Judge voids Elon Musk compensation in lawsuit

A Delaware judge on Tuesday voided the $56 billion pay package of Tesla CEO Elon Musk, ruling that the company’s board of directors failed to prove “that the compensation plan was fair” or show much evidence that they had even negotiated with him.

Tesla’s share price slid about 3% in after-hours trading Tuesday following news of the decision in the lawsuit filed by Richard Tornetta, a shareholder in the electric automaker.

Chancery Court Chancellor Kathaleen McCormick told the parties in the lawsuit to confer on what would be a final order directing Musk to return the compensation he has received under the plan.

Musk can appeal the decision to the Delaware Supreme Court.

The pay package that Tesla granted Musk in 2018 was the largest compensation plan in public corporate history, McCormick noted in her 200-page ruling.

The package made the Tesla and SpaceX boss a centibillionaire and the richest person on the planet.

That plan had offered Musk the chance to secure 12 tranches of Tesla stock options, which would vest if the company’s market capitalization increased by $50 billion and Tesla achieved a revenue target.

“Was the richest person in the world overpaid?” asked McCormick in her decision.

“The stockholder plaintiff in this derivative lawsuit says so. He claims that Tesla, Inc.’s directors breached their fiduciary duties by awarding Elon Musk a performance-based equity-compensation plan.”

“In the final analysis, Musk launched a self-driving process, recalibrating the speed and direction along the way as he saw fit,” the judge wrote. “The process arrived at an unfair price. And through this litigation, the plaintiff requests a recall.”

McCormick ruled that Tornetta had proved that Musk “controlled Tesla” and that the process leading to the board’s approval of his compensation was “deeply flawed.”

She wrote that Musk had “extensive ties” with the people who were negotiating for Tesla on the package, including members of management “who were beholden to Musk,” among them General Counsel Todd Maron, his former divorce attorney.

“There is no greater evidence of Musk’s status as a transaction-specific controller than the Board’s posture toward Musk during the process that led to the Grant,” McCormick wrote.

“Put simply, neither the Compensation Committee nor the Board acted in the best interests of the Company when negotiating Musk’s compensation plan. In fact, there is barely any evidence of negotiations at all,” she wrote. “Rather than negotiate against Musk with the mindset of a third party, the Compensation Committee worked alongside him, almost as an advisory body.”

Musk did not immediately respond to CNBC’s request for comment.

In a tweet late Tuesday afternoon, Musk wrote, “Never incorporate your company in the state of Delaware.”

In a later tweet, he started a poll with the question: “Should Tesla change its state of incorporation to Texas, home of its physical headquarters?”

Tornetta’s lawyer, Greg Varallo, in a statement said, “We are enormously grateful for the Court’s thorough and extraordinarily well-reasoned decision in turning back the Tesla board’s absurdly outsized pay package for Musk.”

“The Court’s hard work will redound directly to the benefit of Tesla investors, who will see the dilution from this gargantuan pay package erased,” Varallo said.

McCormick’s ruling hinged on a finding that Musk, rather than its board of directors and shareholders, controlled Tesla, at least when it came to the question of setting his compensation.

The judge wrote: “In addition to his 21.9% equity stake, Musk was the paradigmatic ‘Superstar CEO,’ who held some of the most influential corporate positions (CEO, Chair, and founder), enjoyed thick ties with the directors tasked with negotiating on behalf of Tesla, and dominated the process that led to board approval of his compensation plan.”

Tesla and Musk’s attorneys, the court decided, “were unable to prove that the stockholder vote was fully informed because the proxy statement inaccurately described key directors as independent and misleadingly omitted details about the process.”

Earlier this month, Musk began angling for 25% of voting control over Tesla.

He currently owns about 13% of the company’s stock outright.

“I am uncomfortable growing Tesla to be a leader in AI & robotics without having ~25% voting control. Enough to be influential, but not so much that I can’t be overturned,” he wrote in a post on X, the social media site formerly known as Twitter.

Musk owns X and runs it, having purchased it in late 2022.

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