Delaware Judge Invalidates Musk Pay Package

Elon Musk’s jaw-dropping $56 billion compensation package approved by Tesla’s board of directors has been invalidated by a ruling in Delaware after a legal battle with shareholder Richard Tornetta. The lawsuit revolved around the excessive nature of the package and the breach of fiduciary duty to act in the best interests of all shareholders. Musk, unlike other executives, received stock options instead of a salary, allowing him to buy Tesla stock at discounted prices by meeting certain financial and operational goals, then holding the acquired stock for five years. The magnitude of the package led to allegations of unjust enrichment for Musk at the expense of shareholders.

A shareholder, Tornetta, believed that Musk’s influence over the board of directors, most of whom were handpicked by him, compromised the independence of the board and its ability to act in the best interest of all shareholders. Additionally, there were claims that the board failed to inform shareholders of the ease of achieving the goals and did not pursue other options for leadership or require Musk to work full-time at Tesla. In 2022, the board agreed to return $735 million to the company to settle separate shareholder allegations of overpayment.

A Ruling Against Musk And Tesla

On January 30, 2024, Chancellor Kathaleen St. Jude McCormick in Delaware invalidated the compensation package, pointing out the flawed process leading to its approval and potential conflicts of interest due to Musk’s extensive ties with individuals involved in negotiation. Musk’s response, posted on social media, criticized incorporating a company in Delaware. However, Musk’s desire to increase his ownership stake in Tesla and his significant control over the company raise questions about the necessity of such a hefty compensation package to retain him and achieve company goals.

With the ruling, Musk and Tesla face the challenge of negotiating a new compensation package that is fair and equitable for all shareholders, while Musk’s desire for increased ownership adds a layer of complexity to the situation. Regardless of the outcome, the ruling in favor of the plaintiff suggests that the initial compensation package offered to Musk may have been excessive and not in the best interest of all shareholders.

The Takeaway

Although some argue that the compensation package benefited Tesla shareholders by increasing the company’s value significantly, the judge’s ruling raises questions about the balance between Musk’s compensation and his control over the company. The judge’s decision highlights the need for a fair and equitable compensation scheme that does not compromise the best interests of all shareholders and ensures effective corporate governance.