Elon Musk, the richest man in the world and CEO of Tesla, saw his largest salary package in US business history annulled on Monday, for $56 billion. Delaware Chancery Judge Kathaleen McCormick A court specializing in oversight of most US listed companies ruled that the approval process violated basic corporate governance standards. According to the ruling, Tesla’s board was not sufficiently independent of Musk when it approved compensation in 2018, making the entire process “tainted by conflicts of interest.” The ruling also orders Tesla to pay $345 million in legal fees to lawyers who represented the shareholders.
The reasons for a historic decision
McCormick’s ruling opens a watershed into the interiorities of corporate governance in the United States, revealing power dynamics that until now had remained in the shadows. The legal battle began with a lawsuit from shareholder Richard J. Tornetta, questioning not so much Musk’s salary amount, but the approval process. According to The New York Times, Tornetta claimed that “the board had not acted autonomously” and that the company had provided “materially misleading information” to investors.
The compensation package had a complex structure, proposed in 2017 and approved in 2018. It provided multiple stock options that the businessman would obtain only if Tesla achieved “ambitious growth goals” in terms of market capitalization, revenue and profits. At the time, few believed that these goals would be achieved: Tesla continues to struggle to be profitable in the production of electric vehicles (EV). But the manufacturer exceeded all expectations, allowing Musk to raid all the bonuses in the following years. The pay package has become even more significant with the recent rise in Tesla shares since Trump’s election victory, reaching $100 billion. An explosion in value driven by investor expectations about the Republican administration’s future EV policies, an area in which Tesla has invested heavily.
Musk’s compensation package, tied to a series of ambitious financial goals, was first approved by more than 70% of Tesla shareholders in 2018.
The two sentences
The Delaware Court’s first ruling came in January 2024: The judges ruled that the CEO’s $56 billion pay package was “excessive” and that the decision-making process that led to its approval was “flawed by procedural irregularities.” This initial verdict took many analysts and investors by surprise, raising questions about the soundness of governance at Tesla and the ability of its board to exercise effective control over management’s actions. However, the council did not give up and attempted to overturn the court’s decision through a second consultation.
In June 2024, Tesla shareholders were again asked to express their opinion on Musk’s compensation plan; the majority confirmed their support for the salary of 56,000 million. A result that seemed to annul the previous ruling of the Delaware court and agree with the South African businessman. But the case was far from closed. With Monday’s ruling, the judge reaffirmed that not even the second round of votes can remedy the procedural defects that had marred the package approval process. In other words, the will of the shareholders, no matter how broad, cannot override compliance with judicial regulations and the correct application of Company Law.
During the trial, Tesla defended the amount of the compensation package, arguing that “it was necessary to keep Musk involved in the company”; According to the court, this is precisely one of the fundamental problems. The judges found that the board of directors put the desire to please Musk above the considered evaluation of what was truly best for the company and all of its investors. An attitude that undermines the board’s supervisory and control role over management.
Social media companies that once tried to promote a ‘healthy’ information ecosystem have largely given up, and experts say the clearest example is Musk’s X.
What will happen now with Tesla and its boss?
Even without this million-dollar compensation, Musk will retain an important role in controlling Tesla. The New York Times indicates that the businessman still owns a 13% stake in the company, valued at $150 billion. McCormick noted that these actions “already gave him every incentive to push Tesla to transformative levels of growth,” calling into question the need for such a large additional amount.
Tesla faces a strategic crossroads that could redefine the balance of the entire American automobile industry. The company announced its appeal, but legal experts predict a long road through the Delaware court system, which could extend all the way to the Federal Supreme Court. According to the New York Times“the board is likely to attempt to craft a new compensation package under the jurisdiction of Texas,” where the company has moved its registered office. This move represents an attempt to escape the jurisdiction of Delaware, traditionally the preferred legal domicile of American companies for its favorable tax policies. But analysts stress that any compensation will be vulnerable to legal challenges if the council does not demonstrate greater autonomy from Musk’s power.
Article originally published in WIRED Italy. Adapted by Alondra Flores.
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