Tesla CEO Elon Musk faced a significant legal setback on Monday when a Delaware judge upheld her earlier decision to void his 2018 CEO compensation plan, valued at approximately $56 billion.
The package, deemed the largest in US history for a public company executive, was ruled improperly granted due to what the court described as a flawed approval process.
Key Findings
Chancellor Kathaleen McCormick concluded that Musk had exercised undue control over Tesla’s board, dictating the terms of the pay plan without fair negotiation.
The judge described the process leading to the plan’s approval as “deeply flawed.”
Despite a shareholder vote in June aimed at ratifying the pay plan.
McCormick stated that such post-trial efforts could not alter her decision.
She said:
“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.”
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Responses
In a statement posted on X (formerly Twitter), Tesla announced plans to appeal the ruling.
Musk called the decision “absolute corruption” in a separate post on the platform.
McCormick approved $345 million in legal fees for the firm that successfully represented Tesla shareholders in the case.
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Background and Implications
The 2018 pay package was designed to reward Musk based on Tesla’s market capitalization milestones, potentially granting him options worth billions.
However, the court found that the board failed to independently negotiate the terms and allowed Musk to exert excessive influence.
Fallout from January Ruling
Musk criticized Delaware’s court system, urging companies to avoid incorporating in the state.
Tesla’s shareholders later voted to reincorporate the company in Texas, a move that was finalized earlier this year.
Musk also moved his aerospace company SpaceX’s state of incorporation to Texas.
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Financial Context
Despite the legal challenges, Musk’s financial standing remains robust:
Musk’s wealth has grown by over $43 billion in recent weeks, driven by a sharp rise in Tesla’s stock price.
Musk’s Tesla shares alone are valued at approximately $150 billion, placing him among the world’s wealthiest individuals.
According to Equilar, the voided 2018 compensation plan would have been worth $101.4 billion at today’s stock price.
Broader Implications
This ruling highlights the growing scrutiny of executive compensation, particularly in cases where governance processes may not meet expected standards.
The outcome could influence how public companies structure and approve similar compensation plans in the future.
While Tesla plans to appeal, the decision underscores the importance of robust corporate governance and fair negotiations in ensuring shareholder trust.
