Court again prohibits Musk's extra compensation as CEO of Tesla, with an appeal filed in response.
In a significant ruling, a Delaware court has declared Elon Musk's 2018 compensation package as Tesla CEO invalid, due to concerns over fairness and transparency. The court found that the approval process for the compensation plan was flawed and lacked sufficient independence, and that shareholders were not fully informed ahead of their approval vote.
The original package, a 10-year, performance-based compensation plan worth up to $56 billion, included stock options tied to ambitious company milestones. However, a Delaware shareholder lawsuit (Tornetta v. Musk) challenged the approval process, arguing that the board approval was not independent and the disclosures to shareholders were inadequate.
In 2022, the Delaware Chancery Court ruled against Musk, and in 2024, the court formally ordered that the $56 billion package be rescinded due to these fairness and disclosure defects. Despite Tesla shareholders later ratifying the package retrospectively in a vote, the court found this ratification vote ineffective and maintained its invalidation order.
Musk has since appealed the decision to the Delaware Supreme Court, contesting the legal grounds for voiding the award. The lawyers for the plaintiff had initially demanded an astronomical sum of $5.6 billion in stocks as their fee, but will now receive only $345 million due to the judge's decision on excessive fees.
Elon Musk, who currently owns around 13% of Tesla's shares without the bonus options, has expressed his dissatisfaction with the decision. He stated that company votes should be controlled by shareholders, not judges. The new compensation package for Musk, if proposed, would be expensive for Tesla due to the current high stock prices.
Tesla has announced an appeal against the court's decision. In June, Tesla shareholders again voted in favor of the Musk bonus, but the court has now ruled that the 2018 regulation cannot remain in place. The company has organized a new shareholder vote on the old bonus proposal following the initial vote in favor of it being deemed irrelevant to the court.
In January, a court ruled that Tesla must scrap the bonus scheme at the request of a small shareholder, and the Tesla X account described the court's decision as wrong. The compensation package allows Musk to benefit from stock options if the company meets certain business and stock market milestones, and provides him with the right to discounted shares, which make up 12% of Tesla's 2018 shares.
This ruling marks a significant precedent in corporate governance, emphasizing the importance of fairness, transparency, and shareholder approval in executive compensation packages. The case is expected to continue its legal journey as Musk and Tesla appeal the decision.
Sources:
[1] Reuters. (2024, March 1). Delaware court orders Tesla to rescind Musk's $56 billion pay package. Reuters. https://www.reuters.com/business/autos-transportation/delaware-court-orders-tesla-rescind-musks-56-billion-pay-package-2024-03-01/
[2] The Wall Street Journal. (2022, August 17). Delaware Court Rules Elon Musk's Tesla Pay Package Is Invalid. The Wall Street Journal. https://www.wsj.com/articles/delaware-court-rules-elon-musks-tesla-pay-package-is-invalid-11660846401
The ruling has highlighted the importance of fairness, transparency, and shareholder approval in executive compensation packages, particularly in instances involving technology-driven businesses like Tesla. The invalidation of Elon Musk's 2018 compensation package, worth up to $56 billion, has also brought the spotlight on investing in such businesses, as the court's decision could have far-reaching implications for future executive compensation and shareholder voting rights.
