Elon Musk, Tesla’s CEO, became one of the world’s wealthiest people, yet his 2018 salary package was denied by a Delaware state court judge.
Delaware Chancery Court Chancellor Kathaleen McCormick, who oversaw the bench trial that concluded in November 2022, ruled on Tuesday that Elon and the Tesla board failed to fulfill their burden of demonstrating that the remuneration arrangement was reasonable.
With Tuesday’s closing price, the 303 million split-adjusted options on stocks that Elon Musk got as part of the package are now worth $51 billion, minus the reasonable $23.34 exercise price per share.
The case was heard in Delaware, the state where Tesla and many other notable US companies were incorporated.
Elon Musk tweeted on Tuesday, saying, “Never incorporate your company in the state of Delaware,” though he did not immediately respond to the announcement.
In a second tweet, he stated, “If you prefer shareholders to decide matters, I recommend incorporating in Nevada or Texas.” Additionally, he posted a poll on X inquiring as to whether Tesla ought to relocate its corporate headquarters to Texas, the state in which it was founded. 88% of those who responded to the poll had not yet cast a ballot as of 7 am ET.
The claim was filed by shareholders, who said that the excessive number of stock options and the directors’ close proximity to Elon prevented them from acting in the best interests of the company’s stockholders.
They further claimed that the financial standards Elon had to meet to be eligible for each of the twelve different “tranches,” or blocks of data, of stock, were not the same as the “stretch achievement goals” that the company had told investors about to secure their support for the package. Rather, they contended that the company’s internal growth estimates, which were disclosed with banks and rating agencies, were virtually the same as the milestones.
Greg Varallo, one of the plaintiffs’ attorneys in the lawsuit, released a statement saying, “We are incredibly grateful for the court’s thorough and exceptionally well-reasoned decision in throwing back the Tesla board’s absurdly outsized pay package for Elon Musk.” He said that by having the dilution from this enormous pay package eliminated, Tesla stockholders will gain from the ruling.
The Judge Dismisses Elon’s Claim
Musk and the Tesla board’s attorneys contended that a shareholder vote authorized the compensation package. With the exception of the votes held by Elon Musk and his brother, 73% of the shares that cast ballots in that election supported the remuneration plan.
Additionally, they contended that since the issuance, the value of the stockholders’ Tesla shares had increased dramatically. The company’s market valuation was $54 billion when the pay package was approved. It had risen to $607 billion by Tuesday’s business close, a gain of more than 1,000%. The Tesla lawyers contended that since Musk played a significant role in the company’s increase in value, the remuneration package was fair.
The claim that Elon Musk would not receive payment if the package was rejected was, however, refuted by McCormick, who stated, Musk’s preexisting equity stake provided him tens of billions of dollars for his efforts.
Additionally, McCormick discovered that Elon Musk was making decisions about his compensation package and that the Tesla board was not serving as the purported check on him and his salary.
She stated that while the governing board of the company and the CEO should sincerely negotiate the CEO’s remuneration because they have different goals, Elon Musk started an autonomous process and adjusted its course and speed as needed.
The judge declared that the entire process was “deeply flawed,” noting that Todd Maron, “Musk’s former separation attorney and whose respect for Musk moved him to tears during his accumulation,” and Antonio Gracias, a personal friend of Elon Musk’s who frequently went on family vacations with the CEO of Tesla, were among the members of the compensation committee.
It is hardly unexpected that there was no significant dispute over any of the provisions of the plan, considering the group of individuals assigned to negotiate on Tesla’s behalf.