A court in Delaware, United States, has voided a compensation agreement worth $55.8 billion, awarded to Elon Musk in 2018 by the electric vehicle manufacturer Tesla.
A shareholder initiated a lawsuit, contending that the payment was excessive. Judge Kathaleen McCormick ruled the Tesla board’s endorsement of Musk’s compensation was significantly flawed.
Elon Musk posted on his social media platform X, formerly known as Twitter, “Never incorporate your company in the state of Delaware”.
This unprecedented compensation package in corporate history significantly contributed to Musk becoming one of the wealthiest individuals globally.
Tesla’s directors defended the agreement during the trial, stating it was crucial for retaining a leading entrepreneur like Musk and maintaining his focus on the company.
However, Judge McCormick concluded that Tesla and Musk’s legal team failed to demonstrate that the shareholder vote was adequately informed, citing Musk’s close connections with those negotiating on behalf of Tesla.
Brian Quinn, a professor at Boston College Law School, remarked that justifying such a deal is challenging, given the judge’s findings of Musk’s control over the board.
In her 201-page verdict, Judge McCormick labeled the pay as “an unfathomable sum” and unfair to Tesla’s shareholders.
She also observed that Tesla’s directors, who negotiated the pay deal, were overly influenced by Musk’s celebrity status.
Greg Varallo, representing Tesla shareholder Richard Tornetta, who filed the lawsuit in 2018, told Reuters it was a “Good day for the good guys”.
Ray Wang, head of Constellation Research in Silicon Valley, said while the size of the pay is concerning, the crucial issue is the compensation committee’s lack of proper information.
Wang noted, “If the compensation committee had been properly informed, shareholders would not have a case”.
The decision is subject to appeal at the Delaware Supreme Court.
Following the ruling, Tesla shares fell approximately 3% in extended trading in New York, having already lost over 20% of their value this year.
Mr. Musk also posted on X, “I recommend incorporating in Nevada or Texas if you prefer shareholders to decide matters”.
He then conducted a poll asking his followers whether Tesla should “change its state of incorporation to Texas, home of its physical headquarters”.
Professor Quinn commented that such decisions should be left to Tesla shareholders, not Musk’s social media followers.
“He treats Tesla like his own, but even if he calls himself the ‘Technoking of Tesla’, he is not the majority owner”, he added.
Besides leading Tesla and owning substantial shares, Musk also owns multiple companies including X, SpaceX, and Neuralink.
After selling a significant portion of his Tesla shares to purchase X, Musk holds around 13% of the platform, expressing interest in increasing his stake in Tesla.
Musk has voiced concerns about Tesla’s advancements in AI and robotics, stating, “I am uncomfortable with Tesla being a leader in AI and robotics without having 25% voting control”.
He highlighted the risk of Tesla being vulnerable to questionable takeover attempts without greater control over its direction.
“Unless that is the case, I would prefer to build products outside of Tesla”, Mr. Musk added.
