Why did a Delaware judge shoot down $56bn Tesla pay package for Elon Musk again?

About the $56 billion pay package

Richard Tornetta, a Pennsylvania resident, sued Musk and other Tesla directors in 2018 over Musk’s pay package. At the time, he held just nine shares of the company.

According to a Reuters report, the package gave Musk stock grants of over 300 million Tesla shares worth around 1% of the company’s equity “each time the company achieved one of 12 tranches of escalating operational and financial goals.” This would have effectively made Musk richer by $56 billion at 2018 rates.

Tornetta viewed this as unfair and said, “Shareholders were not told how easily the goals would be achieved when they voted on the package.”

Tesla justified the payout at the time to ensure Musk dedicated his attention to the company. This is backed by his own remarks that he would shift his focus to other pursuits, including developing artificial intelligence, unless his control on Tesla is increased. Musk does not currently receive a salary from the company.

However, Tornetta said that the pay was unnecessary to incentivise Musk to help Tesla succeed, as the billionaire already owned around 22% of the company’s stock. In January, McCormick agreed and ruled that this grant, then described as the “largest executive compensation award in the history of public markets”, could not be justified on any reasonable metric.

McCormick also noted that Tesla’s current board of directors lacks independence as it includes Kimbal Musk, Elon Musk’s brother, and James Murdoch, son of media tycoon Rupert Murdoch, who have close relationships with Musk.

What has happened since the January ruling?

After the January ruling, Musk posted on X, “Never incorporate your company in the state of Delaware.” The company eventually shifted its incorporation to Texas in June, following a shareholder vote.

Tesla subsequently put the original package with enhanced disclosures to a shareholder vote in June and it was passed with 72% support.

On Monday, McCormick ruled that this vote provided no ground to challenge her previous ruling. She wrote, “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.”

However, McCormick allowed a concession for Tesla in charging them $345 million in attorney fees for the plaintiff, a significant reduction from the 29 million Tesla shares, valued at $10 billion on Tuesday (December 3) according to a Bloomberg report. She wrote, “In a case about excessive compensation, that was a bold ask.”

Tesla stock has increased by 44% this year, riding on Donald Trump’s victory in the US presidential election. Thus, the contested stock options have jumped in value to over $100 billion today. According to a Financial Times report, this would push his overall value to $343bn if his stakes in SpaceX, social media platform X and xAI are included. The decision therefore will take a dent in his wealth, but does not significantly alter his billionaire status.

Moreover, his role in the upcoming Donald Trump administration is expected to impact Tesla valuation further, with the company’s shares jumping 42% over the past month.

Musk is now expected to appeal the decision in the Delaware Supreme Court.

This is an updated version of an explainer published on February 2, 2024