Elon Musk, the visionary entrepreneur behind Tesla Inc., is grappling with a significant setback as a Delaware judge nullified his $55 billion pay package. This decision, arising from a shareholder’s challenge on grounds of excessiveness, poses a substantial threat to Musk’s colossal wealth and raises uncertainties about the future of his enterprises.
However, the fate of Musk’s fortune now hangs in the balance pending a probable appeal.
In a groundbreaking ruling on Tuesday, the Delaware Chancery Court invalidated Musk’s substantial compensation plan, marking his first major legal defeat. This development mandates Tesla’s board to initiate a fresh proposal for executive compensation, scrapping the ambitious plan granted to Musk over five years ago. The news had an immediate impact, with Tesla’s stock sliding about 3% in after-hours trading.
Despite being granted the largest executive compensation plan in history, Musk refrained from exercising his options due to the legal challenges faced in the Delaware Chancery Court. Musk, who previously sold a significant portion of his Tesla shares to acquire Twitter, has consistently urged the board to arrange another substantial stock award. He argues that a larger stake in Tesla is crucial for maintaining control and advancing the company’s initiatives in artificial intelligence.
This legal ruling has cast a shadow over the future of Musk’s wealth. Valued at approximately $51.1 billion, the options constituted one of his most valuable assets. Without them, his net worth would plummet to $154.3 billion, making him the third-richest person globally, a significant shift from his consistent position as the world’s wealthiest individual in recent years, according to the Bloomberg Billionaires Index.
Elon Musk’s New York-based lawyer, Evan Chesler, has not provided immediate comments on the court’s decision.
The Delaware Chancery Court Chief Judge, Kathaleen St. J. McCormick, delivered the verdict after a trial concluded over a year ago. The judge sided with a shareholder who contended that Tesla directors failed to make proper disclosures about the 2018 executive compensation package and the performance benchmarks tied to Musk.
“In the final analysis, Musk launched a self-driving process, recalibrating the speed and direction along the way as he saw fit,” wrote Judge McCormick in her 200-page ruling. “The process arrived at an unfair price. And through this litigation, the plaintiff requests a recall.”
Musk, 52, has consistently held the top position on Bloomberg’s wealth list, primarily due to his stake in Tesla, the world’s most valuable auto company. The vested stock options from his compensation plan, tied to performance targets, remained unexercised, as revealed in regulatory filings.
Responding to the court’s decision on his social media platform, Musk suggested, “Incorporate in Nevada or Texas if you prefer shareholders to decide matters.”
Known for defying corporate norms, Musk has typically emerged victorious in court battles, including a previous shareholder suit related to his acquisition of renewable-power provider SolarCity.
In the compensation case, lawyers representing Tesla shareholder Richard Tornetta argued that board members compromised their independence, allowing Musk to shape the details of his pay plan. McCormick noted Musk’s acknowledgment of essentially “negotiating against myself” during the approval process.
The judge criticized the absence of adversarial negotiations between the board and Musk regarding the grant’s size, calling the compensation plan “historically unprecedented.” Musk’s defense failed to justify the necessity of such a plan to motivate transformative growth, as Musk had no intentions of leaving Tesla.
During an earnings call, Musk emphasized the importance of a larger stake in Tesla for maintaining control rather than purely financial considerations. He expressed concerns about being ousted by shareholder advisory firms and criticized proxy advisers Glass Lewis and Institutional Shareholder Services.
Greg Varallo, one of Tornetta’s lawyers, praised the court’s decision, calling it the undoing of an “absurdly outsized pay package for Musk” and highlighting the relief for Tesla shareholders from the share-dilution impact.
The next steps remain uncertain, as it is unclear whether Musk will appeal the ruling or if Tesla’s board will formulate a new compensation plan. Musk, who has committed a substantial portion of his wealth to SpaceX’s ambitions of colonizing Mars, vowed to use the options from the 2018 package for funding if upheld.
The judge acknowledged Musk’s belief in a moral obligation to direct wealth toward Mars colonization in a post on Twitter in 2018. Musk stated, “Colonizing Mars is an expensive endeavor,” expressing his commitment to allocating resources for this mission alongside addressing problems on Earth.
