Elon Musk’s multibillion-dollar pay package is rejected again by judge

Tesla’s board had argued that a shareholder vote earlier this year addressed the court’s previous criticisms

A Delaware judge upheld her earlier ruling striking down Elon Musk’s multibillion-dollar pay package, plunging Tesla’s board into more uncertainty over how to compensate its superstar chief executive for a decade of work.

The court’s decision follows a shareholder vote earlier this year approving the pay package for a second time. Tesla had argued that the vote addressed many of the court’s criticisms that Musk’s compensation deal had been flawed, partly because of insufficient disclosures to shareholders.

The judge, Chancellor Kathaleen McCormick, had in January ordered the entire package be rescinded, saying directors were beholden to Musk and the approval process for the pay deal was tainted and lacked transparency.

McCormick said in her latest opinion that she wasn’t swayed by the second shareholder vote. Lawyers for Tesla and Musk “got creative” with their arguments to overturn her prior ruling, but ultimately their position wasn’t backed up by legal precedent, she added.

She also said there were no grounds to reverse a ruling based on evidence occurring after the trial’s end and that Tesla’s disclosures to shareholders in June contained “multiple, material misstatements” that made it ineffective.

The judge additionally ruled on the award for the Tesla shareholder who brought the original suit, calling their request for $US5.6 billion in legal fees “a bold ask” in a case about excessively high executive compensation. McCormick said the plaintiff, a Tesla shareholder named Richard Tornetta, was entitled to $US345 million in either cash or Tesla shares.

Tesla and Musk can appeal the ruling. Tesla’s stock was down 1 per cent in after-hours trading Monday evening, following the release of the judge’s decision.

The ruling marks another setback for Tesla’s directors, who have said the record stock-option deal was necessary to ensure Musk stayed focused on the carmaker at a time when it is facing slower growth in its automotive business.

Musk oversees five other companies besides Tesla, including artificial-intelligence venture xAI which has raised billions of dollars from private investors. In recent weeks, Musk’s attention has been further divided after agreeing to help President-elect Donald Trump audit government regulations and expenditures through a proposed Department of Government Efficiency.

The board has said any new pay package for Musk will be more expensive for shareholders because the stock options will be awarded at a much higher price.

Bernstein Litowitz Berger & Grossmann, the law firm representing Tornetta, said in a statement that it hopes the “well-reasoned decision will end this matter for the shareholders of Tesla.” The firm added that it will look forward to defending the ruling on appeal.

Tesla, Musk and the other current and former directors named in the suit didn’t immediately reply to a request for comment.

The ruling is the latest development in a legal dispute that dates back to 2018 when shareholders ratified an unusual compensation package for the Tesla chief executive. Musk agreed to forgo a cash salary and instead would be issued stock options in return for hitting milestones tied to Tesla’s market value, revenue and profitability.

At the time, Tesla’s board directors characterised the targets, which included growing the company’s market capitalisation by more than 10 times, as difficult to achieve. Tesla hit the last of those milestones in 2022, meaning Musk was set to receive options to purchase roughly 300 million shares.

Musk has yet to exercise any of these options.

In 2018, Tornetta sued the company and several directors, claiming that Musk exercised undue influence over the creation of the pay package and that the board misled investors.

Earlier this year, the Delaware court agreed. McCormick rescinded the entire pay package, now worth over $US100 billion based on Monday’s closing share price, ruling the process was unfair because Musk exerted undue control over the board. She called the multibillion-dollar award an “unfathomable sum.” The electric-car maker’s board then took the pay deal back to shareholders in June, arguing that a second successful vote would overcome the judge’s objections. To bolster their argument, directors attached the Delaware judge’s opinion from January to ensure shareholders were fully aware of the court’s concerns before casting ballots.

Tesla shareholders ended up ratifying the pay package with an overwhelming 72 per cent majority.

The Tesla CEO was so elated by the result he danced onto the stage during the company’s annual shareholder’s meeting and thanked voters for their support.

Soon after the vote, attorneys representing Tesla, its board and Musk petitioned for the judge to throw out her ruling, saying a show of support by fully-informed shareholders resolved the court’s concerns about the original 2018 ratification process.

“This is a thorough smackdown of Musk’s ratification theory,” said Brian Quinn, a law professor at Boston College, of the judge’s latest opinion. If the court had recognised the second shareholder vote, it would create a “get out of jail free” for any CEO seeking to overturn a judge’s opinion, he said.

“The court wasn’t having any of it,” Quinn added.

The fresh legal setback presents Tesla’s board with few easy remedies to compensate Musk for a decade of essentially unpaid work.

Tesla board chair Robyn Denholm has presented Musk’s compensation as key to the company’s future.

“If Tesla is to retain Elon’s attention and motivate him to continue to devote his time, energy, ambition and vision to deliver comparable results in the future, we must stand by our deal,” Denholm wrote in a letter to shareholders before the vote.

Denholm has said the company could consider a fresh compensation package for Musk but that would likely be a greater cost to shareholders. One estimate from Tesla’s accounting department said a similar option award could result in a $US25 billion charge, because the company’s share price has grown dramatically since 2018.

“There are other alternatives,” Denholm said in a June interview with CNBC, without offering specifics. “But none of them are as good from a shareholder perspective.”

The Wall Street Journal