A Delaware Chancery Court judge today has voided Elon Musk’s 2018 Tesla pay package, siding with shareholders who sued the board over the compensation agreement, calling it “the largest in human history.”
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“The process leading to the approval of Musk’s compensation plan was deeply flawed,” Chancellor McCormick said in her decision, and ordered the contract be voided.
“Never incorporate your company in the state of Delaware,” said Musk on X after the ruling.
Never incorporate your company in the state of Delaware
— Elon Musk (@elonmusk) January 30, 2024
The Tesla stockholder who brought the suit, Richard Tornetta – “individually and on behalf of all others similarly situated,” sued board members James Murdoch, Robyn Denholm, Antonio Gracias, Linda Johnson Rice, Brad Buss, Ira Ehrenpries and Musk to invalidate the grant, worth up to $56 billion if the electric automaker achieved certain market cap and financial milestones
The suit called the Tesla board “conflicted” and “supine” to the CEO, alleging Musk designed the package himself and pushed it through. It says three of the first milestones were easily achievable and that shareholders who voted to approve the package weren’t fully informed on all the details. It also called Musk a “part-time” employee who divided his time between various businesses, and said Musk demanded the package “for the avowed purpose of colonizing Mars (the planet).”
Compensation cases have a high bar. One of the highest profile and maybe only lawsuit like it to go to trial was an unsuccessful one against the board of Walt Disney in 2005 for approving a $140 million severance payment to Michael Ovitz after 14 months at the company. Ovitz was hired and fired by CEO-chairman Michael Eisner. Shareholders said he lorded over a board stacked with his friends and associates.
Plaintiffs also here say directors were close friends of Musk and his family, as well as business associates who enthusiastically invested in his various ventures. They say Musk effectively controlled the company and controlled the board as Tesla’s founder and largest shareholder, even without a majority stake. He owned about 20% of the company.
Directors argued, unsuccessfully, that the board was independent and studied the package carefully over months with advice from outside experts.
The suit brings up issues often raised in CEO pay arguments across companies and sectors including media, where shareholders have started to pipe up. Boards justify high pay as necessary to attract and retain executives. But how high? Musk would never have resigned as chief of Tesla, the suit argues. And his large stake was enough to align his interest with the company’s performance with lesser incentives. Directors/defendants, in their pretrial brief, said that Musk had in fact talked about stepping away from the CEO role.
His 2018 package consisted of 12 tranches of 100 million stock options, the first requiring Musk to nearly double Tesla’s market cap from $53 billion to $100 billion and meet a specified revenue or adjusted EBITDA goal. Each remaining tranche required another $50 billion in market cap, up to $650 billion, and one financial milestone, or Musk received nothing. The first tranche vested in May of 2020 and directors said he’s achieved 11 of the 12. Achieving the milestones was “anything but a foregone conclusion” at the time, they said, when Tesla was facing challenges, burning through cash and not sustainably profitable. As Tesla shares skyrocketed subsequently, Musk became the richest person in the world.
Tesla shares fell after-market today on the ruling.
“The 2018 plan was designed with Musk in mind. [It was] not a typical pay package intended to compensate the ordinary executive for overseeing the day-to-day operations of a mature company,” the defendants said.
“The plaintiff is entitled to rescission,” Judge Kathaleen wrote in her ruling that agreed Musk’s pay package was set by Tesla’s board in an inappropriate way.
“The parties are to confer on a form of final order implementing this decision and submit a joint letter identifying all issues, including fees that need to be addressed to bring this matter to a conclusion at the trial level,′ she wrote.
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