Elon Musk’s $56bn pay package from Tesla should have been restored by a vote of the company’s shareholders last year, a Tesla attorney has said to the Delaware Supreme Court in the United States.
The Tesla lawyer made his arguments on Wednesday as one of the biggest corporate legal battles entered its final stage after a lower court judge had in January 2024 rescinded the Tesla CEO’s record compensation. The company is also appealing a ruling by the lower court that rejected as legally invalid a vote by shareholders to restore the pay package.
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“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 case’s outcome could have substantial consequences for the state of Delaware, its widely used corporate law, and its Court of Chancery, a once-favoured venue for business disputes that has recently been accused of hostility towards 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 favour 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.
Dexit
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 percent 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 vote demonstrated 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.”
After 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 (EV) company, which agreed in August to a replacement deal if his 2018 plan is not restored. Tesla has said the replacement plan will cost $25bn or more in accounting charges.
The company said the replacement award was meant to focus the attention of Musk, who said earlier this year that he was forming a new US 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.
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 considering the appeal of the pay ruling as well as the $345m legal fee that McCormick ordered Tesla to pay to the attorneys for Tornetta, who held just nine Tesla shares when he sued to block the pay deal. The court typically takes months to rule.
Tesla estimated in 2018 that the stock options plan would be worth $56bn if the company met operational and financial goals, which it did. Because the stock continued to appreciate, the options are currently worth closer to $120bn, by far the largest executive compensation ever. Musk is the world’s richest person with a fortune of around $480bn, according to Forbes.
The defendants have argued that McCormick erred in finding social and business ties to Musk compromised their independence, and said Tesla shareholders were informed of the economic terms of the pay deal before they approved the plan. The directors said she should have reviewed the pay package under the “business judgment” standard, which protects directors from second-guessing by courts.
The directors have long argued the pay package performed as hoped – it focused the attention of Musk, a serial entrepreneur, and he transformed Tesla from a startup into one of the world’s most valuable companies.
