Written by Tom Hulse
Tesla's stock price fell about 3% in extended trading, and some investors eyed the ruling in hopes it would prompt a review of Tesla's governance.
Tesla's board has been criticized for failing to oversee a bellicose, headline-grabbing CEO who has battled regulators and led several other companies at the same time.
The ruling, which can be appealed, invalidates the largest pay package in corporate America. The judge found that the stock-based compensation was negotiated by directors who appeared to be beholden to Mr. Musk, who is currently ranked by Forbes magazine as the world's richest person.
“Overwhelmed by the 'everything is better' rhetoric, or perhaps dazzled by Mr. Musk's superstar appeal, the board never asked the $55.8 billion question. Was the plan really necessary to achieve its goals?'' wrote Katherine McCormick of the Delaware Court of Chancery.
Mr. McCormick directed Tesla shareholders who objected to the pay plan to work with Mr. Musk's legal team on an order enforcing the decision. If the parties agree on a final order and shareholder attorney fees to be paid by Tesla, the case can be appealed to the Delaware Supreme Court.
The decision comes as Tesla warns of slowing growth and the electric vehicle industry reevaluates demand. Tesla has become the world's most valuable automaker under Musk, but much of that value is based on hopes for future breakthroughs such as self-driving robotaxis.
“Never incorporate a company in Delaware,” Musk said in a post on social media platform X, which he acquired in 2022.
Musk's lawyer did not immediately respond to an email seeking comment.
“Have a nice day, good people,” said an email from Greg Ballaro, the attorney for Tesla shareholder Richard Tornetta, who filed the lawsuit in 2018.
CEO compensation
“The incredible scale and unfathomable sum of the largest compensation plan in history was tailored to help Mr. Musk achieve what he believed would create a 'good future for humanity,'” McCormick wrote in a 201-page opinion. It seems so,” he wrote.
Musk testified during a week-long compensation trial in November 2022 that the money would be used to fund interplanetary travel.
“This is how we're going to get humans to Mars,” he testified. “So Tesla can help potentially achieve that.”
The 10-year salary contract that Tesla and Mr. Musk signed in 2018 was worth about $51 billion at Tuesday's closing price of Tesla stock, including the cost of Mr. Musk exercising his options.
That's about a quarter of his $210.6 billion fortune, according to calculations by Forbes magazine, and currently exceeds LVMH by about $2 billion. LVMH.PA French CEO Bernard Arnault and his family.
The ruling comes as Tesla prepares for new compensation negotiations with its CEO. In a post on X earlier this month, Musk said he was reluctant to lead Tesla unless he controlled 25% of the voting power. The billionaire, who owned about 13% of the company at the time, said negotiations would not begin until after McCormick's ruling.
“Given how she describes the board's process through director testimony, there is no way her recent request for 25% will be approved,” said Brian Quinn, a professor at Boston University School of Law. said. “She was dead on arrival,” she said.
McCormick said many of the directors on Tesla's board, including current members Kimbal Musk, the brother of Elon Musk, and James Murdoch, the son of media mogul Rupert Murdoch, have ties with the CEO. He wrote that he lacked independence due to his close personal relationships. Two of Tesla's other current directors, Robin Denholm and Ira Ehrenpreis, showed a lack of independence in determining pay, she said.
The Board of Directors currently has eight members, including the CEO.
Ross Gerber, president and CEO of Gerber Kawasaki Wealth and Investment Management and a Tesla investor, told Reuters that before negotiating Musk's new pay package, He said the ruling showed that the company needed to replace at least three directors with independent directors.
“Essentially, Tesla's entire corporate structure was deemed inappropriate for a publicly traded company,” Gerber said.
Tesla directors argued during the trial that the company was paying money to ensure that one of the world's most dynamic entrepreneurs remained committed to the electric car maker. Antonio Gracias, who served on Tesla's board from 2007 to 2021, called the package “a great deal for shareholders.”
Mr. Tornetta's lawyers say that Tesla's board never told shareholders that the goals were easier to achieve than the company admitted, and that internal projections suggest that Mr. Musk will soon lose his compensation. It argued that it had shown that it would be eligible to receive the majority of the money.
The plaintiffs' legal team also says the board has an obligation to reduce his salary or find another CEO, and should require Musk to work full-time at Tesla instead of focusing on side projects like SpaceX and X. claimed that it was. .
Kristin Hull, founder of Tesla investor Near Impact Capital, said the board is beholden to Musk, which she said is a common problem at other big tech companies. “This is a brother's show,” she said of the situation.
The compensation package gives Musk stock options for about 304 million shares, which he can purchase for about $23.33 per share, well below Tuesday's closing price of $191.59. Musk earned all 12 stock option grants as Tesla gradually achieved its financial and operational goals.
McCormick said Musk has not exercised any of his options, which would require him to hold the shares for five years before selling.
He had no guaranteed salary.
Tesla's value has ballooned from $50 billion at the time of package negotiations to more than $1 trillion in 2021.
Amit Batish of executive compensation research firm Equilar estimated in 2022 that Musk's package was about six times the combined compensation of the 200 highest-paid executives in 2021.
