefit of the $55.8 billion pay plan by leading Tesla to a market value of $650 billion and record revenues and profits within a decade.

Tesla achieved all twelve market capitalization milestones and eleven operational milestones, providing Musk with approximately $28 billion in stock option gains, according to a post-trial brief filed by the plaintiff's attorneys in January. However, stock option grants are subject to a five-year holding period.

Defense attorney Evan Chesler argued at trial that the compensation package was a “high-risk-reward” deal that benefited not only Musk, but Tesla shareholders. After implementing the plan, the value of the company, which is headquartered in Austin, Texas, rose from $53 billion to more than $800 billion, after briefly reaching $1 trillion.

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Chesler also said that Tesla made sure to include the $55 billion payout amount in the proxy statement because the company wanted shareholders to know that “this is an amazing number that Mr. Musk could potentially earn.”