A Delaware court on Monday, December 2, rejected Elon Musk's record-breaking $56 billion pay package as Tesla's CEO, despite its approval by Tesla shareholders at a meeting in June.
The compensation, comprising 303 million Tesla stock options, had already been invalidated in January by Delaware Chancery Court Chancellor Kathaleen McCormick. At the time, McCormick sided with a shareholder who challenged the package, ruling that Musk and Tesla's board failed to prove the plan was fair.
Musk's attorneys sought to overturn the January decision, pointing to the June shareholder vote in which 84% of non-Musk-affiliated shares approved the 2018 pay plan. However, McCormick dismissed the motion on Monday, asserting that the new shareholder ratification did not necessarily demonstrate that the extraordinary compensation package served the best interests of investors.
McCormick found multiple flaws in Tesla's ratification attempt, including "material misstatements" in documents provided to shareholders about the effect of their vote. "The motion to revise is denied," McCormick wrote. "The large and talented group of defense firms got creative with the ratification argument, but their unprecedented theories go against multiple strains of settled law," she added.
The court also awarded $345 million in attorney fees, significantly less than the $5.6 billion requested by the lawyers of plaintiff Richard Tornetta, a Tesla shareholder.
While acknowledging their calculation method was technically sound under Delaware law, which bases fees on the percentage of benefit achieved, McCormick ruled that such a large award would constitute an excessive windfall.
Shareholders originally backed the Musk compensation plan in March 2018 which was specifically designed to reward the 53-year-old founder for Tesla's significant growth. But in a lawsuit, Tornetta accused the defendants of failing in their duties when they authorized the pay plan and alleged that Musk dictated his terms to directors, who were not sufficiently independent from their star CEO.
He also accused Musk of "unjustified enrichment" and asked for the annulment of a pay program that helped make the entrepreneur the richest man in the world.
During a trial in 2022, Musk countered that investors in Tesla were some of the "most sophisticated in the world" and able to keep tabs on his management. He said Tesla had been the laughingstock of the auto industry, and it was only the massive success of the company's Model 3 that turned things around. Musk insisted that he played no role in coming up with the package nor discussed his deal with the board members, some of them close friends, who ultimately signed off on it.
The Delaware Court of Chancery has been a pillar of US capitalism for more than a century and is the jurisdiction where roughly two-thirds of American Fortune 500 companies are registered.