A judge in Delaware has ruled that Elon Musk is not eligible for the significant compensation package given to him by Tesla’s board of directors, which could be valued at over $55 billion.

Chancellor Kathaleen St. Jude McCormick’s decision was made over five years after a lawsuit was filed by shareholders against Tesla CEO Musk and the company’s directors. They were alleged to have violated their responsibilities to the electric vehicle and solar panel manufacturer, leading to loss of corporate resources and undeserved benefits for Musk.

The attorneys representing the shareholder argued that the compensation agreement should be nullified due to Musk’s influence and the deceptive negotiations with directors who were not impartial. They also alleged that shareholders approved the agreement based on misleading and incomplete information presented in a proxy statement.

The defense lawyers argued that the payment arrangement was fairly discussed by a committee of unbiased members, included ambitious performance goals that were mocked by certain Wall Street investors, and approved by a shareholder vote that was not mandatory according to Delaware law. They also contended that Musk did not have control over the company as he owned less than one-third of it.

The lawyer representing Musk and the other Tesla defendants did not promptly reply to an email requesting a statement.

Musk responded to the decision regarding X, the social networking site previously known as Twitter which he owns, by providing business guidance. He advised, “Avoid incorporating your company in Delaware.”

During the trial in November 2022, Musk refuted claims that he had control over the terms of the compensation package or was present at any meetings where the board, compensation committee, or working group discussed the plan.

McCormick concluded that due to Musk’s role as a majority shareholder and potential conflict of interest, the compensation plan must adhere to a stricter standard.

“The process that resulted in the approval of Musk’s compensation plan was severely flawed,” stated McCormick in his vividly-worded 200-page ruling. “Musk had significant connections with the individuals responsible for negotiating on behalf of Tesla.”

McCormick mentioned Musk’s extensive professional and personal connections with Ira Ehrenpreis, the chairman of the compensation committee, and Antonio Gracias, another member of the committee. She also pointed out that the team responsible for creating the pay package included Todd Maron, Musk’s previous divorce lawyer who now serves as general counsel.

The judge stated that Maron acted as a main intermediary between Musk and the committee, but it is uncertain whose interests he aligned with. However, the defendants used several documents written by Maron as evidence of a fair process.

McCormick determined that the most appropriate solution would be to retract Musk’s compensation package. She stated, “Ultimately, Musk initiated a self-directed procedure, altering the pace and course as he deemed necessary. This procedure resulted in an unjust price. As a result of this lawsuit, the plaintiff is seeking a retraction.”

Greg Varallo, the main lawyer representing the shareholder who filed the lawsuit, commended McCormick’s choice to overturn the “excessively large” compensation package for Musk.

Wedbush Securities analyst Dan Ives described the outcome of the Delaware court case as surprising and unprecedented. Many investors initially dismissed it as routine legal matters, but the ruling against Tesla, Musk, and the board is a major legal victory.

Musk testified during his trial and dismissed the idea that his relationships with specific members of the Tesla board, which included occasional vacations together, implied that they would obey his commands.

The agreement stated that Musk would receive a large sum of money if Tesla achieved specific market capitalization and operational goals. This would occur each time the company reached a market cap and operational milestone simultaneously. Musk, who held approximately 22% of Tesla at the time of the agreement, would be granted stocks equal to 1% of outstanding shares. If Tesla’s market cap increased by $600 billion, Musk’s ownership in the company would rise to around 28%.

Every goal involved increasing Tesla’s market value by $50 billion and achieving ambitious targets for revenue and pre-tax profit growth. Musk would only receive the full amount of his compensation plan, which totaled $55.8 billion, if he guided Tesla to a market value of $650 billion and record-breaking levels of revenue and earnings within ten years.

According to a brief submitted by the plaintiff’s lawyers in January, Tesla has successfully reached all twelve market capitalization goals and eleven operational goals, resulting in stock option gains of approximately $28 billion for Musk. The stock options are subject to a five-year hold period.

The defense lawyer, Evan Chesler, stated during the trial that the remuneration plan was a high-risk, high-reward arrangement that not only benefited Elon Musk but also Tesla shareholders. Following the implementation of the plan, the value of the company, headquartered in Austin, Texas, soared from $53 billion to over $800 billion, with a brief peak of $1 trillion.

According to Chesler, Tesla deliberately included the $55 billion compensation amount in their proxy statement to inform shareholders that it was a significant and potentially staggering sum that Mr. Musk could potentially receive.

Source: wral.com