Elon Musk’s $55 billion pay package at Tesla Inc. was overturned by a Delaware judge after a shareholder challenged it as excessive, a decision that would significantly reduce Musk’s fortune and jeopardize the future of his firms.
That is, if the decision survives an expected appeal.
Tesla’s board will have to start over with a new proposal after the company’s co-founder received the highest executive compensation package in history, resulting in his first major court setback. Musk never attempted to execute his options after they were challenged in Delaware Chancery Court. Tesla’s share price fell around 3% in after-hours trade on the news.
Musk has often encouraged Tesla’s board to arrange for another huge stock award for him, years after selling a significant portion of his shares in the firm to acquire Twitter. The billionaire has stated that he needs a larger stake in Tesla in order to preserve control of the electric vehicle manufacturer and grow into artificial intelligence.
The decision leaves Musk’s money in uncertainty. The options, valued at $51.1 billion, were one of his most valuable assets. Without them, his net worth would plummet to $154.3 billion, making him the third-richest person in the world after spending most of the past few years as No. 1 on the Bloomberg Billionaires Index.
Musk’s New York-based lawyer, Evan Chesler, did not immediately respond to an email or phone call requesting comment late Tuesday on the judgment.
Following a trial that finished more than a year ago, Delaware Chancery Court Chief Judge Kathaleen St. J. McCormick ruled in favor of an investor who claimed Tesla directors failed to make adequate disclosures about Musk’s 2018 executive remuneration package and performance targets. She also discovered that conflicts of interest hampered the board’s review of the pay plan.
“In the end, Musk initiated a self-driving process, recalibrating the speed and direction along the way as he saw fit,” the judge stated in a 200-page decision. “The procedure came at an unreasonable cost. Through this litigation, the plaintiff seeks a recall.”
Musk, 52, topped Bloomberg’s wealth list due to his share in Tesla, the world’s most valuable automaker. The stock options from his compensation plan have vested in increments over the last few years as performance criteria have been met, but he has not exercised any of them, according to regulatory filings.
The billionaire responded quickly to the verdict on his social media network X, formerly known as Twitter. He offered the option of “incorporating in Nevada or Texas if you prefer shareholders to decide matters.”
Never incorporate your company in the state of Delaware
— Elon Musk (@elonmusk) January 30, 2024
Musk, who prides himself on defying business standards, has typically won court battles, including a shareholder suit over his acquisition of renewable-energy supplier SolarCity.
In the compensation issue, lawyers for Tesla shareholder Richard Tornetta contended that board members lacked independence while drafting the pay package for the company’s CEO and allowed him to inappropriately tailor the elements of his pay plan to his liking.
Musk dictated the “framework and financial terms, which remained fundamentally unchanged” throughout the board’s approval process, Tornetta’s lawyers claimed in documents. In her conclusion, McCormick observed that Musk admitted he was essentially “negotiating against myself” in the back-and-forth over his compensation.
“The most striking omission from the process is the absence of any evidence of adversarial negotiations between the board and Musk concerning the size of the grant,” the court noted in his ruling. The ruling was delayed in part due to the judge’s back surgery last year.
Musk’s justification did not explain why the “historically unprecedented compensation plan” was required to drive the CEO to achieve “transformative growth.” Musk has no intention of leaving Tesla, and his ownership stake provided enough motivation to keep him focused on growth, according to the judge.