In January this year, Elon Musk lost a battle over his pay.

In January this year, Elon Musk lost a battle over his pay.

I wrote about it at some length in a Capital Letter here. My opening paragraph outlined what had happened:

In January 2018, Elon Musk agreed a new compensation package with Tesla’s board that, if Tesla did astonishingly well, could have amounted, over time, to $55.8 billion. The package was approved by the company’s stockholders two months later. Tesla did astonishingly well. Too bad: In January 2024 the package was struck down by a Delaware judge.

The case had been brought by Richard Tornetta, a seemingly rather ungrateful shareholder. Then again, he only had nine shares. Suspicious types speculated that he might have been one of those shareholders whom law firms like to have on hand. I have no idea whether Tornetta was one of those.

In any event, the case came before a judge, Kathaleen McCormick, who was highly critical of the process by which Musk’s salary had been fixed by the board. Ordinarily, judges are extremely unwilling to second-guess board decisions, but, in Delaware, explained McCormick, “The law recognizes unique risks inherent in a corporation’s transactions with its controlling stockholder.”

Control in this sense does not mean that the stockholder holds, say, 51 percent of the company, or a blocking minority or had crossed some other ownership threshold. McCormick also looked at the composition of the board, and specifically, its relationship with Musk, and concluded that it was not sufficiently independent. Once she had come to that conclusion, everything changed:

The defendants had to overcome the “burden of proving at trial that the compensation plan was entirely [my emphasis added] fair.” This is widely acknowledged, in McCormick’s words, as “Delaware’s most onerous standard of review.”

And then she concluded that the package was not “fair,” rescinded the package, leaving Musk uncompensated for the work he had put in since 2018, other (of course) than stock appreciation, but, as I wrote, “That stake reflected both his own investment in the company and stock he had received in return for past services.” Once again, too bad.

McCormick’s judgment was well written and, at times amusing (although Musk would not have found it hard to contain his laughter), but scratch a little beneath her arguments, and it’s not hard to see evidence of the prejudices of our apparatchik class at work. And that class is none too keen on our business class (see, whatever those grim “Khanservatives” may claim, the peculiar and antique prejudices of Lina Khan, the central planner now holed up at the FTC). And if our apparatchik class — and that, for all the fancy talk — is what members of the judiciary are, doesn’t think much of the business class, they dislike its maverick entrepreneurs even more. They also dislike what those mavericks are paid. Jealousy: It’s a thing,

McCormick began her judgment in the first case questioning whether “the richest person in the world was overpaid,” a question that hinted at disapproval that there even was a richest person in the world, especially one who was quite so rich as Elon Musk, and who, if the package passed muster, would be much richer still.

McCormick commented, “The incredible size of the biggest compensation plan ever . . . seems to have been calibrated to help Musk achieve what he believed would make “a good future for humanity.” Of course, she — imagine a discreetly hidden smirk — conceded, a “good future for humanity is a really good thing,” although (here comes the dagger), “some might question whether colonizing Mars is the logical next step.” As I observed in February, “twenty years ago, she would probably have questioned what Musk was doing fooling around with a rocket company.” This December, that jibe looks more foolish still.

There’s more on McCormick’s argument in the Capital Letter, but one other thing is worth mentioning now:

The approval of the compensation plan at a special meeting of Tesla’s shareholders was not enough to save the day. Seventy-three percent of the votes cast were in favor. This total excludes Musk and his brother Kimbal — adding their votes would have taken the total to some 80 percent.

Musk appealed the judgment, but didn’t leave it at that. Another vote was held on the pay package (it was again approved by a super majority), but McCormick treated that as irrelevant. She rejected the idea that a “stockholder vote can be deployed to reverse any form of judicial ruling, whatever the ruling, no matter how final.” The board could not flip “the outcome of an adverse post-trial decision based on evidence they created after trial.”

To dismiss the revote as simple “evidence” of what had already been litigated rather than as an expression of what the owners of the company wanted for their company now seems highhanded to me, but it could well be that procedurally the revote could only be treated as an ex post facto attempt to validate what had already happened rather than as a fresh start. Doubtless Delaware’s supreme court will decide on that, and other issues related to this case.

As I wrote in February:

As a senior member of the judiciary [McCormick] is ex officio a protector of the broader interests of the legal profession, custodians of a system in which an excessive premium is put on process and procedure, a premium that all too often has been a source of hugely profitable rent-seeking — at enormous cost to everyone else.

And indeed Tornetta’s lawyers did well enough. They didn’t make the billions they had asked for, but $345 million isn’t the worst payday.

While Musk will appeal the judgement, it is likely that Tesla’s board will try to design a new pay package under Texas law, where the company has now moved its corporate registration, but, even that will take some care.

Like so much that has taken place in recent years, from ESG to stakeholder capitalism to (despite its current troubles) DEI, this case also raises troubling questions about the standing of shareholders in the companies they own, particularly when those companies are public.

After the initial judgment, Musk tweeted, “The parasitic load of being a public company has become extremely high.” Indeed it has. The U.S. had more than 7,000 public firms in 1996, and in 2020 it had less than 4,000. There are a lot of reasons for that, including merger activity, but it seems reasonable to think that the way in which a listing opens companies up to the impositions and depredations of an apparatchik class that may have interests contrary to those of the shareholders has something to do with it.