Court Cancels Elon Musk's $55.8 Billion Tesla Pay Deal But The ...

NEW YORK, NEW YORK - OCTOBER 31: Elon Musk and Maye Musk attend Heidi Klum's 2022 Hallowe'en Party ... [+] at Sake No Hana at Moxy LES on October 31, 2022 in New York City. (Photo by Taylor Hill/Getty Images)

Is Tesla CEO Elon Musk worth the money? A Delaware Court rescinded his pay deal Tuesday, according to the Wall Street Journal. I infer the judge considers Musk overpaid. “Never incorporate your company in the state of Delaware,” Musk posted on X.

But I think Tesla’s shareholders have benefited from the deal. In March 2018, when Tesla’s board approved Musk’s pay package, Tesla was losing money and its stock traded at around $17 a share — giving the company a stock market capitalization of $50 billion. Since then Tesla stock has soared to $187 a share — yielding a value of $610 billion.

Following approval of the deal, shareholders sued, “arguing that the plan was devised unfairly, with Musk essentially creating his own pay package with the help of allies on the Tesla board,” according to the New York Times NYT .

On January 30, a Delaware court rescinded Musk’s compensation package. The judge — who valued the package at $55.8 billion — argued Tesla’s board was shirking its fiduciary duty to shareholders when it approved the pay package, noted the Journal.

Viewing Musk’s pay from a return-on-investment perspective, the judge arguably is missing the point. For Musk’s $55.8 billion, Tesla shareholders enjoyed a tenfold return on their investment — since the company’s market capitalization has increased by $560 billion in the last nearly six years.

In March 2018, Tesla’s board granted Musk a pay package consisting of 12 tranches of stock options. While they are fully vested, Musk has not exercised the options, noted the Journal.

Equilar said the compensation package was the largest ever granted to a public company CEO. A corporate governance expert was shocked by the court’s cancellation of Musk’s deal. “Rarely, if ever, does a Delaware court rescind a compensation agreement,” said Charles Elson, a retired professor at the University of Delaware, in the Journal report. “To my memory it hasn’t happened.”

When the package was approved, Tesla’s market capitalization was $50 billion, noted Reuters. In order for Musk’s options to vest, Tesla needed to meet various revenue and profit targets and its market capitalization needed to exceed $650 billion. The last of these hurdles was cleared in 2022, according to the Journal.

The Delaware Court of Chancery judge struck down Musk’s pay contact because she found deep flaws in the process for securing the deal’s approval. How so? Musk had “extensive ties” with board members who negotiated the pay arrangement, Chancellor Kathaleen McCormick wrote in her opinion, noted the Journal.

“Musk was the paradigmatic ‘Superstar CEO,’ who held some of the most influential corporate positions (CEO, Chair, and founder), enjoyed thick ties with the directors tasked with negotiating on behalf of Tesla, and dominated the process that led to board approval of his compensation plan,” she added.

The judge characterized board Chair Robyn Denholm’s approach to oversight obligations as “lackadaisical” and described in detail the relationships between Musk and some board members.

The judge concluded those board members were “beholden” to Musk. And according to the Journal, she chided the board for not asking “the $55.8 billion question: Was the plan even necessary for Tesla to retain Musk and achieve its goals?”

Musk has asked Tesla’s board to increase his stake from 13% to 25%. So, he has an incentive to work on robotics and artificial intelligence businesses as part of Tesla, I wrote on January 25.

This boost in his Tesla stake appears less likely in the wake of the judge’s ruling. “Given the way she describes the board process - through the testimony of the directors - there is no way that his most recent demand for 25% can get approved,” Brian Quinn, a professor at Boston College Law School, told Reuters. “It's dead on arrival.”

Will Musk appeal to a higher court? He probably will but is unlikely to prevail. Eric Talley, a professor at Columbia Law School, told the Times “chancellors like McCormick historically have wide latitude to rule on such punishments.”

The answer remains to be seen. But Tesla stock was down in morning trading on January 31.