July 15, 2024

U.S. judge nullifies Elon Musk’s $56bn Tesla compensation package


A judge in the U.S. state of Delaware has voided Tesla CEO Elon Musk’s colossal $56 billion compensation package, siding with shareholder Richard Tornetta, who argued that Musk was overcompensated.

The Delaware Chancery Court judge, Kathaleen McCormick, ruled in favor of Tornetta, granting the annulment of Musk’s 2018 compensation agreement, valued at a staggering $55.8 billion.

McCormick emphasized that the shareholder was “entitled to rescission,” and instructed both parties to “confer” and submit a joint letter identifying all issues, including fees, for resolution at the trial level. The court’s comprehensive 200-page ruling sent shockwaves through financial markets, causing Tesla’s share price to drop over three percent in after-hours trading.

Musk, responding on X (formerly Twitter), expressed his sentiments with a concise message: “Never incorporate your company in the state of Delaware.” Meanwhile, a lawyer representing Musk did not provide an immediate comment on the decision.

Notably, the compensation plan in question, characterized by Judge McCormick as “the largest potential compensation opportunity ever observed in public markets,” allowed Musk to receive Tesla shares in 12 tranches based on specific performance criteria. Greg Varallo, representing the shareholders, praised the court’s decision, stating that it will directly benefit Tesla investors by eliminating dilution resulting from the massive pay package.

During the trial, Musk revealed that, at the time of the pay deal’s approval, investors believed Tesla would fail and go bankrupt. He highlighted the challenging financial position the company faced, emphasizing the low probability of survival. Since then, Tesla’s share price has soared, making it the world’s most valuable carmaker by market capitalization and catapulting Musk to the position of the world’s richest person.

Judge McCormick described Musk as the “paradigmatic ‘Superstar CEO'” and criticized the flawed process leading to the approval of his compensation plan. She highlighted Musk’s influential positions within Tesla, close ties with negotiating directors, and dominance in the approval process. McCormick pointed to Musk’s extensive relationships with compensation committee members, such as Ira Ehrenpreis and Antonio Gracias, raising concerns about the lack of meaningful negotiation over the plan’s terms.

The non-jury trial, which unfolded around the time of Musk’s acquisition of X and his leadership in SpaceX, serves as a pivotal moment in the ongoing scrutiny of executive compensation practices within corporate America. The fallout from this ruling could reverberate across the business landscape, prompting renewed discussions on the accountability and fairness of executive pay.

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