On Tuesday, Chancellor Kathaleen St. Jude McCormick, in a ruling, determined that Elon Musk is not entitled to the significant compensation package granted by Tesla’s board of directors, potentially exceeding $55 billion.
This decision follows over five years of litigation initiated by shareholders against Tesla CEO Musk and the company’s directors.
The allegations centered on breaches of duty to the electric vehicle and solar panel manufacturer, resulting in the misallocation of corporate assets and unjust enrichment for Musk.
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The legal representatives of the shareholders contended that the compensation package should be invalidated due to its imposition by Musk and its emergence from purportedly fraudulent negotiations with directors lacking independence from him.
Additionally, they argued that shareholders endorsed the package based on misleading and incomplete disclosures in a proxy statement.
Defense Claims Fair Negotiation of Compensation Plan
The defense counsel asserted that the remuneration plan underwent fair negotiations conducted by an independent compensation committee.
The plan incorporated ambitious performance milestones, which received ridicule from certain Wall Street investors, and obtained approval through a shareholder vote, despite not being obligatory under Delaware law.
Furthermore, they contended that Elon Musk was not a controlling shareholder as his ownership stake in the company was less than one-third at the relevant time.
An attorney representing Musk and other Tesla defendants did not promptly respond to an email seeking commentary.
In response to the ruling, Musk took to X, the social media platform previously known as Twitter, which he owns, and offered business advice.
He stated, “Never incorporate your company in the state of Delaware.”
Musk Denies Involvement in Compensation Package Talks
In testimony during the trial in November 2022, Elon Musk refuted any involvement in dictating the terms of the compensation package or attending meetings where discussions about the plan took place among the board, its compensation committee, or a working group instrumental in its development.
Nevertheless, Chancellor McCormick concluded that due to Musk’s status as a controlling shareholder with a potential conflict of interest, a more stringent standard must be applied to scrutinize the pay package.
McCormick specifically pointed to Musk’s extensive business and personal connections with Ira Ehrenpreis, the chairman of the compensation committee, and Antonio Gracias, another committee member.
She also highlighted the presence of Todd Maron, Musk’s former divorce attorney, in the working group responsible for crafting the pay package.
McCormick determined that the appropriate course of action was the annulment of Musk’s compensation package.
In her final assessment, she expressed that Musk initiated a self-directed course, adjusting the speed and direction according to his discretion.
The outcome of this process resulted in an inequitable valuation.
Through the course of this legal proceeding, the plaintiff seeks a retraction of the compensation package.