A judge in the US state of Delaware has nullified a $55.8bn pay deal awarded to Elon Musk in 2018 by the electric car company Tesla. The lawsuit was initiated by a shareholder who contended that it was an overpayment.
Judge Kathaleen McCormick found that Tesla directors, who negotiated the pay package, were overly influenced by Mr Musk’s high-profile status and did not fully inform shareholders. She described the deal as “incomprehensible” and ruled it should be cancelled.
The pay deal was the largest ever in US corporate history, contributing to Mr Musk becoming the wealthiest person globally. Bloomberg and Forbes estimated his net worth to be between $198bn and $220bn, in November 2023.
Compensation tied to performance
Tesla’s package linked Mr Musk’s compensation to performance targets, such as Tesla’s share price and profitability. However, he does not receive a salary.
Tesla shareholder Richard Tornetta, despite owning just nine Tesla shares, launched legal action calling for the award to be rescinded. He argued that shareholders were not given sufficient information about how easily Mr Musk’s performance goals would be achieved.
After years of legal argument, a week-long trial commenced in November 2022 where Tesla directors argued that the substantial pay award was designed to ensure that Mr Musk, one of the world’s most dynamic entrepreneurs, would continue to dedicate his attention to the company.
Musk’s other ventures
In addition to being the chief executive and a major shareholder of Tesla, Mr Musk owns several other companies, including the social media platform X, the rocket company SpaceX, and the brain chip firm Neuralink, dividing his time between them.
Judge’s ruling
In her 201-page ruling released on January 30, Judge McCormick stated that incentivising Mr Musk was not the primary reason for the oversized pay package. Instead, the Tesla directors had been influenced by the rhetoric surrounding the often controversial chief executive.
Musk’s ties with compensation committee
Furthermore, Mr Musk had significant ties with members of Tesla’s compensation committee, including a 15-year business and personal relationship with committee chair, Ira Ehrenpreis. Mr Musk was also closely associated with another committee member, Antonio Gracias, with business dealings stretching back two decades.
Board members James Murdoch and Linda Johnson Rice, although not on the compensation committee, were found to have been involved in the process. The judge noted that Mr Musk, along with his brother Kimbal, who also sits on Tesla’s board, recused themselves from most of the meetings and all of the votes on the 2018 pay package.
Conflict of interest
However, she stated that five of the six directors who voted on the pay package were beholden to Musk or had compromising conflicts. Many of the documents the Tesla directors cited as proof of a fair process were drafted, pushed out, or endorsed by Todd Maron, Mr Musk’s divorce-attorney-turned-general-counsel.
Following the release of the ruling, Greg Varallo, an attorney for the Tesla shareholder Mr Tornetta, described it as a “good day for the good guys,” in an email reported by the Reuters news agency. “He treats Tesla like his own, but even if he calls himself the ‘Techno-king of Tesla’, he is not the majority owner,” Prof Quinn added.
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