Elon Musk’s $56 billion compensation package, initially approved in 2018, has faced multiple legal challenges, and his latest setback is a ruling from Delaware judge Kathaleen McCormick. In January, McCormick ruled that the compensation, linked to Tesla’s performance, was excessive and not justified, as Musk had significant control over the company.
Despite a resounding 84% approval from Tesla shareholders in June, who ratified the pay package once again, McCormick upheld her decision, reinforcing her view that the deal was unfair to shareholders. This ruling has created significant tension, as Musk’s attorneys had hoped to reverse the judgment following shareholder backing.
The dispute began in 2018 when Tesla’s board approved a pay package for Musk that was heavily tied to the company’s stock performance rather than a traditional salary. This package, totaling 300 million Tesla shares, was designed to incentivize Musk to focus on long-term goals.
However, the judge ruled that Musk, with his considerable influence over the company, had essentially dictated the terms of his compensation, making the deal appear more self-serving than fair to shareholders.
In response to the ruling, Tesla sought to have the compensation ratified again by shareholders in June, where it was overwhelmingly re-approved by those not holding significant stakes, such as Musk’s brother Kimbal.
Despite this shareholder backing, Judge McCormick rejected the argument that the ratification should override her previous ruling. She described the legal theories presented by Musk’s defense as “creative” but ultimately contrary to established law.
Elon Musk
Her judgment emphasized that the board had failed to demonstrate that the terms of Musk’s compensation were entirely fair, particularly considering Musk’s dominant role at the company. The ruling effectively means that, while Musk is entitled to some form of compensation, this particular package was deemed excessively favorable to him, undermining shareholder interests.
Musk’s pay package and its implications go beyond compensation; it could lead to an increase in his stake in Tesla from 13% to more than 20%. This further increase in ownership was part of his long-term plan to have greater control over Tesla’s direction, including its ventures into AI and robotics.
Musk has previously expressed his desire to have around 25% voting control in Tesla to ensure he has enough influence but not so much that he cannot be challenged. He has suggested that without this control, he may reduce his involvement in Tesla’s development of AI and robotics.
In response to the court’s ruling, Musk has made it clear that he plans to appeal, stating that the decision undermines the rights of shareholders to control corporate governance. He voiced frustration over the idea of judges, rather than shareholders, making significant decisions about company control.
Adding fuel to the fire, Musk’s earlier decision to move SpaceX’s incorporation from Delaware to Texas in protest against McCormick’s earlier ruling highlights his determination to protect his interests and the autonomy of shareholders. Additionally, the legal case has seen an unusual twist, with attorneys for the plaintiff demanding an eye-watering $6 billion in fees, which McCormick reduced to $345 million.
