Judge Cancels $55.8bn Pay Deal Awarded to Elon Musk by Tesla
In a surprising turn of events, a judge in the US state of Delaware has canceled a $55.8 billion pay deal awarded to Elon Musk, the CEO of Tesla. The lawsuit was filed by a shareholder who argued that the payment was an overpayment. Judge Kathaleen McCormick found that Tesla directors, who negotiated the pay package, were “perhaps starry-eyed” due to Musk’s “superstar appeal” and did not fully inform shareholders about the deal. She ruled that the pay deal should be canceled, calling it “unfathomable.”
The pay deal, which was the largest ever in US corporate history, helped make Musk the richest person in the world. His net worth was estimated to be between $198 billion and $220 billion in November 2023. The package tied Musk’s compensation to performance targets, such as Tesla’s share price and profitability, but he does not receive a salary.
The lawsuit was brought by Tesla shareholder Richard Tornetta, who felt that Musk was being overpaid. Despite owning just nine Tesla shares, Tornetta launched legal action calling for the award to be rescinded. He argued that shareholders were not given enough information about how easily Musk’s performance goals would be achieved.
The trial, which lasted for a week in November 2022, saw Tesla directors arguing that the huge pay award was designed to ensure that Musk would continue to dedicate his attention to the company. Musk is not only the chief executive and a major shareholder of Tesla but also owns several other companies, including SpaceX and Neuralink.
However, in her 201-page ruling released on Tuesday, Judge McCormick stated that incentivizing Musk was not the main reason for the oversized pay package. Instead, she found that the Tesla directors had been “swept up by the rhetoric” surrounding Musk and his often controversial reputation. She also highlighted Musk’s “extensive ties” with members of Tesla’s compensation committee, including a 15-year business and personal relationship with committee chair Ira Ehrenpreis.
The judge further revealed that Musk was “close friends” with another committee member, Antonio Gracias, with whom he had business dealings spanning two decades. Although Musk and his brother Kimbal recused themselves from most of the meetings and votes on the 2018 pay package, Judge McCormick found that five of the six directors who voted on the package “were beholden to Musk or had compromising conflicts.”
Additionally, the judge noted that many of the documents cited by the Tesla directors as proof of a fair process were “drafted, pushed out, or endorsed” by Todd Maron, Musk’s divorce attorney turned general counsel. She highlighted Maron’s admiration for Musk, which moved him to tears during his deposition.
Following the release of the ruling, Greg Varallo, an attorney for Tesla shareholder Richard Tornetta, expressed his satisfaction, calling it a “good day for the good guys.” Elon Musk responded to the judgment with a post on X (formerly known as Twitter), recommending against incorporating a company in Delaware and suggesting Nevada or Texas as alternatives.
The cancellation of the pay deal has had an immediate impact on Tesla’s stock price, with shares down by around 2.5% in extended New York trade. This year alone, Tesla shares have lost more than 20% of their value.
When the original pay package was proposed in 2018, it attracted widespread attention and criticism. Several shareholder advisory groups recommended voting against it, deeming it overly generous. Brian Quinn, a professor at Boston College Law School, stated that it was “hard to justify a transaction like this” given Musk’s influence over the board. Although Musk currently owns about 13% of Tesla, he has recently expressed a desire to increase his stake in the company.
The cancellation of the pay deal serves as a reminder that even influential figures like Elon Musk are subject to scrutiny and legal challenges. It highlights the importance of transparency and fair practices in corporate governance, ensuring that shareholders are adequately informed and protected. As Tesla moves forward from this setback, it remains to be seen how the company will navigate its future compensation plans and maintain its position in the electric car market.