Elon Musk’s $55.8 Billion Tesla Pay Package Struck Down by Judge

user avatar Author: Editors Desk Source: WSJ:
January 30, 2024 at 20:51
The judge ruled Tesla and Elon Musk failed to prove the compensation plan was fair. PHOTO: BEATA ZAWRZEL/ZUMA PRESS
The judge ruled Tesla and Elon Musk failed to prove the compensation plan was fair. PHOTO: BEATA ZAWRZEL/ZUMA PRESS

The Delaware judge cited Musk’s “extensive ties” with those determining his most recent pay deal, which shareholders approved in 2018.

A Delaware judge struck down Elon Musk’s multibillion-dollar pay package at 

Tesla TSLA 0.35%increase; green up pointing triangle
 after finding the process for securing its approval “deeply flawed,” a major setback for the chief executive of the world’s most valuable automaker.

The decision, issued Tuesday in the Delaware Court of Chancery, calls into question how Tesla’s board plans to compensate Musk, a serial entrepreneur with an array of other business interests.

It also puts greater attention on Musk’s personal wealth. While in recent years he has been ranked as the world’s richest person, most of his resources are tied up in shares of his companies. 

“The process leading to the approval of Musk’s compensation plan was deeply flawed,” Chancellor Kathaleen McCormick wrote in the opinion, citing Musk’s “extensive ties” with those determining his most recent pay deal, which shareholders approved in 2018. The pay package was valued at a maximum of $55.8 billion, McCormick wrote.

“Musk was the paradigmatic ‘Superstar CEO,’ who held some of the most influential corporate positions (CEO, Chair, and founder), enjoyed thick ties with the directors tasked with negotiating on behalf of Tesla, and dominated the process that led to board approval of his compensation plan,” she wrote.

Before the opinion landed, Musk had begun pushing for greater control over Tesla, where he is the largest shareholder with 13% ownership. 

Musk’s personal finances have become more complicated since he sold more than $39 billion in Tesla stock in 2021 and 2022, at least some of it to help purchase the social-media platform Twitter, now X.

Earlier this month, he said he felt uncomfortable transforming Tesla into a leader in artificial intelligence and robotics unless he controls around 25% of the company. 

 At the time, Musk said the Tesla board was waiting for a decision in the Delaware case before revisiting his compensation.

Musk’s 2018 pay package, which consisted of 12 tranches of stock options, had fully vested, though he had yet to exercise any of those options.

A Tesla shareholder, Richard Tornetta, asked Delaware’s business-law court to cancel the pay deal, alleging the Tesla CEO controlled the approval process and that the board misled investors, who signed off on it. Musk has said he didn’t dictate the terms of his pay plan. The case went to trial in late 2022.

When Tesla’s board presented the plan for shareholder approval in 2018, it described those milestones as difficult to achieve. The likelihood Tesla would meet several of the targets in Musk’s compensation package was a key point of contention at trial. 

Attorneys for the plaintiff displayed records showing the company was forecasting it would soon hit three of the performance milestones. Musk and others said they viewed the goals as difficult to achieve.

“Never incorporate your company in the state of Delaware,” Musk tweeted Tuesday after the decision was released. An attorney for the plaintiff praised the decision.

Tesla shares fell 3.6% in after-hours trading Tuesday.

The nonjury trial unfolded in the weeks after Musk acquired X, the social-media company formerly known as Twitter, a tumultuous period in which the takeover drew the CEO’s attention away from Tesla. Musk also runs rocket company SpaceX and is a founder of neuroscience company Neuralink and the tunneling firm Boring Co.

Musk’s outside commitments were top of mind as Tesla’s board began contemplating a new pay package for Musk in 2017, board member and compensation committee chair Ira Ehrenpreis testified at trial.

“I was thinking about how do we keep him engaged at Tesla?” Ehrenpreis said.

The compensation plan Tesla’s board devised was highly unorthodox: no cash and a dozen tranches of stock options that would vest when the company achieved a combination of operational and market valuation milestones.

For all 12 tranches to vest, Tesla—valued at less than $60 billion at the time and bleeding money—needed to reach a market capitalization of at least $650 billion while also hitting various revenue and profit targets. The company cleared the last of those hurdles in 2022.

Musk’s level of control over Tesla’s board also took center stage during a 2021 trial in Delaware over the company’s acquisition of SolarCity, another Musk business. The judge in that case sided with Musk, finding that the board meaningfully vetted the deal for the solar company, though Musk was too involved.

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