A Delaware judge on Tuesday overturned Tesla CEO Elon Musk’s $56 billion payout to Tesla CEO Elon Musk, CNBC reports.
According to the judge’s ruling, the company’s board of directors failed to provide compelling evidence “that the compensation plan was fair” or prove that they negotiated with him at all.
After news of the ruling in a lawsuit filed by Richard Tornetta, a shareholder in the electric car maker, became public, Tesla’s share price fell about 3 per cent in over-the-counter trading on Tuesday.
Chancery Court Chancellor Kathaleen McCormick told the parties in the lawsuit to consult on what the final order would be, ordering Musk to return the compensation he received under the plan. Elon Musk may appeal the decision to the Delaware Supreme Court.
The compensation package that Tesla gave Musk in 2018 was the largest compensation plan in the publicly traded corporation’s history, McCormick noted in her 200-page ruling.
The package made the Tesla and SpaceX boss a centibillionaire and the richest man on the planet. As part of the plan, Musk could receive 12 tranches of Tesla stock options that would vest if the company’s market capitalisation grew by $50 billion and Tesla reached its revenue target.
McCormick ruled that Tornetta had proved that Musk “controlled Tesla” and that the process leading to the board’s approval of his compensation was “deeply flawed.”
She wrote that Musk had “extensive ties” with the people who were negotiating for Tesla on the package, including members of management “who were beholden to Musk,” among them General Counsel Todd Maron, his former divorce attorney.” McCormick added:
“There is no greater evidence of Musk’s status as a transaction-specific controller than the Board’s posture toward Musk during the process that led to the Grant. Put simply, neither the Compensation Committee nor the Board acted in the best interests of the Company when negotiating Musk’s compensation plan. In fact, there is barely any evidence of negotiations at all. Rather than negotiate against Musk with the mindset of a third party, the Compensation Committee worked alongside him, almost as an advisory body.”
Elon Musk did not immediately respond to a request for comment. But in a tweet late Tuesday afternoon, he wrote:
“Never incorporate your company in the state of Delaware.”
Later, he started a poll with the question:
“Should Tesla change its state of incorporation to Texas, home of its physical headquarters?”
Tornetta’s lawyer, Greg Varallo, in a statement said:
“We are enormously grateful for the Court’s thorough and extraordinarily well-reasoned decision in turning back the Tesla board’s absurdly outsized pay package for Musk. The Court’s hard work will redound directly to the benefit of Tesla investors, who will see the dilution from this gargantuan pay package erased.”
McCormick’s decision was based on a finding that Musk, not the company’s board and shareholders, controlled Tesla, at least when it came to setting his compensation.
The judge wrote:
“In addition to his 21.9% equity stake, Musk was the paradigmatic “Superstar CEO,” who held some of the most influential corporate positions (CEO, Chair, and founder), enjoyed thick ties with the directors tasked with negotiating on behalf of Tesla, and dominated the process that led to board approval of his compensation plan.”
Tesla and Musk’s attorneys, the court decided, “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.”
Earlier this month, Musk began claiming 25% voting control of Tesla. He currently owns about 13% of the company. Musk wrote in a post on X:
“I am uncomfortable growing Tesla to be a leader in AI & robotics without having ~25% voting control. Enough to be influential, but not so much that I can’t be overturned.”
Musk owns X and runs it, having purchased it in late 2022.
