Delaware Chancery Court Judge Joseph Slights III ruled this week that Elon Musk’s controversial 2018 pay package at Tesla, potentially worth over $50 billion, was invalid. The surprise ruling stated that the compensation plan lacked effective independent oversight by Tesla’s board of directors. Tesla’s stock plunged over 10% following the news, wiping over $60 billion from its market valuation.
In response, Musk announced Tesla will hold an immediate shareholder vote to reincorporate the electric carmaker from Delaware to Texas, where its new Gigafactory is located. The move would get Tesla out from under the oversight of the Delaware courts, which have unique authority over the corporate governance of companies incorporated within the state.
Background of the Pay Package Saga
Elon Musk does not receive a regular salary as Tesla’s CEO and instead his compensation has consisted entirely of stock option grants that vest over time based on ambitious operational and market value milestones.
In 2018, Tesla shareholders approved what was at the time the most lucrative executive compensation package ever awarded. The pay deal could be worth over $50 billion if Tesla meets extremely high targets, including growing to one of the most valuable companies in the world with a market cap of $650 billion. For reference, Tesla’s current market cap stands around $400 billion.
The pay package award was controversial from the start, given its unprecedented size. But Tesla argued it was necessary to retain Musk’s leadership and incentivize growth towards making Tesla the most valuable auto manufacturer that accelerates the world’s transition to sustainable energy.
| Year | Target | Current Status | Potential Payout |
|---|---|---|---|
| 2018 | $100 billion market cap | Achieved | $1.7 billion |
| 2019 | $150 billion market cap | Achieved | $2.3 billion |
| 2020 | $200 billion market cap | Achieved | $11 billion |
| 2021+ | $650 billion market cap | Not yet achieved | $50+ billion |
While Tesla has hit the targets thus far resulting in Musk reaping billions already, the ultimate $650 billion goal remains distant.
Amidst criticism of the pay package, Musk has said he does not actually want an extremely lucrative payout and instead structured it to be an “incentive for Tesla and SpaceX to be extremely successful and make a meaningful contribution to the world”.
Lawsuit Brought by Shareholder
A Tesla shareholder, Richard Tornetta, sued Tesla in 2018 alleging the pay package unfairly enriches Musk without requiring him to work towards increasing Tesla’s value for outside shareholders.
Tornetta claimed the pay package should have been negotiated by a genuinely independent board free from Musk’s influence. His lawsuit challenged Musk’s outsized control over Tesla’s board and lack of checks on conflicts of interest.
The heart of the plaintiff’s argument was that the board did not sufficiently push back on Musk’s demands or negotiate to protect outside shareholders.
Delaware courts often side against boards making decisions that enrich executives at the expense of regular shareholders. The state grants companies flexibility in structuring executive pay to incentivize performance, but requires meticulous processes to demonstrate decisions were independent and justified.
Ruling Against Tesla
This week, after years of proceedings, Judge Slights ruled in favor of the shareholder plaintiff Tornetta.
Slights wrote that “any member of Tesla’s board who dared to oppose approval of the 2020 plan knew that it would likely infuriate Musk.”
The opinion stated Tesla’s board *”neutered itself” with excessive control granted to Musk that *“deprived it of independence” when approving the unprecedented pay package.
Slights ordered Musk to return to Tesla the stock grants he has received thus far. Going forward, Tesla is barred from issuing further stock awards to Musk under the compensation plan unless the board takes steps to meet independence requirements under Delaware law.
Musk and Tesla Outraged, Plan Move to Texas
Elon Musk reacted with outrage at the ruling, sending an email to all Tesla employees:
“This is an outrage! I never not once wanted to be the richest person in the world or to have a giant pay package. I simply asked to be incentivized based on the incredible success of Tesla in fulfilling its mission. And now corrupt lawyers and judges in Delaware can undo the shareholder approval?? This is why NO ONE trusts the system anymore.”
Musk also took to Twitter promising he would fight against the “messed up legal system” and hinted Tesla may consider reincorporating in another state:
{{< tweet 1752718082621972853 >}}
The next day, Tesla sent out a surprising notice that it intends to ask shareholders to vote on reincorporating the company in Texas. Such a move would potentially put Tesla out of reach of the Delaware courts going forward.
Musk tweeted “Good riddance to the bribery and corruption in Delaware!”
However the move faces skepticism from some legal experts and analysts…
What Does Move to Texas Mean?
Tesla shifting its state of incorporation from Delaware to Texas may allow Musk to avoid Delaware oversight. But corporate governance experts say it would undermine shareholder rights.
Delaware’s Chancery Court system offers a reliable, specialized judicial process for resolving corporate disputes. Reincorporating in Texas risks more volatility and uncertainty around decisions that impact Tesla shareholders.
Plus, Tesla could still face lawsuits in Delaware courts given many current shareholders are tied contractually to Delaware incorporation.
So while an emotional Musk may wish for an escape from Delaware, the state has a 400 year history as the premiere home for U.S. business entities. Approximately 70% of Fortune 500 companies are incorporated there due to predictable oversight.
A Texas reincorporation may remedy issues around Musk’s pay package, but opens up risks around decisions like mergers, acquisitions, board appointments – areas where investors rely on Delaware law for consistency and fairness.
Tesla’s board will face scrutiny over backing such a dramatic change only weeks after their governance was found severely lacking. Moving the $400 billion company away from reliable courts, against conventional wisdom, may undermine already shaky confidence.
What’s Next for Tesla and Musk
It remains unclear whether the Tesla board will ultimately approve pursuing a full reincorporation in Texas. News of a potential move alone caused enough uncertainty to wipe 10% off Tesla’s stock price the day after the ruling.
Regardless of where Tesla ends up incorporated, the court voiding Elon Musk’s pay package sends shockwaves. Musk faces the humiliating loss of his earned compensation so far.
After Delaware’s rebuke of Tesla governance, shareholders may pressure the company to appoint additional independent directors and restraints on the famous CEO. Musk is unlikely to accept new constraints quietly – however necessary the accountability may be.
The saga also fuels Musk’s battle with short sellers and media critics who he believes constantly undervalue Tesla’s business.
With Tesla’s stock battered, Musk will be on the warpath to prove Delaware courts wrong and justify the highest executive compensation in history. Get ready for fiery tweets, aggressive targets for vehicle deliveries, and outlandish promises of Full Self Driving by year’s end.
Stay tuned as Delaware courts, Elon Musk, Tesla’s board, shareholders, and the entire auto industry react to this bombshell ruling!
References
Key source articles include:
Reuters: Elon Musk bashed by heavy metal drummer who cost him $56 bln
The Guardian: Elon Musk acts to move Tesla legal base to Texas after pay package ruling
CNBC: Tesla shares slide after judge voids Elon Musk’s $56 billion compensation
To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.
