... after losing a shareholder suit in Delaware.
Just a few weeks ago, Elon Musk lost a major shareholder suit in a Delaware court. A judge “tossed out his record-breaking $56 billion Tesla pay package”. That’s a $56 billion-with-a-‘B’ pay package that would have been the largest in history. Over forty times larger than the highest compensation package to date.
To put it in context with the rest of the business universe “. . . Equilar, an executive pay research firm, estimated that Musk's package was around six times larger than the combined pay of the 200 highest-paid executives” in the world..
The package granted stock options for some 304 million shares that would allow Musk to buy at about $23/each. At the time of the court’s decision, shares of Tesla were trading at $191.59. Musk earned each stock option award when Tesla hit escalating financial and operational goals over the years.
The package was put in place in 2018 and immediately challenged by shareholders.
The Decision (Part One)
In a two-hundred-page opinion, Judge Kathaleen McCormick eviscerated the details of the incentive package. She called the compensation “an unfathomable sum that was over the top, unnecessary to secure Musk’s services and unfair to other shareholders because of the dilutive effect on their holdings.”
The ‘outrageousness’ of the package, however, was not the driving factor behind her opinion. Nor was there any outward animosity toward Elon Musk. Her decision was directed toward the actions and inactions of the Tesla Board of Directors, i.e., the people who approved the package in the first place.
Well, ‘approved’ is too strong a word, it was, according to the judge and the original complaint (filed by a shareholder days after the package was announced) more like ‘rubberstamped.’
The Tesla Board
Over the last six years or so the Tesla board has been roundly criticized – not to mention satirized – for failing to oversee “its combative, headline-making CEO as he fought regulators, invested in and ran other multi-billion-dollar corporations”, and more. Judge McCormick noted that “the lead director negotiating for Tesla, had a 15-year business relationship with Musk. Another member of the working group had a 20-year relationship and regularly went on holiday with Musk’s family. A third member was the company’s general counsel, Todd Maron, who was Musk’s former divorce lawyer and “whose admiration for Musk moved him to tears during his deposition.” Additional directors included Elon Musk's brother, and James Murdoch, son of media tycoon Rupert Murdoch, who had “close personal ties with the CEO.”
The board had eight members including Musk, if you’re counting at home, that’s six sure votes on everything.
In other words, what Elon the CEO asked for, Elon the CEO and shareholder got.
The Board’s Mistakes
The immense size of the package was, at least, an optics problem but not an insurmountable one if, of course, the board was acting in the best interests of Tesla. And was subsequently able to adequately explain their actions to the shareholders.
At that, they failed.
The Tesla directors rationalized it only by stating that the package was needed to “ensure one of the world's most dynamic entrepreneurs continued to dedicate his attention to the electric vehicle maker.”
The Shareholders’ Argument
Tesla shareholders complained that the compensation package, when executed, would unnecessarily dilute their ownership. They argued that the board never told shareholders that “the goals were easier to achieve than the company was acknowledging and that internal projections showed Musk was quickly going to qualify for large portions of the pay package.”
In other words, the board was paying Musk for a sure thing.
The shareholders also argued that “the board had a duty to offer a smaller pay package or look for another CEO and that they should have required Musk to work full-time at Tesla instead of allowing him to focus on side projects, like SpaceX and X.”
The Decision (Part Two)
The judge’s decision pivoted on that last point. Her wording was sharp and to the point:
Swept up by the rhetoric of 'all upside,' or perhaps starry-eyed by Musk’s superstar appeal, the board never asked the $55.8 billion question: Was the plan even necessary for Tesla to retain Musk and achieve its goals?
Her answer was a firm ‘no.’
Why Elon [probably] Really Wants Out of Delaware
Hint: It’s about Precedent
"Never incorporate your company in the state of Delaware," was Musk’s predictable response to the decision. He claims that Telsa will move its corporate home from Delaware to Texas, citing the fact that 80% of the respondents in an X poll supported the move.
It comes across as a fit of pique because he lost in court, but there is another, more solid, reason.
This decision came down as Musk was about to ‘negotiate’ a new compensation package with the board. This time around he has been very vocal about needing 25% of the voting control of Tesla.
Most legal observers agree that, in light of this decision, the company needs to replace ‘at least; three directors with independent board members before it can approve a new package or it risks the same fate as this one.
As an investment manager and Tesla investor states, "Essentially, the entire corporate structure of Tesla has been deemed, like not appropriate for a public company."