Tesla CEO Elon Musk suffered a stunning rebuke Tuesday when a Delaware judge struck down the pay package that helped make him a multi-millionaire and the world’s richest human being.
In a decision that shed a harsh light on the behavior of Musk and Tesla’s board, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery said the CEO had effectively overseen his own compensation plan, which is currently It’s worth around 50 dollars. billion, with the help of obedient board members.
“The process that led to the approval of Musk’s compensation plan was deeply flawed,” the judge said. He ordered the contract that gave Musk “the largest potential compensation plan in the history of the public markets” to be voided and told the parties in the case to figure out how Musk would repay the excess payment.
Some compensation experts said the decision would send a warning to other companies that gave their top executives very large pay packages.
“It’s an incredibly important decision because it establishes that there is overcompensation,” said Sarah Anderson, director of global economics projects at the Institute for Policy Studies, a progressive research group.
When coming up with the stock option package in 2018, Tesla’s board of directors said Musk would only be paid if the company produced exceptional results and its stock price soared.
But a group of Tesla shareholders questioned the package, which ended up giving Musk the right to acquire about 304 million Tesla shares at a preset price of $23.34 per share if the company met certain revenue, profit and profit targets. stock price.
The package, which was divided into 12 separate grants, each tied to its own goal, is worth about $51.1 billion at Tesla’s closing stock price on Tuesday. Musk achieved all 12 goals, but under the terms of his package, he must hold those shares for at least five years before selling them.
Greg Varallo, a lawyer who represented Tesla shareholders, said the shares would be canceled. That would substantially reduce Musk’s wealth and his stake in Tesla, which is around 13 percent after he sold shares to finance his acquisition of Twitter, the company he renamed X.
“The court’s hard work will directly benefit Tesla investors, who will see the dilution of this gigantic pay package erased,” Varallo, a partner at Bernstein Litowitz Berger & Grossmann, said in an email.
Tesla did not immediately respond to a request for comment.
“Never incorporate your company in the state of Delaware,” Musk said in a post on X.
The decision, which can be appealed to the Delaware Supreme Court, is likely to fuel Tesla critics who say there are too few checks on Musk’s behavior. The company’s eight-member board of directors includes several close friends of Musk and his brother, Kimbal. Many board members owed much of his personal wealth to Musk, and he effectively dictated his own pay package, Chancellor McCormick said.
“In the final analysis,” he wrote, “Musk launched a process of autonomous driving, recalibrating speed and direction along the road as he saw fit. “The process came at an unfair price.” The pay package was not necessary to retain Musk or motivate him because he already owned tens of billions of dollars worth of Tesla stock, Chancellor McCormick said.
The information provided to shareholders before they voted to approve the package was “materially deficient,” he said.
The lawsuit, which led to a trial in November 2022, took on greater significance after Musk’s acquisition of Twitter in October. He faced widespread criticism for spending time trying to overhaul Twitter as Tesla’s stock plummeted and its growth slowed amid growing competition. One justification for Musk’s pay package at Tesla was that it was a way to keep him focused on car manufacturing.
The decision also raises questions about how Tesla’s board will address a demand by Musk this month for an even larger stake in the company. Musk said he needed to own 25 percent of Tesla to avoid takeovers and have enough control of the company while he develops robots and other artificial intelligence technologies.
If his demands are not met, Musk said, he will look for unspecified companies outside of Tesla. The company’s board of directors, led by Robyn Denholm, has not publicly responded to her demand for a larger stake in the company.
In his testimony during the trial, Musk suggested that his impact on the auto industry justified his salary. “Tesla has had an immense effect on the world,” he said. “It’s not just Tesla that’s making electric vehicles – we’ve really been the main reason the rest of the auto industry has moved toward sustainable electric vehicles.”
When the package was announced, Tesla was still struggling to produce a large number of cars and few believed Musk would win all the shares. Supporters of the plan also noted that it would gain nothing if performance hurdles were not overcome. They said that would motivate him to make Tesla a leading automaker.
But Chancellor McCormick wrote that Musk already had a 22 percent stake in Tesla before the package, and that those shares would rise in value if the company did well.
“This stake gave him every incentive to take Tesla to transformative levels of growth,” he said.
Executives at Compensia, the consulting firm that helped design the package, did not respond to a request for comment.
The case was heard in Delaware because Tesla, like many companies, is incorporated there. After becoming X, Twitter incorporated in Nevada last year. It was previously incorporated in Delaware.
“People have moved away because they don’t like the judges’ rulings,” said Carl Tobias, a law professor at the University of Richmond, referring to Delaware. “But most people consider it the gold standard.”