After weeks of deliberation, a Delaware judge has ruled in favor of Tesla investors who sued to challenge the $56 billion pay package for Tesla CEO Elon Musk.
The ruling, which was made public in a court filing, marks a major victory for the plaintiffs who argued that Musk's compensation package was excessive and not in the best interest of the company's shareholders.
In her decision, the judge stated that the "collection of features characterizing Musk's relationship with Tesla and its directors gave him enormous influence over Tesla," which ultimately led to the court's ruling in favor of the investors. She also noted that the company failed to prove that the stockholder vote approving the compensation package was "fully informed," as the proxy statement provided inaccurate information about the directors' independence and omitted key details about the process.
This ruling is significant as it requires Tesla to rescind the pay package, which would require Musk to return any shares he acquired through the compensation plan. The judge also directed the two parties to discuss a final form of order to implement her decision, as well as to address any other remaining issues to bring the matter to a conclusion at the trial level. However, the ruling may still be appealed to the Delaware Supreme Court, leaving some uncertainty over the final outcome.
Tesla's compensation package for Musk has been a highly contentious issue, with many investors and experts questioning its fairness and transparency. The plan, which is by far the largest compensation package ever provided to an executive, allowed Musk to buy Tesla stock at heavily discounted prices as the company achieved certain financial and operational goals. Despite Musk not receiving any guaranteed salary, he has qualified for all 12 tranches, or performance targets, in the plan, making him one of the world's wealthiest individuals.
At the heart of the plaintiff's argument was the contention that the Tesla board did not act in the best interest of shareholders in approving such a generous compensation package for Musk. The plaintiffs' lawyers alleged that the board did not disclose to shareholders that the qualifying goals were easier to achieve and that internal projections showed Musk was on track to receive a significant portion of the pay package. Additionally, they argued that the board should have either offered a smaller compensation package or looked for another CEO, rather than allowing Musk to split his time between Tesla and other ventures.
On the other hand, Tesla's defense team argued that the compensation package was necessary to ensure that one of the world's most dynamic entrepreneurs continued to dedicate his attention to the electric vehicle maker. A Tesla director who served from 2007 to 2021, Antonio Gracias, even stated during the trial that the package was a "great deal for shareholders" as it contributed to the company's extraordinary success. However, the judge noted that Gracias had longstanding business relationships with Musk and was personally close enough to vacation with the billionaire's family, raising questions about his objectivity in defending the compensation plan.
In response to the ruling, Musk took to social media platform X to express his frustration. In a post, he wrote "Never incorporate your company in the state of Delaware," which is where Tesla is currently incorporated. In a follow-up post on X, Musk asked users whether Tesla should change its state of incorporation to Texas, where the company's physical headquarters is located. Within half an hour of being posted, over 136,000 users had already voted, with over 90% responding in favor of the change.
The ruling is likely to reignite the debate over Musk's compensation package and put more pressure on the company's upcoming negotiations with the CEO. Musk recently stated that he would only be comfortable expanding Tesla's AI work if he had 25% voting control of the company.
At the time of his comments in mid-January, he owned about 13% of the company's shares. As Tesla's next round of compensation negotiations with Musk approaches, it will be interesting to see how this recent ruling and the public's reaction will impact the outcome.