Elon Musk’s record-breaking $56 billion pay package, awarded to him as part of his compensation plan at Tesla, has been rejected for the second time by a Delaware court. This decision, made by Delaware Chancellor Kathaleen McCormick, has been a result of months of legal battles, despite the fact that Tesla’s shareholders and directors had previously approved the deal.
The ruling, which upholds a January decision, comes as a significant blow to Musk and Tesla, who had fought hard to validate the pay package. Judge McCormick’s ruling underscores concerns over corporate governance and conflict of interest, particularly involving Musk’s influence over the Tesla board. She argued that the package, which dates back to 2018, was not fair, and that board members had been unduly influenced by Musk, which ultimately led to the approval of an excessive compensation plan.
The pay deal in question would have been the largest-ever compensation for a chief executive of a publicly traded company, dwarfing previous high-profile pay packages. Despite Tesla’s legal team’s “creative” arguments defending the deal, McCormick deemed the amount disproportionate to the company’s performance at the time, as well as the terms under which it was granted. She pointed out that while shareholders did approve the compensation package with a 75% vote in June, this vote could not override the legal concerns raised by the nature of the deal and the influence Musk wielded over the board.
Musk, responding to the decision on social media platform X, expressed his dissatisfaction by stating, “Shareholders should control company votes, not judges.” Tesla has also vowed to appeal the ruling, claiming that it undermines shareholder control of the company. In a statement, Tesla further argued that, if not overturned, the decision would set a dangerous precedent, allowing judges and plaintiffs’ lawyers to dictate corporate governance decisions in Delaware, rather than the rightful ownersthe shareholders.
The case stems from a lawsuit filed by a Tesla shareholder who argued that Musk’s pay deal was excessive, given that it was tied to ambitious performance goals, including increasing Tesla’s market value and revenue growth, with payouts contingent on meeting specific targets. The shareholder’s legal team also contended that the deal was not properly vetted by an independent committee or board members with sufficient autonomy. While the shareholder will receive a fee of $345 million for bringing the case, they were not awarded the $5.6 billion in Tesla shares they had sought.
Corporate governance experts and legal scholars have weighed in on the ruling, noting that it reflects broader concerns about the balance of power between corporate boards and CEOs. Charles Elson, a professor at the University of Delaware’s Weinberg Center for Corporate Governance, remarked that the decision was a strong affirmation of the need for conflict-of-interest rules in Delaware, a state that has long been a hub for corporate law. Elson explained, “The idea of conflict rules is to protect all investors, not just minority investors,” and praised McCormick’s decision as a well-reasoned response to a corporate governance system that had been skewed in Musk’s favor.
The decision also highlights a larger trend of corporate boards under increasing scrutiny for their independence and the manner in which compensation packages are structured. In the case of Musk’s pay package, it was clear that his influence over the board had led to a situation where the terms were far beyond what could be considered a reasonable and fair compensation for the performance at that time.
While Tesla may seek to restructure a similar pay package, the decision serves as a reminder of the importance of maintaining proper governance standards and ensuring that boards of directors act independently and in the best interest of shareholders. Moving forward, Tesla’s legal team is likely to continue pushing for the reinstatement of the package, and it remains to be seen how this legal saga will unfold, especially considering Tesla’s recent shift of its legal base to Texas, where corporate governance rules may be more favorable to the company’s interests.
Ultimately, the case underscores a broader conversation about the power dynamics within corporate boards and the ethical implications of executive compensation, particularly in a time when scrutiny over such deals is intensifying.
