A Delaware judge has struck down Elon Musk’s controversial $56 billion compensation package from Tesla, a move that could potentially cost Musk his title as the world’s richest person.
Judge Finds Package Unfair to Shareholders
Chancellor Kathaleen St. Jude McCormick of Delaware’s Court of Chancery ruled on Tuesday that Musk’s massive pay deal, which Tesla shareholders approved in 2018, was unfair and “an unjustified windfall” for Musk (Fortune; CNBC).
The compensation package allows Musk to buy 1% of Tesla’s stock at a deep discount each time the company hits increasingly ambitious financial and operational milestones. Tesla has hit 11 of the 12 targets as its value ballooned to more than $700 billion, making Musk the world’s richest person.
But McCormick said the near-$56 billion payoff was far too high, beyond the bounds of reasonable judgment by Tesla’s directors, and procured through unfair dealing with a conflicted board process (Reuters).
“My mind is blown, it’s unjustified,” said McCormick. She ordered Musk to promptly return the equity grants he has received so far to Tesla. The stunning ruling wipes out the majority of Musk’s compensation and delivers a major victory to shareholder Richard Tornetta, who sued Musk and Tesla directors in 2022 on behalf of the company’s shareholders (Bloomberg).
Tesla Stock Falls, Musk No Longer Richest Person
Tesla shares slid 5% on Wednesday following the ruling, translating to a paper loss for Musk of over $10 billion. Musk mocked tiny Delaware after the defeat, but Tesla said it was considering its next steps (WSJ).
The plunge in Tesla’s stock also caused Musk to lose his title as the world’s richest person that he has held since September 2021. Musk’s real-time net worth estimate by Forbes dropped below Bernard Arnault, the CEO of LVMH luxury goods conglomerate (Forbes).
Musk Tweeted that while he did not care about the title, he “won people’s hearts and minds” by trying to extend life to Mars and accelerate sustainable energy.
Arnault’s current net worth stands at $186.7 billion versus Musk’s $179.6 billion. The see-saw battle for world’s richest person will likely continue as Tesla’s stock fluctuates.
|World’s 2nd Richest
*Net worths as of January 31, 2024
What’s Next For Tesla and Musk
Legal experts say the chances of McCormick’s verdict being overturned on appeal are very slim. Plaintiff Tornetta’s lawyers called the landmark ruling a “huge victory for shareholder rights” that should reverberate through boardrooms across America (Reuters).
Tesla and Musk face a likely appeals process that could run another 1-2 years. In the meantime, Musk will not be able to exercise any more of his Tesla stock grants from the compensation plan.
Analysts say Musk’s legal defeat caps off a terrible start to 2024 for the visionary entrepreneur after a landmark 2022. It serves as a warning for boards to better police massive insider grants and represents just the latest controversy for Musk’s rollercoaster career (The Guardian).
“This is a wake up call for boards to start actively questioning and stress testing all executive compensation,” said corporate governance expert Ele Naumoski. “Elon Musk is not made of teflon.”
Musk Faces Other Controversies
Musk also remains under investigation by federal authorities over his $44 billion takeover deal for Twitter that was marked by chaos and confusion.
In addition, his leadership of Twitter has brought non-stop controversy, including mass layoffs, ultimatums to staff, and changes to content moderation policies that watchdogs say have unleashed troubling levels of hate speech and misinformation. Most analysts expect the turbulence at Twitter to continue unabated through 2024.
“It’s been a disastrous last few months for Musk in many ways with self-inflicted wounds,” said Wedbush analyst Dan Ives. “The carnage from the Twitter deal will continue given the debt load and Musk’s insatiable appetite for stirring the pot.”
So while Musk may soon lose his title as world’s richest person, his eventful 2024 has only just begun.
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