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Tesla’s attempts to push through a $56billion pay package for CEO Elon Musk has once again been struck down by a Delaware judge.
Judge Kathleen McCormick first ruled against the world-record compensation in January, which was devised in 2017 and approved by shareholders in 2018, arguing the package was “excessive” and violated shareholders’ rights due to a conflict of interest in the negotiation process.
The issue arose after one shareholder, Richard Tornetta, disputed the stock award plan.
Tornetta’s lawyers argued Musk used his sway in the company, including close relationships with several board members, to influence the approval process. Judge McCormick said in her January verdict that the process was “deeply flawed.”
She argued that Musk and the Tesla board “bore the burden” of proving the compensation plan was fair: “They failed to meet their burden,” she wrote.
After the ruling, which shocked investors and frustrated Musk and Tesla’s board, the electric vehicle maker said it would seek ratification for the compensation scheme.
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Claiming that the $56billion package was the only way to keep Musk on board, Tesla put the compensation plan to a shareholder vote on June 13, seen by some as a ‘referendum’ on the controversial executive.
As they did in 2018, Tesla shareholders overwhelmingly voted in support of the package. “I just want to start off by saying, hot damn, I love you guys!” Musk told staff at a company event in June after it was approved.
Why did the judge reject Tesla’s $56bn pay package for Musk?
Despite the outcome of the vote, Judge McCormick once again vetoed the package on Monday. In her judgment, she wrote that the justification for Musk’s proposed compensation plan was “fatally flawed,” “indefensible,” and contravened existing laws.
"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 stated. "Put simply, neither the compensation committee nor the board acted in the best interests of the company when negotiating Musk’s compensation plan. In fact, there is barely any evidence of negotiations at all.”
Judge McCormick added that Tesla’s request “flies in the face of the policy bases for all relevant rules of procedure.”
“Even if a stockholder vote could have a ratifying effect, it could not do so here… Were the court to condone the practice of allowing defeated parties to create new facts for the purpose of revising judgments, lawsuits would become interminable,” the opinion said.
While the CEO was undoubtedly entitled to “a range of healthy amounts” of compensation, Judge McCormick argued, Tesla’s Board “capitulated to Musk’s terms and then failed to prove that those terms were entirely fair.”
The judge approved $345million in attorney fees to Tornetta’s legal team who filed the lawsuit.
Musk, Tesla, & plaintiffs react to judge’s controversial ruling
On Monday evening, after Judge McCormick’s ruling was made public, Tesla released a statement on X, describing it as “wrong” and asserting it will appeal the verdict:
“A Delaware judge just overruled a supermajority of shareholders who own Tesla and who voted twice to pay @elonmusk what he’s worth.
The court’s decision is wrong, and we’re going to appeal.
This ruling, if not overturned, means that judges and plaintiffs’ lawyers run Delaware companies rather than their rightful owners – the shareholders.”
Musk responded to the post, adding: “Shareholders should control company votes, not judges.”
After the initial January ruling, shareholders voted in favor of reincorporating Tesla in Texas, moving away from Delaware. “Never incorporate your company in the state of Delaware,” Musk had earlier posted on X.
Meanwhile, the legal firm representing Tornetta said they were “pleased with Chancellor McCormick’s ruling, which declined Tesla’s invitation to inject continued uncertainty into Court proceedings”—but acknowledged the case is “complex.”
