Elon Musk Can't Keep Tesla Compensation Package More Than $55 Billion, Judge Rules

A Delaware judge ruled Tuesday that Elon Musk is not eligible for a major compensation package offered by Tesla's board of directors worth more than $55 billion.

CEO Kathleen St. Jude McCormick's ruling comes five years after a shareholder lawsuit targeted Tesla CEO Musk and company directors. They were accused of breaching their obligations to the maker of electric vehicles and solar panels, resulting in wastage of corporate assets and unjust enrichment for Kasthuri.

The shareholder's attorneys argued that the compensation package should be voided because it was dictated by Musk and was the result of sham negotiations with directors who did not depend on him. They also claimed that it was authorized by shareholders that misleading and incomplete disclosures were made in the proxy statement.

Defense attorneys countered that the pay plan was fairly negotiated by an independent compensation committee whose members were blessed with a shareholder vote that was not even required under Delaware law, with performance milestones so high they were derided by Wall Street investors. 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 the other Tesla defendants did not immediately respond to an email seeking comment.

But Musk responded to X's ruling, the social media platform Twitter previously owned, by offering business advice. “Never incorporate your company in the state of Delaware,” he said.

In hearing testimony in November 2022, Musk denied dictating the terms of the compensation package or attending any meetings where the plan was discussed by the board, its compensation committee or the task force that helped develop it.

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However, since Musk was the controlling shareholder with a potential conflict of interest, McCormick determined that 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 a colorfully written 200-page conclusion. “Musk had extensive relationships with people negotiating on Tesla's behalf.”

McCormick specifically cited Musk's long business and personal relationships with compensation committee chairman Ira Ehrenpreis and fellow board member Antonio Gracias. He also noted that General Counsel Todd Maron, Musk's former divorce attorney, is on the team working on the salary package.

“In reality, Maron was the primary between Musk and the group, and it was unclear whose side Maron saw himself as,” the judge wrote. “Many of the documents cited by defendants as evidence of further due process were drafted by Maron.”

McCormick concluded that the only appropriate solution was to cancel Musk's compensation package. “In the final analysis, Musk began a self-driving process, reassessing speed and direction as he saw fit,” he wrote. “The process came at an unreasonable cost. And through this lawsuit, the plaintiff is seeking a recall.

Greg Varallo, the lead attorney for the shareholder plaintiffs, praised McCormick's decision to replace the “ridiculous amount” of Musk's pay package for Musk.

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“The fact that they lost this in the Delaware court was a jaw-dropper,” said Wedbush Securities analyst Don Ives. “This is unprecedented, such a verdict. I thought it was typical legal noise going to investors and nothing was going to come out about it. They went head-to-head with Tesla and Musk and the team and canceled this, which was a huge legal decision.

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During his trial testimony, Musk downplayed the idea that his friendship with some Tesla board members, including sometimes vacationing together, made them likely to do his bidding.

The plan said Musk would reap billions if Tesla reached certain market capitalization and operational milestones. For each simultaneous meeting of a market cap milestone and an operating milestone, Musk, who owned about 22% of Tesla when the plan was approved, will receive shares equal to 1% of the shares outstanding at the time of the grant. If the company's market capitalization increases by $600 billion, his interest in the company will grow to about 28%.

Each milestone includes increasing Tesla's market capitalization to $50 billion and achieving aggressive revenue and pre-tax profit growth targets. Musk was able to reap the full benefits of a $55.8 billion pay plan by leading Tesla to a $650 billion market capitalization and unprecedented revenue and earnings within a decade.

Tesla has reached all twelve market capitalization milestones and eleven operating milestones, giving Musk nearly $28 billion in stock option gains, according to a January post-trial brief filed by plaintiffs' attorneys. 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, high-reward” deal that benefited not only Musk, but also Tesla shareholders. After the plan was implemented, the value of the Austin, Texas-based company rose from $53 billion to more than $800 billion, briefly reaching $1 trillion.

Chesler also said Tesla confirmed the $55 billion in compensation was included in the proxy statement.

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