Elon Musk’s $56 billion Tesla pay package should have been restored by shareholders last year, a company attorney argued to the Delaware Supreme Court on Wednesday.
This major corporate legal battle entered its final stage after a lower court judge rescinded the Tesla CEO’s record compensation in January 2024. Tesla is appealing the rejection of a shareholder vote to restore the pay package.
“This was the most informed stockholder vote in Delaware history,” Jeffrey Wall, an attorney for Tesla, told the justices. “Reaffirming that would resolve this case.”
The outcome could have substantial consequences for Delaware, its corporate law and its Court of Chancery, accused of hostility to powerful entrepreneurs.
The Court of Chancery ruling striking down Musk’s pay has become a rallying cry for Delaware critics. Chancellor Kathaleen McCormick ruled that the Tesla board lacked independence from Musk when it approved the pay package in 2018 and that shareholders lacked key information when they voted overwhelmingly in favor of it.
As a result, she applied a demanding legal standard and found the pay unfair to investors.
Musk did not attend the arguments, which were held in a special court to accommodate the 65 people in attendance, mostly lawyers.
The defendants, current and former Tesla directors, denied wrongdoing and said McCormick misinterpreted the facts and the law.
Companies switch legal homes
Tesla argued in Dover, Delaware, that the five justices on Delaware’s high court had three avenues to reverse the lower court ruling. They could find that Musk, who owned 21.9 per cent of Tesla stock in 2018, did not control the board pay negotiations and that shareholders were fully informed when they voted to approve it that year.
They could determine that rescinding the pay was an improper remedy because it did not undo the work that Musk had done or the gains that shareholders had received. Or they could determine that last year’s ratification vote demonstrated that shareholders wanted to accept the pay deal, despite the legal flaws.
“Shareholders in 2024 knew exactly what they were voting for,” Wall said. Greg Varallo, an attorney for Richard Tornetta, the small investor who brought the case in 2018, said if the court accepted ratification, it would allow a party to change the outcome after a court case had run its course. “Lawsuits would be interminable,” he told the justices.
Varallo tried to convince the justices the lower court ruling was a result of careful fact-finding and based on settled law.
“There is nothing extraordinary about this trial opinion,” he said. “What makes it truly extraordinary is that it addresses the largest pay package in human history, awarded to the richest man on earth, who is also one of the most powerful men on earth.”
Prompted in part by the Musk pay ruling, large companies, including Tesla, Dropbox, and the venture capital firm Andreessen Horowitz, switched their legal homes to Texas or Nevada, where courts are friendlier toward directors.
Delaware lawmakers responded to the corporate departures, a trend known as “Dexit,” by overhauling its corporate law. If Musk loses the appeal, he will still reap tens of billions of dollars in stock from the electric vehicle company, which agreed in August to a replacement deal if his 2018 plan is not restored. Tesla has said the replacement plan will cost $25 billion or more in accounting charges.
The company said the replacement award was meant to retain and focus Musk, who said earlier this year he was forming a new U.S. political party, on transitioning Tesla to robotics and automated driving. Tesla is now incorporated in Texas, where it is far more difficult for a shareholder to challenge board decisions.
Tesla proposes new pay plan
Tesla’s board last month proposed a $1 trillion compensation plan, highlighting confidence in Musk’s ability to steer the company in a new direction, even as Tesla loses ground to Chinese rivals in key markets amid softening EV demand.
The justices are also considering the $345 million legal fee that McCormick ordered Tesla pay to the attorneys hired by Tornetta, who held just nine Tesla shares when he sued. The court typically takes months to rule.
Tesla estimated in 2018 the stock options plan would be worth $56 billion if the company met operational and financial goals, which it did. Because the stock continued to appreciate, the options are currently worth closer to $120 billion, by far the largest executive compensation ever. Musk is the world’s richest person, with a fortune of around $480 billion, according to Forbes.
