A Delaware judge has invalidated Tesla CEO Elon Musk’s colossal $56 billion pay package, ruling that the electric car manufacturer’s board of directors failed to demonstrate the fairness of the compensation plan.
The decision, handed down in the Delaware Chancery Court, stems from a lawsuit filed by Tesla shareholder Richard Tornetta.
Elon Musk’s 2018 Pay Package Under Scrutiny
The 2018 pay package, characterized as the largest in public corporate history, catapulted Elon Musk into the realm of centi-billionaires and secured his position as the richest person globally.
The package offered Musk the opportunity to acquire 12 tranches of Tesla stock options, contingent upon the company’s market capitalization surging by $50 billion and meeting a revenue target.
Chancery Court Judge Kathaleen McCormick, in her 200-page ruling, questioned whether Musk, the wealthiest individual globally at the time, was overcompensated.
She noted that Tornetta alleged a breach of fiduciary duties by Tesla’s directors in awarding Musk a performance-based equity compensation plan.
McCormick found that Musk had substantial control over Tesla and highlighted flaws in the process leading to the board’s approval of his compensation.
The judge noted Musk’s close ties with individuals involved in negotiating on Tesla’s behalf, including General Counsel Todd Maron, who had previously served as Musk’s divorce attorney.
Describing Musk’s involvement as a “self-driving process,” Judge McCormick concluded that the compensation plan’s outcome was unfair, granting the plaintiff the right to rescission.
The judge instructed the parties to collaborate on a final order to implement the decision, addressing all relevant issues, including fees.
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Elon Musk’s Control, Compensation, and Governance Scrutinized
Musk, his legal representatives, and Tornetta’s attorney have yet to respond to requests for comments on the ruling. However, Musk took to Twitter, advising against incorporating companies in Delaware.
The judge’s ruling pivoted on the determination that Musk, rather than the board and shareholders, controlled Tesla, particularly concerning decisions about his compensation.
The court also criticized Tesla and Musk’s legal team for failing to demonstrate that the stockholder vote was fully informed, citing inaccuracies and omissions in the proxy statement.
Notably, earlier this month, Musk expressed his desire to secure 25% of voting control over Tesla, currently owning about 13% of the company’s stock.
The legal battle sheds light on the intricate dynamics of executive compensation and corporate governance, as well as the influence of charismatic leaders in shaping their own financial rewards.
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