Elon Musk's $56 billion Tesla compensation package voided by judge

Company News

by Glenn Dyer


The chances of Elon Musk getting billions of dollars in shares to gain control of Tesla have suffered a significant setback. A judge in Delaware voided his extravagant $56 billion compensation package from the company.

"Plaintiff is entitled to rescission," Judge Kathaleen McCormick declared in her ruling, instructing the parties to collaborate on a final order to enforce her decision.

The court's opinion instructed Tesla shareholder Richard Tornetta, who challenged the pay plan, to work with Elon Musk's legal team to implement the judge's decision.

This ruling can be appealed to the Delaware Supreme Court.

Tesla's 2018 agreement with Musk is the largest compensation deal ever for an executive and constitutes a significant portion of his immense fortune, one of the world's largest.

The plaintiff also argued that the board had a duty to offer a smaller pay package or seek another CEO, insisting that Musk should have been required to work full-time at Tesla instead of pursuing other projects.

This ruling makes it much harder for the Tesla board to yield to Musk's demands, made in mid-January on Twitter, for more shares.

In a series of posts, he argued that he would not want to lead Tesla in artificial intelligence and robotics without a compensation plan that grants him around 25% ownership of the company's stock, nearly double his current 13% stake.

"I am uncomfortable growing Tesla to be a leader in AI & robotics without having ~25% voting control. Enough to be influential, but not so much that I can't be overturned," Musk wrote in a post on Twitter. "Unless that is the case, I would prefer to build products outside of Tesla."

However, Musk has pledged at least half of his shares (reportedly worth $90 billion) as security for the loss-making $44 billion takeover of Twitter and to fund his rocket company, tunneling company, AI, and other ventures.

His demand has weakened Tesla's share price, which is set to close January down more than 20%, influenced by a weak 2023 profit and revenue, along with a warning of slower sales growth in 2024.

During the trial, which began in November 2022 and concluded a year ago, Musk testified that the money would be used to finance interplanetary travel. "It's a way to get humanity to Mars," he testified. "So Tesla can assist in potentially achieving that."

The compensation package includes stock option awards, allowing Musk to purchase Tesla stock at heavily discounted prices as specific financial and operational goals are met. He must hold the acquired stock for five years.

Musk successfully met all 12 tranches or performance targets outlined in the plan and was not guaranteed any salary.

Tesla's value skyrocketed briefly to over $1 trillion in 2021 from $50 billion when the package was negotiated. However, Tesla's market value at Tuesday's close was $600 billion before the news broke, causing shares to fall another 4.5%.

CNN highlighted that the Tesla board has faced criticism before. In July, Tesla's directors agreed to return $735 million to the company to settle shareholder allegations from a separate lawsuit filed in 2020, which claimed they had overpaid themselves. The lawsuit challenged options granted to directors starting in June 2017.

Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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