A Delaware judge has upheld her earlier decision to rescind Tesla CEO Elon Musk’s massive pay package from 2018, marking a significant setback for Musk and Tesla’s corporate directors.
On Monday, Chancellor Kathaleen St. Jude McCormick denied a request by Musk’s legal team and Tesla directors to overturn her ruling, which found the $56 billion compensation package to be the product of sham negotiations.
The unprecedented pay package was challenged by a Tesla stockholder in a lawsuit, alleging that Musk and Tesla’s board failed to act independently during its creation. The package, tied to Tesla’s stock performance, has fluctuated in value over the years.
Shareholder Vote Fails to Sway Court
After McCormick’s January ruling against the pay package, Tesla shareholders met in June and overwhelmingly ratified the deal for a second time. Musk’s defense argued that this vote demonstrated shareholders’ support for the package despite flaws in the 2018 process highlighted by the court.
However, McCormick rejected this argument in a 103-page opinion, calling the defense’s legal theories “fatally flawed.”
“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,” McCormick wrote. She added that stockholder votes cannot ratify conflicted-controller transactions marred by material misstatements.
Musk voiced his frustration on X, the social media platform he owns, saying, “Shareholders should control company votes, not judges.”
Fee Award Reduced for Shareholder’s Attorneys
McCormick also rejected a staggering $5.6 billion fee request from the attorneys representing the stockholder who brought the lawsuit. The attorneys argued that their efforts resulted in a $51.4 billion benefit to Tesla by preventing dilution of shareholder value.
While the judge acknowledged the methodology behind the fee request, she ruled that the amount was excessive. Instead, McCormick awarded $345 million in legal fees, describing it as an “appropriate sum to reward a total victory” while preventing an undue windfall.
“In a case about excessive compensation, that was a bold ask,” McCormick wrote, referring to the record-setting fee request.
Implications for Tesla and Corporate Governance
This ruling underscores judicial scrutiny over executive compensation and governance practices, particularly in cases involving powerful corporate figures. While Musk remains a pivotal figure at Tesla, the legal challenges surrounding his compensation package reflect broader concerns about corporate accountability.
As Tesla and Musk weigh their next steps, this legal battle highlights the balance between shareholder rights and judicial oversight in shaping corporate governance.
