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June 24, 2024

Judge Voids Elon Musk’s $56 Billion Tesla Pay Package, Throwing Company’s Future Into Doubt

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Feb 4, 2024

A Delaware judge has stunned the business world by voiding Tesla CEO Elon Musk’s controversial $56 billion pay package, ruling it invalid and “unjustified enrichment” that failed basic tests required by law. The decision threatens to upend Musk’s control of Tesla as he vows to move the company from Delaware to Texas to escape what he called its “oversight.”

Background of the Pay Package

In 2018, Tesla’s board approved an unprecedented compensation plan awarding Musk shares equal to 1% of the company’s stock every time Tesla hit key milestones related to market value and operations. If all milestones were met, the package could have been worth a record-shattering $55.8 billion.

Tesla said the package, larger than the entire value of Ford Motor Co, would help drive Tesla’s ambitious growth and innovation by keeping Musk focused on the long-term success of the company he co-founded. Shareholders sued in what became a three week trial in November, arguing the package unjustly enriched Musk without requiring him to work toward the audacious goals set.

The Shock Ruling

Vice Chancellor Kathaleen St. Jude McCormick of Delaware’s Court of Chancery, a respected judge known for her business expertise, ruled Musk’s pay package was invalid. She said the pay plan should have required Musk to work full-time at Tesla. “I find that the 2018 performance award is unjustified enrichment,” she wrote.

McCormick said Delaware courts have long been wary of such one-sided corporate largesse. “If Elon Musk were to leave Tesla or be unable to serve as CEO, he could still have huge paydays without providing any services to Tesla,” she wrote.

Immediate Fallout

Musk angrily lashed out against the ruling on Twitter, saying he had warned that Delaware oversight would eventually destroy Tesla. “Damn those oversight judges and damn Delaware!”, he tweeted, along with the comment “So much for fiduciary duty…”

Tesla stock closed down 12% on Monday, as shareholders reacted with alarm not only over losing Musk’s leadership but also the court rejecting key justifications for his pay package. Dan Ives, a Wedbush Securities analyst called it a “Code red situation”.

Without clear leadership or compensation incentives, Tesla could veer off its steep growth trajectory, analysts warned. “This pay package was a central tool Tesla’s board said was key to spurring the company’s tremendous advancements to date. Its loss creates a tornado situation for Tesla,” Ives wrote.

Other supporters argued Delaware law tipped too far away from allowing visionary founders the freedom to pursue risky, long-term goals. “Good luck to businesses trying to retain top talent focused on the long-term under Delaware law,” venture capitalist Marc Andreessen tweeted.

Musk Vows Move from Delaware

An angry Musk tweeted late Monday that he would ask Tesla shareholders at an upcoming meeting to vote on reincorporating Tesla in Texas. He argued that Delaware’s oversight was hindering Tesla from revolutionary progress.

“We cannot let backward looking Delaware overregulation continue to destroy the future of Tesla. I’m calling on our shareholders to back reincorporating Tesla in the great state of Texas at our next annual meeting!”, Musk wrote.

Pros of Moving Tesla HQ to Texas Cons of Moving Tesla HQ to Texas
Avoid overregulation by Delaware courts Loss of institutional knowledge/talent in California HQ
More business-friendly environment Uncertainty around move could spook Wall Street
Lower taxes Headquarters farther from Fremont factory
Closer coordination with SpaceX and Boring Co. in Texas Backlash over Musk’s criticism of California

While a move to Texas would get Tesla out from under Delaware oversight of its corporate governance, analysts say Musk can expect continued skeptical scrutiny from shareholders and Wall Street over how he runs Tesla without his mega pay package.

“Musk isn’t going to find nirvana in Texas,” writes Bloomberg columnist Liam Denning. “Delaware isn’t an outlier in viewing such staggering pay deals dimly—especially if they aren’t tightly performance-oriented.”

What Sparked the Shareholder Lawsuit

At the heart of McCormick’s ruling was the argument by shareholder Richard Tornetta that Musk’s pay package was negotiated and approved by a compensation committee controlled by Musk and rife with conflict. He also argued Musk’s pay was radically larger and less rigorous than typical CEO compensation tied directly to performance goals.

Tornetta’s 2018 lawsuit became a personal crusade against excessive CEO pay detached from actual company success. It gradually gained support from major Tesla investors and high profile politicians like Bernie Sanders as Musk’s headline-grabbing wealth and ambition climbed.

“No one deserves a $56 billion pay package for running a company that doesn’t even turn a profit,” Tornetta told reporters after the ruling. “Elon Musk got unjustly rich off the backs of regular Tesla employees and shareholders.”

What’s Next for Musk and Tesla

Musk’s vow to pull Tesla from Delaware will throw the company into a period of great uncertainty. While shareholders are scheduled to meet in early March, analysts see a number of legal and logistical hurdles to quickly reincorporating the company.

“This will be a complex and contested transition process at a time Tesla can ill afford disruption,” writes legal scholar Adam Cohon.

And while Musk portrays the move as an escape from meddling judges, the reality is Tesla will now face far more skeptical oversight from media, shareholders and politicians over his leadership without the pay package to justify it.

Tornetta meanwhile has said he will keep watch over Tesla, including if it moves to Texas. His lawyer, Greg Shumaker, says the epic court battle proved Musk’s pay package failed basic standards. “This outcome sends a loud warning to overpaid executives and captive boards everywhere that unjustified enrichment won’t stand.”

So while Musk has built Tesla into the world’s most valuable automaker, McCormick’s ruling underscores how he now faces reality without the most lucrative CEO deal ever inked. Tesla’s next chapter will test whether Musk’s singular drive can keep pace with rivals on its own executive merits.

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AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

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.

By AiBot

AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

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