In an unprecedented legal verdict, Delaware Judge Kathaleen St. Jude McCormick ruled that billionaire tech maverick Elon Musk would not be entitled to the colossal compensation package by Tesla's board of directors, potentially valued at over $55 billion.
A Legal Battle Steeped in Controversy
The landmark ruling follows over five long years of a complex shareholder lawsuit against Musk and the directors of Tesla. The electric vehicle and solar panel entity were under fire for allegations of breaching their fiduciary duties, causing the waste of corporate assets and unduly lining Musk's pocket.
The plaintiff's legal counsel asserted the compensation package's voiding, arguing that Musk, a product of false negotiations with dependent directors, dictated it. Plus, they suggested the proxy statement that approved its issuance deceived shareholders with misleading and incomplete disclosures.
Conversely, defense lawyers stipulated that the pay plan was negotiated relatively by an independent compensation committee, discussing performance milestones so lofty that they invited ridicule among some Wall Street scholars. These lawyers also added that Musk, owning less than a third of Tesla's shares then, didn't qualify as a controlling shareholder.
Musk's Reaction and His Struggle for Control Over Tesla
Globally recognized as a social media influencer, Musk took to 'X' (previously Twitter) to voice his thoughts on the surprising verdict. He used the opportunity to offer business advice, recommending incorporating in Nevada or Texas as per preferences for shareholder decisions.
Just a week before the shocking ruling, Musk had publicly challenged Tesla's directors to create a new compensation plan to give him a dominant 25% stake in the company. Musk asserted that owning a fourth of the company would not mean having full control but being a decisive influencer.
Behind Closed Doors - The Complicated Approval Process
The narrative took a sharp turn when Judge McCormick found Musk a controlling shareholder with a viable conflict of interest and demanded greater rigor for approving the pay package. Unvarnished about her disdain at the process of approving Musk's compensation plan, she termed it 'deeply flawed.' The judge traced Musk's intricate relationship with those involved in the negotiations, particularly highlighting compensation committee chairman Ira Ehrenpreis and fellow member Antonio Gracias.
Her concerns related to Musk's former divorce attorney, Tesla's general counsel, and Todd Maron's significant role. Maron's ambiguous loyalty drew the judge's sharp criticism, as did the fact that most documents cited as proof of 'a fair process' were Maron's creations.
Musk's Pay Package Revoked
In the final punch of this grille, Judge McCormick called for rescinding Musk's compensation package, citing it as the only suitable rectification. She noted Musk's self-guidance and recalibration of the process that ended in an 'unfair price.' The plaintiff's request for a package recall seems to have cut the mustard in this scenario.
The remarkable decision to revoke the 'absurdly outsized' Musk pay package has many commending Judge McCormick's fortitude, including Greg Varallo, the shareholder plaintiff's lead attorney. The verdict sent shockwaves through the corporate world, drawing comments like Wedbush's analyst Dan Ives, calling it a 'jaw-dropper.'
Reflecting on the Compensation Package
In this case, the compensation plan tentatively promised Musk billions if Tesla managed to hit certain market capitalization and operational milestones. Provisions included an award of stock equal to 1% of the outstanding shares each time a market cap milestone was simultaneously met with an operational milestone. Musk could inflate his interest in Tesla to approximately 28%, provided the company's market cap shot up by $600 billion.
Scheduled milestones anticipated Tesla's market cap growth by $50 billion and aggressive revenue and pretax profit growth targets. Aspirations of a $650 billion market cap and unprecedented revenues and profit within a decade would have helped Musk realize the compensation plan's full benefit, totaling $55.8 billion.
The Defense Perspective
On the other end of the spectrum, the defense attorney Evan Chesler posited that Tesla's high-risk, high-reward compensation package had benefits extending beyond Musk to Tesla shareholders. Post-implementation shares climbed from $53 billion to over $800 billion, even briefly touching $1 trillion.
Perhaps appropriately indirectly echoing the Delaware ruling, Chesler pointed out that the head-spinning $55 billion compensation was intentionally stated in the proxy to alert shareholders that Musk could earn this staggering amount.
