Elon Musk Can't Keep Tesla Pay Package More Than $55 Billion, Judge Rules: NPR

Tesla CEO Elon Musk waves as he arrives at Atreggio, the annual political festival organized by Giorgia Meloni's Brothers of Italy political party, on December 16, 2023 in Rome.

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Tesla CEO Elon Musk waves as he arrives at Atreggio, the annual political festival organized by Giorgia Meloni's Brothers of Italy political party, on December 16, 2023 in Rome.

Alessandra Tarantino/AP

DOVER, Del. – Elon Musk is not entitled to a major compensation package awarded by Tesla's board of directors worth more than $55 billion, a Delaware judge ruled Tuesday.

CEO Kathleen St. Jude McCormick's ruling comes five years after a shareholder lawsuit targeted Tesla CEO Musk and company directors. They were accused of breaching their obligations to the maker of electric vehicles and solar panels, resulting in wastage of corporate assets and unjust enrichment for Kasthuri.

The shareholder's attorneys argued that the compensation package should be voided because it was dictated by Musk and was the result of sham negotiations with directors who did not depend on him. They also claimed that it was authorized by shareholders that misleading and incomplete disclosures were made in the proxy statement.

Defense attorneys countered that the pay plan was fairly negotiated by an independent compensation committee whose members were blessed with a shareholder vote that was not even required under Delaware law, with performance milestones so high they were derided by Wall Street investors. They also argued that Musk was not a controlling shareholder because he owned less than a third of the company at the time.

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An attorney for Musk and the other Tesla defendants did not immediately respond to an email seeking comment.

But Musk responded to the ruling by X, the social media platform he formerly owned called Twitter, by offering business advice. “Never incorporate your company in the state of Delaware,” he said. Then he added, “If you want shareholders to decide things, I recommend incorporating in Nevada or Texas.”

Musk, who topped Forbes' list of the world's richest men on Tuesday, challenged Tesla's board earlier this month to come up with a new compensation plan that would give him a 25% stake in the company. In an earnings call last week, Musk, who currently owns 13%, explained that with a 25% stake, he cannot control the company, although he will have strong influence.

In hearing testimony in November 2022, Musk denied dictating the terms of the compensation package or attending any meetings where the plan was discussed by the board, its compensation committee or the task force that helped develop it.

However, since Musk was the controlling shareholder with a potential conflict of interest, McCormick determined that the pay package should be subject to more stringent standards.

“The process that led to the approval of Musk's compensation plan was deeply flawed,” McCormick wrote in a colorfully written 200-page conclusion. “Musk had extensive relationships with people negotiating on Tesla's behalf.”

McCormick specifically cited Musk's long business and personal relationships with compensation committee chairman Ira Ehrenpreis and fellow board member Antonio Gracias. He also noted that General Counsel Todd Maron, Musk's former divorce attorney, is on the team working on the salary package.

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“In reality, Maron was the primary between Musk and the group, and it was unclear whose side Maron saw himself as,” the judge wrote. “Many of the documents cited by defendants as evidence of further due process were drafted by Maron.”

McCormick concluded that the only appropriate solution was to cancel Musk's compensation package. “In the final analysis, Musk began a self-driving process, reassessing speed and direction as he saw fit,” he wrote. “The process came at an unreasonable cost. And with this lawsuit, the plaintiff calls back.”

Greg Varallo, the lead attorney for the shareholder plaintiff, praised McCormick's decision to replace the “ridiculously neglected” Musk pay package.

“The fact that they lost this in the Delaware court was a jaw-dropper,” said Wedbush Securities analyst Don Ives. “It's unprecedented, a ruling like this. I think it's typical legal noise to go to investors and nothing is going to come out about it. They went overboard with Tesla and Musk and the board and overturned this. It's a big legal decision.”

During his trial testimony, Musk downplayed the idea that his friendship with some Tesla board members, including sometimes vacationing together, made them likely to do his bidding.

The plan called for Musk to reap billions if Tesla, based in Austin, Texas, reached certain market capitalization and operational milestones. For each simultaneous meeting of the market cap milestone and the operational milestone, Musk, who owned about 22% of Tesla when the plan was approved, will receive shares equal to 1% of the shares outstanding at the time of the grant. If the company's market capitalization increases by $600 billion, his interest in the company will grow to about 28%.

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Each milestone includes increasing Tesla's market capitalization to $50 billion and achieving aggressive revenue and pre-tax profit growth targets. Musk was able to reap the full benefits of a $55.8 billion pay plan by leading Tesla to a $650 billion market capitalization and unprecedented revenue and earnings within a decade.

Tesla has reached all twelve market capitalization milestones and eleven operating milestones, giving Musk nearly $28 billion in stock option gains, according to a January post-trial brief filed by plaintiffs' attorneys. However, stock option grants are subject to a five-year holding period.

Defense attorney Evan Chesler argued at trial that the compensation package was a “high-risk, high-reward” deal that benefited not only Musk, but also Tesla shareholders. After the plan was implemented, the company's value rose from $53 billion to more than $800 billion, briefly reaching $1 trillion.

Chesler also said Tesla confirmed the $55 billion in compensation was included in the proxy statement.

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