Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
A judge in Delaware has rebuffed Tesla’s attempt to revive a $56bn pay package for Elon Musk, saying that shareholders’ overwhelming re-approval was not enough to override her previous rejection of the package.
Monday’s decision is a stinging rebuke of the world’s most valuable carmaker and Musk, its chief executive, the richest man in the world who has been riding high since Donald Trump was elected for a second term as US president a month ago.
Judge Kathaleen McCormick concluded that Tesla’s unprecedented effort to push the 2018 pay package through a second time, four months after she first voided it, was “creative”. But the board “had no procedural ground for flipping the outcome of an adverse post-trial decision based on evidence they created after trial”, she wrote on Monday.
Tesla vowed to appeal against the decision. “This ruling, if not overturned, means that judges and plaintiffs’ lawyers run Delaware companies rather than their rightful owners — the shareholders,” it said. “Absolute corruption,” Musk wrote on X, his social media platform.
An appeal would leave it to the state’s Supreme Court to decide how much weight the decision by Tesla’s shareholders to reapprove it has at a moment when Musk’s social and political power is at its peak.
Musk has gained the ear of Trump after spending more than $100mn on his political campaign. In return, Musk has gained sway over crucial cabinet appointments and been made co-head of an advisory body that has vowed to dramatically shrink the federal budget.
Musk’s pay package of just over 300mn Tesla shares was directly linked to the company’s performance, requiring it to hit a series of ambitious stock price and operational targets to unlock the award. He receives no salary from the carmaker.
Tesla stock has surged 44 per cent this year, much of that coming after Trump’s election victory on November 5. That means Musk’s stock options have soared in value from $56bn when voided in January to more than $100bn today, helping push his overall wealth to $343bn when his stakes in SpaceX, social media platform X and xAI are included.
The board has argued that awarding Musk a new package of the same size could trigger an accounting charge of $25bn due to Tesla’s substantially higher valuation, which could be one factor behind its vow to appeal.
If it is ultimately granted, the package would increase his ownership of Tesla from just under 13 per cent to more than 20 per cent. Musk has previously said that unless his control over Tesla is increased his attention will shift elsewhere, in particular his efforts to develop artificial intelligence.
McCormick, in her original ruling in February, said the Tesla board that approved the package six years ago was too cosy with Musk, and that her analysis of the grant — described as “largest executive compensation award in the history of public markets” — showed that it could not be justified on any reasonable metric.
After McCormick struck down Musk’s pay package the first time, Tesla put the original package — with enhanced disclosures — to a shareholder vote in June. It passed with 72 per cent support.
But McCormick wrote that if companies were permitted to fix breaches of fiduciary duty after unfavourable court decisions, “lawsuits would become interminable”.
Even as Tesla said it tried to address the court’s issues with the board approval process this year, McCormick wrote on Monday that the most recent proxy statement sent to shareholders remained “materially false or misleading”. The filings incorrectly said that the latest shareholder vote would be enough to override her February decision, she said.
Musk’s public ire has thrown a harsh spotlight on Delaware’s status as the premiere destination for public companies’ legal domiciles. Since the February decision, he has loudly complained about the Delaware corporate law court and has moved all of his companies’ incorporations to either Nevada or Texas. In June shareholders also approved a separate plan to reincorporate the company from Delaware, where the vast majority of big public US companies are listed, to Texas, where several other Musk-controlled companies are based.
Last month, Musk posted on his social media platform X: “When there are egregiously wrong legal judgments in a single state that substantially harm American citizens in all other 49 states, the Federal government should take immediate corrective action.”
Tesla’s lawyers did win one concession. McCormick sided with them in finding the “eye-popping” $5.6bn in Tesla stock requested by law firm Bernstein Litowitz, which had represented the Tesla shareholder who brought the suit, was too much. They were awarded $345mn in fees instead.
While conceding that “their methodology for calculating [the] figure is sound”, McCormick concluded: “In a case about excessive compensation, that was a bold ask”.
The lower amount of $345mn, payable in cash or Tesla stock, was calculated by estimating that the value returned to shareholders was closer to $2.3bn, pointing to an accounting charge it took in 2018.
Bernstein Litowitz said in a statement that it hopes the “well-reasoned decision will end this matter for the shareholders of Tesla”. The firm added it would look forward to defending the ruling on appeal if necessary.
“None of this is over,” said Ann Lipton, a law professor at Tulane University. “The difficulty for that court is [that] Musk’s unsubtle threat to use his new political power to retaliate against Delaware makes it very difficult for that court to rule in his favour without looking like it was cowed.”
