Tesla CEO Elon Musk's $55.8 billion pay package was unfair to the electric carmaker's shareholders and must be rescinded, Delaware Court of Chancery Judge Kathaleen McCormick ruled yesterday. Most of the board members were beholden to Musk or had compromising conflicts, she wrote.
"Swept up by the rhetoric of 'all upside,' or perhaps starry-eyed by Musk's superstar appeal, the board never asked the $55.8 billion question: Was the plan even necessary for Tesla to retain Musk and achieve its goals?" McCormick's ruling said.
The post-trial ruling found in favor of lead plaintiff and shareholder Richard Tornetta, concluding "that the compensation plan is subject to review under the entire fairness standard, the defendants bore the burden of proving that the compensation plan was fair, and they failed to meet their burden."
McCormick's ruling said that the "court orders rescission of the Grant as a remedy for Defendants' fiduciary breaches." This means the contract will be canceled. As McCormick explained, "The remedy of rescission 'restore[s] the parties substantially to the position which they occupied before making the contract.'"
The ruling can be appealed to the Delaware Supreme Court. "Never incorporate your company in the state of Delaware," Musk wrote yesterday in a post on twitter.com. "I recommend incorporating in Nevada or Texas if you prefer shareholders to decide matters," he also wrote.
Tesla gave false, misleading info to shareholders
The Tesla board secured approval of Musk's pay package from a shareholder vote, but the proxy information given to investors was "materially deficient" in McCormick's judgment. The defendants—Musk and other Tesla board members—"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," she wrote.
"In the final analysis, Musk launched a self-driving process, recalibrating the speed and direction along the way as he saw fit. The process arrived at an unfair price. And through this litigation, the plaintiff requests a recall," she wrote.
Musk's pay plan "is the largest potential compensation opportunity ever observed in public markets by multiple orders of magnitude—250 times larger than the contemporaneous median peer compensation plan and over 33 times larger than the plan's closest comparison, which was Musk's prior compensation plan," the ruling said.
Musk already owned 21.9 percent of Tesla before the board approved the 2018 compensation plan. Musk thus had plenty of incentive to remain at Tesla as he "stood to gain over $10 billion for every $50 billion in market capitalization increase," McCormick wrote in her analysis of why the $55.8 billion pay package was unnecessary.
"Musk had no intention of leaving Tesla, and he made that clear at the outset of the process and throughout this litigation. Moreover, the compensation plan was not conditioned on Musk devoting any set amount of time to Tesla because the board never proposed such a term," she wrote.
McCormick is the same judge who oversaw the Twitter lawsuit that forced Musk to complete a $44 billion purchase he tried to get out of.
Board members “beholden to Musk”
McCormick criticized the Tesla board, writing that Tesla Chair Robyn Denholm had a "lackadaisical approach to her oversight obligations." Although Musk and his brother Kimbal recused themselves from the pay-plan vote, "five of the six directors who voted on the Grant were beholden to Musk or had compromising conflicts." This "allow[ed] Musk to dictate the timing of the process and the terms of the Grant," McCormick.
For example, board member James Murdoch "was a long-time friend of Musk before he joined the Board, and they repeatedly vacationed together with their respective families." Board member Antonio Gracias "had business relationships with Musk dating back over 20 years, as well as the sort of personal relationship that had him vacationing with Musk's family on a regular basis."
Ira Ehrenpreis, who chaired the board's compensation committee, was a close friend of Kimbal's and acknowledged that "his personal and professional relationship with the Musk brothers has had a 'significant influence on his professional career.'" Board member Brad Buss "owed roughly 44 percent of his net worth to Musk entities," and "Denholm derived the vast majority of her wealth from her compensation as a Tesla director," the ruling said.
Todd Maron, Tesla's general counsel, wasn't on the board but played a key role in negotiating Musk's pay.
"The working group included management members who were beholden to Musk, such as General Counsel Todd Maron, who was Musk's former divorce attorney and whose admiration for Musk moved him to tears during his deposition," McCormick wrote. "In fact, Maron was a primary go-between Musk and the committee, and it is unclear on whose side Maron viewed himself. Yet many of the documents cited by the defendants as proof of a fair process were drafted by Maron."
Musk demanded more this month
The pay plan gave Musk the opportunity to secure 12 tranches of options, each representing 1 percent of Tesla's outstanding shares as of January 21, 2018. As The New York Times notes, "Musk achieved all 12 goals, but under terms of his package, he has to hold on to those shares for at least five years before selling them."
About two weeks ago, Musk demanded that Tesla give him a 25 percent stake in the company, up from his current 13 percent. Musk sold large portions of his Tesla holdings to finance his 2022 purchase of Twitter.
The plaintiff's law firm said in a press release that McCormick "ordered that the entire pay package be rescinded, thereby setting aside approximately $55 billion in compensation and the dilution to Tesla stockholders that came with it."
Plaintiff's attorney Greg Varallo applauded what he called the "thorough and extraordinarily well-reasoned decision in turning back the Tesla board's absurdly outsized pay package for Musk." Varallo said the ruling "will redound directly to the benefit of Tesla investors, who will see the dilution from this gargantuan pay package erased."
In a separate case in the same Delaware court that was settled in July 2023, Musk and other current and former Tesla board members agreed to return over $735 million to settle a shareholder lawsuit that alleged Tesla directors "grossly" overpaid themselves.
