Judge Orders Tesla to Undo Pay Package that Helped Make Musk World’s Richest Person

The Washington Post / Faiz Siddiqui, Rachel Lerman, Will Oremus

12:37 JST, January 31, 2024

A Delaware judge on Tuesday ruled that Elon Musk’s generous 2018 compensation package, which helped make the tech entrepreneur the world’s richest person, was unfair and should be undone.

The $56 billion package, advanced by shareholders and Tesla’s board, entitled Musk to stock options in the company as it hit specific performance targets. Shareholders sued Musk, alleging the process that led to the package was improper.

The decision was earlier reported by Chancery Daily, which tracks Delaware Chancery Court matters, on Threads.

Musk issued a stern reaction on X, the social media site he bought in 2022, when it was known as Twitter.

“Never incorporate your company in the state of Delaware,” he said.

The ruling comes at a particularly tense juncture for the Tesla CEO. He has asked for 25 percent control over the company – which went on to become the world’s most valuable automaker after the pay package was implemented – after he sold off billions worth of stock to help fund his $44 billion acquisition of Twitter. Investors, including some who were enthusiastic about the 2018 package, are skeptical of Musk’s request for additional control.

Meanwhile, Tesla reported disappointing quarterly financial results last week that stemmed from steep price cuts that increased sales volume but barely grew its revenue. One analyst described the investor call as a “train wreck.”

In her written opinion, Chancellor Kathaleen McCormick said that plaintiff Richard Tornetta was entitled to “rescission,” meaning the package should be undone.

In a news release, the plaintiff’s attorneys summed up their case as three-pronged.

“During a full trial on the merits, Tesla shareholders alleged that they had proved that a number of the plan’s key milestones that Musk and the board described in their disclosures as very difficult to achieve were, in fact, expected based on Tesla’s confidential projections shared with banks and rating agencies; that the proxy wrongly characterized the compensation committee and the board as ‘independent’ when they were not; and that the proxy misrepresented the genesis of the plan, the specifics having originated with Musk himself rather than the compensation committee of the board,” it read.

Plaintiff’s attorney Greg Varallo applauded McCormick’s ultimate decision.

“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,” he said in a statement. “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 said it was now left to Tesla, Musk and the shareholders to carry out her ruling.

“The parties are to confer on a form of final order implementing this decision and submit a joint letter identifying all issues, including fees, that need to be addressed to bring this matter to a conclusion,” McCormick wrote.

She determined that the company needed to prove its compensation package was fair, but that the task “proved too tall an order.”

The approval process for the compensation package was “deeply flawed,” she wrote, in part because of Musk’s close ties with the people representing the company, including the chair and another member of the compensation committee.

The group that worked on the compensation package also included the company’s general counsel, who once served as Musk’s divorce attorney and “whose admiration for Musk moved him to tears during his deposition,” McCormick wrote.

“In the final analysis, Musk launched a self-driving process, recalibrating the speed and direction along the way as he saw fit,” McCormick said, making a tongue-in-cheek reference to Tesla’s self-driving car ambitions. “The process arrived at an unfair price. And through this litigation, the plaintiff requests a recall.”

Testifying at the trial in November 2022, Musk was calm and soft-spoken. He portrayed Tesla as having been in crisis at the time the pay package took effect, in 2017, due to production delays on its Model 3 sedan. He argued that the benchmarks in the compensation plan had seemed extremely unlikely at the time.

Former Tesla board member Antonio Gracias testified that the board saw the lavish performance bonuses as a way to keep the distractible Musk focused on his work at Tesla.

But, McCormick wrote in her opinion, Musk “had no intention” of leaving the company and the package did not tie Musk to dedicate a specific amount of his time to the company.

“The defendants proved that Musk was uniquely motivated by ambitious goals and that Tesla desperately needed Musk to succeed in its next stage of development, but these facts do not justify the largest compensation plan in the history of public markets.”