Tesla urges Delaware Supreme Court to restore Musk’s $56 billion payday

Musk’s $56 billion pay package

One of the biggest corporate legal battles entered its final stage after a lower court judge rescinded the Tesla CEO’s record compensation in January 2024. In December, Chancellor Kathaleen McCormick upheld her previous ruling in a case brought by shareholders, which stated that the process leading to the approval of the pay package was “deeply flawed.”

McCormick ruled that the Tesla board lacked independence from Musk when it approved the pay package in 2018 and that shareholders lacked key information when they voted overwhelmingly in favor of it. As a result, she applied a demanding legal standard and found the pay unfair to investors.

Tesla estimated in 2018 that the stock options plan would be worth $56 billion if the company met operational and financial goals, which it did. Because the stock continued to appreciate, the options are currently worth closer to $120 billion, by far the largest executive compensation ever.

Tesla challenges Delaware court ruling

The case’s outcome could have substantial consequences for the state of Delaware, its widely used corporate law, and its Court of Chancery, a once-favored venue for business disputes that has recently been accused of hostility towards powerful entrepreneurs. The Court of Chancery ruling striking down Musk’s pay has become a rallying cry for Delaware critics. Chancellor Kathaleen

The defendants, current and former Tesla directors, denied wrongdoing and said McCormick misinterpreted the facts and the law.

What Tesla argued

Tesla argued in Dover, Delaware, that the five justices on Delaware’s high court had three avenues to reverse the lower court ruling. They could find that Musk, who owned 21.9% of Tesla stock in 2018, did not control the board pay negotiations and that shareholders were fully informed when they voted to approve it that year.

They could determine that rescinding the pay was an improper remedy because it did not undo the work that Musk had done or the gains that shareholders had received. Or they could determine last year’s ratification vote demonstrated that shareholders wanted to accept the pay deal, despite the legal flaws.

“Shareholders in 2024 knew exactly what they were voting for,” Wall said.

What Richard Tornetta’s lawyer said

Greg Varallo, an attorney for Richard Tornetta, the small investor who brought the case in 2018, said if the court accepted ratification, it would allow a party to change the outcome after a court case had run its course. “Lawsuits would be interminable,” he told the justices.

Varallo tried to convince the justices the lower court ruling was a result of careful fact-finding and based on settled law. “There is nothing extraordinary about this trial opinion,” he said. “What makes it truly extraordinary is that it addresses the largest pay package in human history, awarded to the richest man on earth, who is also one of the most powerful men on earth.”

Prompted in part by the Musk pay ruling, large companies, including Tesla, Dropbox, and the venture capital firm Andreessen Horowitz, switched their legal homes to Texas or Nevada, where courts are friendlier toward directors. Delaware lawmakers responded to the corporate departures, a trend known as “Dexit,” by overhauling its corporate law.

If Musk loses the appeal, he will still reap tens of billions of dollars in stock from the electric vehicle company, which agreed in August to a replacement deal if his 2018 plan is not restored. Tesla has said the replacement plan will cost $25 billion or more in accounting charges.

The company said the replacement award was meant to retain and focus Musk, who said earlier this year he was forming a new US political party, on transitioning Tesla to robotics and automated driving. Tesla is now incorporated in Texas, where it is far more difficult for a shareholder to challenge board decisions.

Musk’s $1 trillion compensation plan

Tesla’s board last month proposed a $1 trillion compensation plan, highlighting confidence in Musk’s ability to steer the company in a new direction, even as Tesla loses ground to Chinese rivals in key markets amid softening EV demand.

The justices are also considering the $345 million legal fee that McCormick ordered Tesla pay to the attorneys hired by Tornetta, who held just nine Tesla shares when he sued.