Elon Musk, the chief executive of Tesla, suffered a stunning rebuke on Tuesday when a judge in Delaware struck down the pay package that helped make him a multi-billionaire and the world’s richest man.
In a decision that cast a harsh light on the conduct of Mr. Musk and Tesla’s board, Chancellor Kathaleen St. billion — 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. He ordered that the contract that gave Mr. Musk “the largest potential compensation plan in the history of public procurement” be voided and told the parties to the case to work out how Mr. Musk would repay the extra pay.
Some compensation experts said the decision would send a warning to other companies that have awarded very large pay packages to their top executives.
“It’s an incredibly important decision because it shows that there is such a thing as overcompensation,” said Sarah Anderson, director of the global economy program at the Institute for Policy Studies, a progressive think tank.
When he devised the stock option package in 2018, Tesla’s board said Mr Musk would only be paid if the company performed exceptionally well and its share price soared.
But a group of Tesla shareholders challenged the package, which ended up giving Mr. Musk the right to acquire about 304 million Tesla shares at a predetermined price of $23.34 a share if the company met certain revenue, profit and price targets share.
The package, which was split into 12 separate grants each tied to its own target, is worth about $51.1 billion at Tesla’s closing share price on Tuesday. Mr. Musk met all 12 goals, but under the terms of his package, he must hold those shares for at least five years before selling them.
Greg Varallo, an attorney representing 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 he sold shares to finance the acquisition of Twitter, the company he renamed X.
“The court’s hard work will directly benefit Tesla investors, who will see the cut from this huge pay package written off,” 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 in the Delaware Supreme Court, is likely to fuel Tesla’s critics who say there are too few checks on Mr Musk’s behaviour. The company’s eight-seat board includes several close friends of Mr. Musk and his brother, Kimball. Many board members owed much of their personal wealth to Mr. Musk, and he essentially dictated his own pay package, Chancellor McCormick said.
“Ultimately,” he wrote, “Musk initiated a self-driving process, recalibrating speed and direction along the way as he saw fit. The process has reached an unfair price.” The pay package was not necessary to retain or motivate Mr. Musk because he already owned tens of billions of dollars worth of Tesla stock, Chancellor McCormick said.
The information given to shareholders before they voted to approve the package was “materially deficient”, he said.
The suit, which is set to go to trial in November 2022, took on added significance after Mr Musk bought Twitter in October. He faced widespread criticism for spending time trying to overhaul Twitter, while Tesla’s shares tumbled and its growth slowed amid increasing competition. One justification for Mr. Musk’s pay package at Tesla was that it was a way to keep him focused on making cars.
The decision also raises questions about how Tesla’s board will deal with Mr. Musk’s demand this month for an even bigger stake in the company. Mr Musk said he needed to own 25% of Tesla to avoid takeovers and to have enough control over the company as it develops robots and other artificial intelligence technology.
If his demands are not met, Mr. Musk said, he will pursue unspecified ventures outside of Tesla. The company’s board, led by Robyn Denholm, has not publicly responded to his request for a larger stake in the company.
In his testimony during the trial, Mr. Musk suggested that his impact on the auto industry justified his pay. “Tesla has had a huge impact on the world,” he said. “It’s not just that Tesla makes electric vehicles – we’re really the main reason why the rest of the auto industry has 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 win all the shares. Proponents of the plan also noted that he would get nothing if his performance hurdles were not cleared. They said it would motivate him to make Tesla a leading automaker.
But Chancellor McCormick wrote that Mr. Musk already had a 22 percent stake in Tesla before the package, and that those shares would rise in value if the company did well.
“That ownership stake gave him every incentive to push Tesla to levels of transformational growth,” he said.
Executives at Compensia, the consulting firm that helped create the package, did not respond to a request for comment.
The case was heard in Delaware because Tesla, like many companies, is based there. After becoming X, Twitter incorporated in Nevada last year. It was previously incorporated in Delaware.
“People have left there because they don’t like the judges’ decisions,” said Carl Tobias, a law professor at the University of Richmond, referring to Delaware. “But most people think of it as the gold standard.”
