DOVER, Delaware – Elon Musk does not have a right to the unprecedented compensation package that Tesla’s board of directors approved on Tuesday, which could be worth more than $55 billion.
Chancellor Kathleen St. Jude McCormick’s verdict comes more than five years after a shareholder lawsuit challenged Tesla CEO Musk and the company’s directors. They were accused of failing to fulfil their duties to the manufacturer of electric vehicles and solar panels, resulting in a waste of business assets and unfair enrichment for Musk.
The remuneration package, according to the shareholders’ attorneys, should be illegal because Musk dictated it and false negotiations with directors who were not independent of him led to its creation. They further asserted that shareholders who received inaccurate and incomplete information in a proxy statement approved it.
Elon Musk Cannot Keep Tesla Pay Package Worth More Than $55 Billion, Judge Rules
Defence attorneys argued that an independent compensation committee fairly negotiated the pay plan, included performance milestones so lofty that some Wall Street investors mocked them, and was approved by a shareholder vote that was not even required by Delaware law. They also claimed Musk was not a controlling shareholder because he held less than one-third of the firm at the time.
A counsel for Musk and other Tesla defendants did not immediately respond to an email requesting comment.
However, Musk responded to the verdict on X, the social media network formerly known as Twitter that he owns, by providing business advice. “Never incorporate your company in the state of Delaware,” he said. He said, “I recommend incorporating in Nevada or Texas if you prefer shareholders to decide matters.”
Musk, who topped Forbes’ list of the world’s richest people on Tuesday, challenged Tesla’s board earlier this month to devise a new pay plan for him that would include a 25% interest in the company. On an earnings call last week, Musk, who presently owns 13%, said that while he cannot control the company with a 25% ownership, he does have a significant impact.
In the November 2022 trial testimony, Musk denied that he dictated the specifics of the compensation package or attended any sessions where the board discussed the proposal, its remuneration committee, or a working group that assisted in its development.
Elon Musk Cannot Keep Tesla Pay Package Worth More Than $55 Billion, Judge Rules
McCormick concluded, however, that because Musk was a controlling stakeholder with a possible conflict of interest, the pay package needed to be held to a higher standard.
“The process leading up to the approval of Musk’s compensation plan was deeply flawed,” McCormick wrote in the colourfully written 200-page ruling. “Musk had extensive ties with the persons tasked with negotiating on Tesla’s behalf.”
McCormick also mentioned Musk’s long-standing business and personal contacts with pay committee head Ira Ehrenpreis and fellow member Antonio Gracias. She also mentioned that general counsel Todd Maron, Musk’s old divorce attorney, was in the working group negotiating the pay deal. Maron served as Musk’s main intermediary, and the court noted in its decision that it was unclear which side of the argument Maron supported. Nevertheless, Maron created many of the documents that the defendants cited as evidence of a fair process.
McCormick concluded that the only appropriate action was to cancel Musk’s remuneration deal. “In the final analysis, Musk launched a self-driving process, recalibrating the speed and direction along the way as he saw fit,” she wrote in a statement. “The procedure came at an unreasonable cost. Through this litigation, the plaintiff seeks a recall.”
Greg Varallo, a lead attorney for the shareholder plaintiff, hailed McCormick’s move to rescind Musk’s “absurdly outsized” compensation deal.
“The fact that they lost this in Delaware court is jaw-dropping,” said Wedbush Securities analyst Dan Ives. “This verdict is unprecedented. Going in, I believe investors assumed it was just legal noise and that nothing would come of it. The fact that they went head-to-head with Tesla, Musk, and the board and overturned this is a significant legal decision.”
During his trial evidence, Musk disputed that his friendships with specific Tesla board members, which included several vacations together, meant they were likely to follow his orders.
The proposal intended for Musk to earn billions of dollars if Tesla, based in Austin, Texas, met specified market capitalization and operational targets. Musk, who held approximately 22% of Tesla when the plan was authorized, would get stock equal to 1% of outstanding shares at the time of the grant. If the company’s market valuation increased by $600 billion, his stake in it would rise to almost 28%.
Elon Musk Cannot Keep Tesla Pay Package Worth More Than $55 Billion, Judge Rules
Each milestone entailed increasing Tesla’s market value by $50 billion while reaching aggressive revenue and pretax profit growth goals. Musk was only eligible for the full $55.8 billion pay plan if he led Tesla to a market capitalization of $650 billion and unprecedented revenues and earnings within a decade.
According to the plaintiff’s attorneys’ January post-trial brief, Tesla has met all twelve market capitalization milestones and eleven operational milestones, resulting in almost $28 billion in stock option profits for Musk. However, the stock option grants require a five-year holding period.
During the trial, defence counsel Evan Chesler argued that the incentive package was a “high-risk, high-reward” transaction that benefited Tesla stockholders and Musk. After the plan was implemented, the company’s worth increased from $53 billion to more than $800 billion, briefly reaching $1 trillion.
According to Chesler, Tesla included the $55 billion pay amount in the proxy statement because the business wanted shareholders to understand that “this was a heart-stopping number that Mr. Musk could earn.”
SOURCE – (AP)
