A Delaware judge invalidated Tesla CEO Elon Musk’s $56 billion pay package on Tuesday, asserting that the company’s board failed to demonstrate the fairness of the compensation plan and lacked sufficient evidence of negotiation with Elon Musk.
Following this decision in a lawsuit filed by shareholder Richard Tornetta, Tesla’s stock price dropped approximately 3% in after-hours trading. Chancellor Kathaleen McCormick of the Chancery Court directed the parties to discuss a final order for Elon Musk to return the compensation received under the plan.
Elon Musk has the option to appeal the ruling to the Delaware Supreme Court. The 2018 pay package, deemed the largest in public corporate history, turned Elon Musk into a centi-billionaire and the world’s richest person, offering him 12 tranches of Tesla stock options tied to market cap and revenue targets.
In her 200-page ruling, McCormick questioned whether Musk was overpaid and stated that Tornetta successfully argued that Tesla’s directors breached their fiduciary duties in awarding Elon Musk the compensation plan. She found that Musk had substantial influence over Tesla and criticized the flawed process leading to the compensation approval.
The judge highlighted Musk’s close ties to those negotiating for Tesla, including General Counsel Todd Maron, and concluded that neither the Compensation Committee nor the Board acted in the company’s best interests during the negotiation.
While Musk did not immediately respond, he later tweeted, “Never incorporate your company in the state of Delaware” and initiated a poll about potentially changing Tesla’s state of incorporation to Texas.
Tornetta’s lawyer, Greg Varallo, praised the court’s decision, stating that it will benefit Tesla investors by eliminating dilution from the contentious pay package. McCormick’s ruling centered on Musk’s control over Tesla’s compensation decisions, asserting that the board and shareholders were unable to prove the stockholder vote was fully informed.
In a recent development, Musk has expressed a desire for 25% of voting control over Tesla, owning about 13% of the company’s stock. His ownership of X, a social media site, has fueled his influence in strategic decisions.