Tesla CEO Elon Musk’s salary dispute has taken a new turn, according to CNN. In January, Delaware Chancellor Kathaleen McCormick rejected the validity of a pay package Musk would receive from Tesla, describing it as an “unfathomable” and “unfair” sum to Tesla shareholders. Most recently, she denied the package for a second time. This decision comes despite the pay award being ratified by shareholders in a contested vote in June.
McCormick has become Musk’s worst nightmare, especially considering his package of stock options is currently valued at about $101.45 billion.
Denied for a second time. In a 103-page ruling, McCormick concluded, “The motion to revise is denied. The large and talented group of defense firms got creative with the ratification argument, but their unprecedented theories go against multiple strains of settled law.”
In her ruling, McCormick highlighted four critical flaws in the arguments of Musk’s lawyers:
- Their approach intended to manipulate the outcome of the previous trial using evidence introduced afterward.
- The claim of shareholder ratification was submitted too late.
- What Musk’s lawyers called “common law ratification” has no basis. According to McCormick, an affirmative shareholder vote can’t ratify a conflicted controller transaction, such as the one in question.
- Even if the shareholder ratification of the pay package held some value, the call for a meeting would nullify this ratification due to the “multiple material misstatements in the proxy statement.”
“Each of these defects standing alone defeats the motion to revise,” the ruling says.
Shareholders voted in favor. In May and June, Musk’s supporters actively sought the necessary backing to ratify the pay package agreed upon during the shareholders’ meeting. In the past few, Tesla became a battleground for a “civil war” as shareholders took positions for or against Musk’s compensation package.
Tesla took unprecedented actions to facilitate the vote, including setting up a dedicated website for shareholders and running advertisements on X to promote arguments in support of Musk. In the end, 77% of voters backed the Tesla CEO’s pay package. TechCrunch reported that Musk expressed his gratitude with an enthusiastic “Hot damn, I love you guys” when he took the stage at the company’s annual meeting.
The negotiation process was flawed from the start. On the surface, Musk’s pay package appeared legitimate, given that all agreed-upon targets for revenue, gross operating profit, and market capitalization for 2018 were met. However, McCormick highlighted significant issues with the process. “The process leading to the approval of Musk’s compensation plan was deeply flawed. Musk had extensive ties with the persons tasked with negotiating on Tesla’s behalf,” she said in her January ruling.
McCormick pointed out that Musk had a 15-year personal friendship with compensation committee chairman Ira Ehrenpreis. According to the Delaware judge, he also has a long history of business and personal relationships with fellow committee member Antonio Gracias, with whom he shared family vacations.
She also noted that Todd Maron was part of the working group tasked with defending Tesla’s interests during Musk’s compensation package negotiation. Maron was Musk’s divorce attorney and is known for his deep admiration for the tech mogul. He even cried during Musk’s court deposition.
Salary drama. Throughout the process, Musk’s pay package has fluctuated. When Tesla initially approved the compensation plan in 2018, it was valued at $2.28 billion. The package is structured as call options on nearly 304 million Tesla shares, meaning its value changes with the stock price.
As Tesla’s stock price has risen, the value of the pay award has increased, ranging from $45 billion to $56 billion. In June, the value of Musk’s package with stock options was estimated at $56 billion. Tesla is currently trading at record highs, which means his package is now valued at a staggering $101.45 billion.
Economic blow for all involved. McCormick’s ruling isn’t only severe for Musk, but it also impacts Richard Tornetta, the Tesla shareholder who blocked the compensation. Tornetta had requested 10% of the amount in question, which totals $5.6 billion. “In a case about excessive compensation, that was a bold ask,” the Delaware judge said in her second ruling.
Instead, she awarded Tornetta 15% of the original value of Musk’s pay package from 2018 as compensation. It amounts to $345 million, to be paid in cash or company shares.
The legal battle is far from over. The recent setback for Musk’s pay package doesn’t signify the end of the dispute. During the same shareholder meeting that approved Musk’s compensation plan, the company also decided to relocate Tesla’s headquarters from Delaware to Texas.
This move opens the possibility for Musk’s defense to appeal to the Delaware Supreme Court, and potentially transfer the case out of Delaware’s jurisdiction in search of a more favorable court system now that the company is established in another state.
Image | Thomas Hawk
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