A recent legal ruling has overturned the controversial $55.8 billion pay package awarded to Elon Musk, Tesla’s CEO, deeming it an “unfathomable sum” that was unjust to shareholders. Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery declared on Tuesday that Tesla’s board of directors had failed to demonstrate the fairness of Musk’s compensation to shareholders.
In a substantial 200-page ruling, McCormick stated that the defendants were burdened with proving the fairness of what was considered the largest potential compensation plan in the history of public markets. She concluded that this task proved too challenging. The lawsuit challenging Musk’s pay package was initiated by a shareholder who alleged that Musk held close ties with the Tesla board and had an undue influence on negotiations.
Musk and Tesla contended that ensuring Musk’s continued leadership was crucial for the company’s future, asserting that the deal had concessions for shareholders. However, the judge argued that Musk, with his significant equity stake and influential corporate positions, was the “Superstar CEO” who controlled Tesla, especially in the context of his compensation plan.
The question now arises: What happens next?
With the voiding of Musk’s pay package, Tesla board members are facing what Wedbush Securities analyst Daniel Ives describes as a “tornado situation.” They must navigate negotiations for a new compensation package that garners approval from both shareholders and Musk. Additionally, Musk recently expressed a desire to increase his ownership stake in the company, adding another layer of complexity to the situation.
To gauge the sentiments of Tesla shareholders, Musk took to X, the social media platform he owns, recommending that the company incorporate in Texas or Nevada. This move reflects a strategic consideration of relocating to a more business-friendly state, raising the question of potential changes to Tesla’s incorporation.
Case Western Reserve University law professor Anat Alon-Beck suggests that Musk’s failure to adhere to the fundamentals of the fairness doctrine and demonstrate the inherent fairness of the pay package is a self-inflicted wound. According to Alon-Beck, these are basic principles that Musk could and should have followed, particularly in the context of Delaware corporate law.
Even with the revoked pay package, Musk remains a major Tesla shareholder, owning approximately 411 million Tesla shares valued at around $78 billion. The court ruling sheds light on broader discussions around executive compensation, especially when compared to the compensation of rank-and-file employees, which often lags significantly behind.
The judge criticized Musk’s 2018 pay package as “absurd,” highlighting its unprecedented scale compared to compensation plans of peers and previous packages. Bart Naylor, financial policy advocate for Public Citizen, called Musk’s pay package an insult to the true worth of a senior manager, emphasizing the need for reevaluation in the executive compensation landscape.
In the aftermath of this legal ruling, Tesla’s board faces pivotal decisions and negotiations, determining the course of Musk’s compensation and potentially reshaping the company’s corporate structure. The outcome will be closely watched, not just by Tesla stakeholders but by those interested in the ongoing debate on executive compensation and fairness in corporate governance.