A Delaware judge has struck down a compensation plan for Tesla Inc CEO Elon Musk from 2018, just six months after Tesla shareholders approved the pay package for a second time.
What Happened
A 2018 pay compensation plan provided several milestones that seemed extremely hard for Musk and Tesla to hit, with high payouts if he could accomplish the improbable. Musk hit the milestone accomplishments from the 2018 incentive plan, which led to options paid out worth around $56 billion.
Background
Delaware Chancery Court Judge Kathaleen McCormick ruled in January that the pay package would be voided due to Tesla’s board being influenced by Musk when they adopted the plan. A lawsuit against the plan was previously brought forth by a Tesla shareholder. McCormick ruled once again against the pay package, despite shareholders approving the compensation plan again in a vote announced in June.
The Latest Ruling
The judge said the defendants failed to prove “entire fairness” in the case. “The defendants responded by putting the rescinded compensation plan — the exact same plan that the post-trial opinion deemed a breach of the duty of loyalty — to a stockholder vote for the stated purpose of ‘ratifying’ it,” McCormick writes.
McCormick denied the motion to revise and said the defendants’ argument goes against settled law, citing at least “four fatal flaws” in their argument. The judge said there was evidence created after trial, common-law ratification can’t be raised for the first time after the post-trial opinion, a shareholder vote cannot ratify a transaction, and misstatements in the shareholder vote proxy statement were all fatal flaws.
Attorney Fees
The judge also ruled in favor of the plaintiffs for attorney fees in the amount of $345 million, which was less than the $5.6 billion being asked. The fee can be paid via cash or Tesla stock.
Impact on Tesla Stock
The judge’s ruling will likely be appealed, which could continue to be an overhang on Tesla stock in the coming months. Tesla stock is down 1.35% to $352.26 in after-hours trading.
Why It’s Important
Musk is the world’s richest person, worth an estimated $343 billion and up $113 billion in 2024. Musk’s wealth recently hit an all-time high with Tesla stock soaring and increased valuations for other Musk-related companies gaining after the 2024 election win by his friend Donald Trump.
The pay package is the largest for a U.S. corporate executive, and the Tesla shares would be worth over $100 billion now, based on the current share price. Without the payout, Musk will likely remain the world’s richest person, but the news could take a cut out of his wealth.
Analyst Reaction
Wedbush analyst Daniel Ives said the pay package being rejected was not a surprise. “We expect the Musk $56 billion pay package now goes to appeal in Delaware courts and eventually could go the Federal appeals process depending on next steps,” Ives tweeted. “This continues to be a soap opera playing out in Delaware.”