 "A US judge just blocked Elon Musk's $56 bn pay deal: Here's what happened")
In a blow to Tesla CEO Elon Musk’s earnings potential, a Delaware judge ruled on Monday that he is not entitled to receive the $56 billion compensation package, despite a shareholder vote in June that supported its reinstatement. The ruling, handed down by Chancellor Kathaleen McCormick of the Delaware Court of Chancery, follows her January decision that the pay package was excessive, a move that stunned investors and cast doubt over Musk’s future at the electric vehicle giant.
Musk’s pay package under fire
The $56 billion package, one of the largest in corporate history, was originally structured to reward Musk with stock options tied to Tesla hitting certain performance and valuation goals. Tesla’s board had defended the pay structure, arguing that Musk’s leadership and vision were integral to the company’s rapid growth. However, Chancellor Kathaleen McCormick’s earlier ruling had rescinded the package, deeming it “unfathomable” and citing Musk’s overwhelming influence over the board during the pay negotiations, despite holding only around 22 per cent of Tesla’s stock.
In her latest ruling, McCormick ruled that the June vote by Tesla shareholders to approve the package could not override the prior decision. Tesla had hoped the vote would be sufficient to reinstate the package, arguing that it reflected shareholder support for Musk’s leadership. However, McCormick rejected this argument, emphasising that such a ratification vote should have been conducted before the trial, and that a company cannot ratify a transaction involving a conflicted controller — like Musk.
“Were the court to condone the practice of allowing defeated parties to create new facts for the purpose of revising judgments, lawsuits would become interminable,” McCormick wrote in her 101-page opinion.
Tesla plans appeal
In response to the ruling, Tesla expressed disappointment, stating, “The ruling is wrong, and we’re going to appeal.” The company argued that the judge had disregarded the supermajority of shareholders who voted to reinstate the pay package.
Musk and Tesla now have the option to appeal the decision to the Delaware Supreme Court, a process that could take up to a year to unfold. If successful, the appeal could potentially overturn McCormick’s ruling, but the uncertainty remains high.
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Rising tensions over executive pay
The compensation package originally awarded Musk stock options valued at up to $56 billion, contingent on Tesla meeting specific operational and financial goals. These targets were exceeded, and Tesla's stock has surged, now valuing the package at around $101 billion, following a significant rally after the November 2024 US Presidential election.
Despite the apparent success of the company's stock price under Musk's leadership, Tesla shares dropped 1.4 per cent in after-hours trading following McCormick’s ruling.
The role of corporate governance
The ruling shines a spotlight on the complexities of corporate governance, especially when a company’s founder and CEO holds significant control over its decision-making process. McCormick’s previous opinion found that Musk had improperly influenced the pay negotiations, effectively controlling the process through his dominance on the board, which Tesla shareholders had not been fully informed about.
“Musk improperly controlled the 2018 board process to negotiate the pay package,” McCormick concluded in January, further stating that shareholders were not given a clear understanding of how achievable the package’s goals were when they approved the deal.
Impact on Tesla’s future pay plans
With the court’s ruling, Tesla faces the challenge of determining Musk’s future compensation. While the company has already expressed intentions to appeal, a potential new pay plan could be costly for the automaker. The original pay package, which granted Musk 304 million stock options based on aggressive performance goals, had led to a $2.6 billion charge when implemented. A replacement package with similar terms would likely cost less than 10 per cent of the original value.
Additionally, any attempt to reinstate the previous pay package could trigger significant accounting and tax implications for Tesla, potentially costing the company $25 billion. These costs are tied to the extraordinary value of the stock options Musk would receive, which would be taxed at a steep rate given the current market conditions.
Shareholder sentiment and public backlash
The ongoing legal battle has sparked frustration among Tesla’s retail investors, who largely supported Musk's compensation package in the June shareholder vote. Many of these investors have voiced their anger on social media, claiming that McCormick’s decision undermines shareholder rights.
Omar Qazi, a prominent Tesla investor and social media user (@WholeMarsBlog), mentioned on X (formerly Twitter), “Beyond the pedantic details of legal procedure, the bigger issue here is that the voice of shareholders is being overruled.” Qazi, who has over 551,000 followers, urged that the appeal process should take shareholder opinions into account.
Musk’s influence and future plans
Despite the ongoing legal drama, Musk remains deeply involved in several high-profile ventures, including his work with SpaceX, Neuralink, and a new role with former President Donald Trump’s push to streamline government spending. Musk has shown no signs of slowing down, and his future compensation from Tesla could shape his continued leadership of the company.
Earlier this year, Musk suggested that he might seek a larger stake in Tesla or even pursue new business ventures if his pay package was not restored. This could signal a future where Musk, one of the world’s wealthiest individuals, continues to steer Tesla forward — albeit with heightened scrutiny and potential legal hurdles.
Legal costs and implications for Tesla
McCormick also ordered Tesla to pay $345 million in attorney fees to the law firms representing shareholders in the legal case against Elon Musk’s pay package. Though much lower than the $6 billion originally sought, it is still among the largest fee awards in securities litigation history. Tesla now faces a decision: create a new pay plan, potentially escalating legal battles, or settle with shareholders to avoid further litigations.
As the case moves toward appeal, the legal and financial stakes remain high for both Musk and Tesla. With the Delaware Supreme Court poised to take up the case, the coming months could offer a clearer picture of how corporate governance will evolve in the Tesla saga and the broader tech industry.
[With agency inputs]