Delaware judge nullifies Musk's $56 billion compensation deal

Elon Musk's $56 billion compensation plan was declared unjust by a Delaware judge on Tuesday, nullifying the biggest compensation agreement in company history.

Elon Musk, the world's richest man, will not be able to keep his 2018 compensation package, according to a ruling issued Tuesday by Judge Kathaleen McCormick of the Delaware Court of Chancery.

It is possible to appeal the ruling. Chancery Daily, a publication that tracks and updates the Delaware Chancery Court, first reported on Threads.

For Musk and the Tesla board, the decision does not mean a clean break. Unanswered concerns include Musk's compensation and what happens to his fortune, which is primarily concentrated in his numerous businesses.

McCormick stated in her decision that Tesla “bore the burden of proving that the compensation plan was fair, and they failed to meet their burden.”

Musk expressed his dissatisfaction with the decision by taking to X, the social media platform that was once known as Twitter and which he now controls in part because of an earlier McCormick ruling.

pic.twitter.com/27beLd57HX

— Elon Musk (@elonmusk) January 31, 2024

Never incorporate your company in the state of Delaware

— Elon Musk (@elonmusk) January 30, 2024

The judge oversaw Musk's lawsuit against Twitter, which resulted in his consent to finalise the $44 billion acquisition. Selling his Tesla stock allowed Musk to pay for the acquisition of Twitter in large part.

“Never incorporate your company in the state of Delaware,” Musk posted on X. Musk later posted a poll asking whether Tesla should change its state of incorporation to Texas.

Should Tesla change its state of incorporation to Texas, home of its physical headquarters?

— Elon Musk (@elonmusk) January 31, 2024

The dispute revolved around the issue of "fairness," which surfaced in 2019 when Tesla shareholder Richard Tornetta filed a lawsuit to void Musk's 2018 compensation package. At the time, Tornetta said the package was unfairly paid to Musk without requiring him to concentrate solely on the automaker.

Divided into 12 tranches of 1.69 million shares each, the 20.3 million stock option awards made up the 2018 shareholder-approved compensation plan.

As per the terms of the deal, if Tesla reached particular benchmarks for market capitalization, revenue, and adjusted earnings (apart from some one-time expenses like stock compensation), the options would vest in 12 equal instalments.

McCormick remained unfazed, even though many would contend that it was just because the great majority of stockholders authorised it.

She composed her letter due of the “defendants were unable to prove that the stockholder vote was fully informed because the proxy statement inaccurately described key directors as independent and misleadingly omitted details about the process.”

The reason McCormick called the process that resulted in the adoption of Musk's compensation plan "deeply flawed" was because of his close relationship with the individuals, including board members, who were meant to be bargaining on Tesla's behalf.

Additionally, she pointed out that the testimony demonstrated that this was more of a joint endeavour than a negotiation.

Additionally, McCormick considered how reasonable the "price" was. The defendants asked the court to contrast what Tesla "got" with what it "gave." Her appraisal was insufficient. As she puts it:

“The compensation plan was not conditioned on Musk devoting any set amount of time to Tesla because the board never proposed such a term. Swept up by the rhetoric of “all upside,” or perhaps starry-eyed by Musk’s superstar appeal, the board never asked the $55.8 billion question: Was the plan even necessary for Tesla to retain Musk and achieve its goals?”

She acknowledged that Tesla, the defendants, had demonstrated Musk's “uniquely motivated by ambitious goals and that Tesla desperately needed Musk to succeed in its next stage of development.” But she added, “These facts do not justify the largest compensation plan in the history of public markets.”