Elon Musk’s $56 billion pay deal with Tesla is unfair, judge says

A Delaware judge ruled Tuesday that Elon Musk’s $56 billion payday was unfair, overturning the largest compensation deal in corporate history.

The ruling, handed down Tuesday in the Delaware Court of Chancery by Judge Kathaleen McCormick, means that Musk, the world’s richest person, cannot keep the 2018 compensation package. The decision may be subject to of a call. Chancery Daily, which tracks and shares updates on the Delaware Chancery Court, first reported the decision on Threads.

The decision does not bring a clean end to Musk or the Tesla board. How Musk is paid and what happens to his wealth, which is largely tied to his many businesses, remain unanswered questions.

In his ruling, McCormick wrote that Tesla “had the burden of proving that the compensation plan was fair, and they failed to meet their burden.”

Musk shared his displeasure with the decision by turning to X, the social media site formerly known as Twitter, which he owns in part thanks to an earlier decision by McCormick. The judge oversaw Twitter’s lawsuit against Musk, which ended with him agreeing to close his $44 billion deal. Musk largely financed the acquisition of Twitter by selling his Tesla shares.

“Never incorporate your company in the state of Delaware,” Musk said on X. Musk then released a poll asking whether Tesla should change its state of incorporation to Texas.

This question of “fairness” was at the heart of the case, which began in 2019 when Tesla shareholder Richard Tornetta sued to void Musk’s 2018 pay deal, claiming to at the time that the package had been unfairly paid to Musk without requiring his full focus on the automaker.

The compensation plan approved by shareholders in 2018 consisted of 20.3 million stock options divided into 12 tranches of 1.69 million shares. Under the terms of the agreement, options vest in 12 tranches if Tesla achieves specific milestones in market capitalization, revenue and adjusted earnings (excluding certain one-time fees such as stock compensation). ).

Although many might argue that it was fair because the vast majority of shareholders approved it, McCormick was unmoved. She wrote because “defendants were unable to prove that the shareholder vote was fully informed because the proxy statement inaccurately described the principal directors as independent and misleadingly omitted details about the process “.

McCormick described the process leading to approval of Musk’s compensation plan as “deeply flawed,” largely because of his deep ties to the people, including board members, who were supposed to negotiate at Tesla name. She also stressed that the testimonies showed that it was less of a negotiation and more of a cooperative enterprise.

McCormick also weighed in on the fairness of the “price.” The defendants urged the court to compare what Tesla “gave” to what Tesla “got.” His assessment was not sufficient. She wrote in her decision:

“The compensation plan was not conditional on Musk devoting a certain amount of time to Tesla, as the board never proposed such a term. Carried away by the “it’s all upside down” rhetoric, or perhaps dazzled by Musk’s superstar appeal, the board never asked the $55.8 billion question: the Was the plan even necessary for Tesla to retain Musk and achieve its goals?

She acknowledged that the defendants (Tesla) had proven that Musk was “motivated solely by ambitious goals and that Tesla desperately needed Musk to succeed in its next stage of development.” But, she added, “these facts do not justify the largest compensation plan in the history of public procurement.”