Elon Musk, the CEO of Tesla, suffered a surprise rebuke on Tuesday when a judge in Delaware canceled the pay package that made him a multi-billionaire and the richest person in the world.
In a decision that sheds sharp light on the conduct of Mr. Musk and Tesla’s board, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery said the chief executive effectively monitored his own compensation plan with the help of compliant board members.
“The process that led to the approval of Musk’s compensation plan was deeply flawed,” the judge said. It ordered the cancellation of the contract that gave Mr. Musk “the largest potential compensation plan in the history of the public markets” and asked the parties in the case to work out how Mr. Musk would repay the overpayment.
Some compensation experts said the decision was a warning to other companies that gave their top executives very high pay packages.
“It’s an incredibly important decision because it proves that there is such a thing as excessive compensation,” said Sarah Anderson, global economics project director at the Institute for Policy Studies, a progressive research group.
When drafting the stock option package in 2018, Tesla’s board said Mr. Musk would only be paid if the company achieved exceptional results and its stock price soared.
But a group of Tesla shareholders challenged the package, which ultimately gave Mr. Musk the right to purchase about 304 million Tesla shares at a set price of $23.34 per share if the company met certain sales, profit – and share price targets achieved.
The package, which was divided into 12 separate grants each tied to its own goal, is worth about $51.1 billion at Tesla’s closing share price on Tuesday. Mr. Musk has met all 12 goals, but according to his package, he must hold on to these shares for at least five years before he can sell them.
Greg Varallo, a lawyer who represented Tesla shareholders, said the shares would be canceled. That would significantly reduce Mr. Musk’s wealth and his stake in Tesla, which stands at about 13 percent after selling shares to finance his acquisition of Twitter, the company he renamed X.
“The court’s hard work will directly benefit Tesla investors, who will see the dilution from this gigantic pay package eliminated,” Mr. Varallo, a partner at Bernstein Litowitz Berger & Grossmann, said in an email.
Tesla did not immediately respond to a request for comment.
“Never incorporate your company in the state of Delaware,” Mr. Musk said in a post on X.
The decision, which can be appealed to the Delaware Supreme Court, is likely to fuel Tesla critics who say there is too little scrutiny of Mr. Musk’s conduct. The company’s eight-member board includes several close friends of Mr. Musk and his brother Kimbal. Many board members owed much of their personal wealth to Mr. Musk, and he effectively dictated his own salary package, said Chancellor McCormick.
“Ultimately,” she wrote, “Musk initiated an autonomous driving process, recalibrating the speed and direction along the way as he saw fit. The process came at an unfair price.” The pay package was neither necessary to retain Mr. Musk to motivate because he already owns Tesla shares worth tens of billions of dollars, said Chancellor McCormick.
The information given to shareholders before they voted to approve the package was “materially deficient,” she said.
The lawsuit, which went to trial in November 2022, became even more important after Mr. Musk took over Twitter in October. He was widely criticized for spending time overhauling Twitter as Tesla’s shares slumped and growth slowed amid increasing competition. One justification for Mr. Musk’s pay package at Tesla was that it allowed him to focus on building cars.
The decision also raises questions about how Tesla’s board will handle Mr. Musk’s demand this month for an even larger stake in the company. Mr. Musk said he needed to own 25 percent of Tesla to avoid takeovers and have enough control over the company as it develops robots and other artificial intelligence technologies.
If his demands are not met, Mr. Musk said he would pursue unspecified ventures outside of Tesla. The company’s board, led by Robyn Denholm, has not publicly responded to his calls for a larger stake in the company.
In his testimony during the trial, Mr. Musk suggested that his influence on the automotive industry justified his salary. “Tesla has had an immense impact on the world,” he said. “Tesla doesn’t just make electric vehicles – in fact, we were the main reason the rest of the automotive industry moved to sustainable electric vehicles.”
When the package was announced, Tesla was still struggling to produce large numbers of cars and few believed Mr. Musk would acquire all the shares. Proponents of the plan also noted that it would get nothing unless performance hurdles were exceeded. They said it would motivate him to make Tesla a leading automaker.
But Chancellor McCormick wrote that Mr. Musk already owned a 22 percent stake in Tesla before the package and that the value of those shares would increase if the company did well.
“This stake gave him every incentive to lead Tesla to transformative growth,” she said.
Executives at Compensia, the consulting firm that helped draft the package, did not respond to a request for comment.
The case was heard in Delaware because Tesla, like many other companies, is incorporated there. After becoming X, Twitter was founded in Nevada last year. It was previously incorporated in Delaware.
“People have moved away because they don’t like the judges’ rulings,” said Carl Tobias, a law professor at the University of Richmond, referring to Delaware. “But most people think of it as the gold standard.”
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2024-01-30 23:40:42
www.nytimes.com
