Elon Musk may be one of, if not the wealthiest person in the history of the human race, but in some ways, he’s just like you and I. For instance, much like Musk, you and I also are likely not getting a corporate compensation package worth $50 billion anytime soon. But while you and I were (probably) not counting on such a generous payout in the first place, Musk very much was.
Those expectations came to a screeching halt this week after Delaware Chancery Court Chancellor Kathaleen McCormick ruled against the Tesla CEO, writing that the construction of Musk’s compensation package from the electric car company was “deeply flawed.” The result, McCormick concluded, was an “unfair price” that had been essentially set by Musk himself using proxies and allies on the Tesla board in 2018. This week’s ruling stems from a lawsuit filed by Richard Tornetta, a Tesla shareholder and former thrash-metal drummer, who argued the compensation deal — predicated on Tesla achieving 12 specific milestones under Musk’s leadership — was “a breach of fiduciary duty” by a “conflicted” board which “failed to demonstrate” that Musk’s payout “was fair.”
With the massive stock options at the heart of the deal at risk of being canceled should Musk fail at his expected appeal of McCormick’s ruling, there is more than just money on the line for the Tesla CEO.
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‘Excessive compensation’Musk’s at-risk stock options represented some of the tech titan’s “most valuable assets” and now place his historic fortune “in limbo,” Bloomberg reported. Losing the $50 billion worth of shares would drop his net worth to just over $150 billion, reducing him to the “third-richest person in the world after spending most of the past couple of years as No. 1.”
Negating Musk’s compensation packet will directly benefit shareholders, an attorney for Tornetta told The New York Times, since the “dilution from this gargantuan pay package” will ultimately be “erased.” In the short term, however, Tesla stock has taken a precipitous downturn in the hours following Tuesday’s ruling. Just “38% of analysts covering Tesla stock have Buy ratings” currently, according to Barrons, as compared to the “average Buy-rating ratio for stocks in the S&P 500” of around 55%. Moreover, the ruling could have “wide implications for the rest of corporate America,” the financial outlet reported.
The ruling was “incredibly important” because it establishes “such a thing as excessive compensation,” Institute for Policy Studies global economy project director Sarah Anderson agreed to the Times. At the same time, it has drawn attention to Delaware’s reputation as a corporate haven, with Tulane Law Professor Ann Lipton telling the paper the case “could prompt other companies to leave the state.” Musk himself has fueled those concerns, urging his followers on X to “never incorporate your company in the state of Delaware” and instead turn to Nevada and Texas “if you prefer shareholders to decide matters” after the ruling was published.
‘They’re going to lose Musk’s interest in the company’In part, McCormick’s ruling has highlighted the mercurial financial maneuvers Musk has utilized across his various companies, such as selling Tesla shares to finance his purchase of Twitter. As she noted in the decision, Tesla’s defendants justified the astronomically large compensation package by claiming in part that “Musk needed additional incentives to stay on at Tesla or he would spend more time at SpaceX.”
The challenge for Tesla’s board moving forward is to “come up with a new package and soon,” Vanderbilt University finance professor Joshua Tyler White told Business Insider. Otherwise, “they’re going to lose Musk’s interest in the company.” Earlier this month Musk stated on X that he is “uncomfortable growing Tesla to be a leader in AI & robotics without having ~25% voting control.” Without it, he explained, “I would prefer to build products outside of Tesla.”
At the same time, any new compensation program — while likely significantly smaller and more confined than the just-negated one — will still be under harsh scrutiny, Harvard Law School professor Jesse Fried told Reuters. “Musk has already generated value” for those with Tesla stock, Fried explained. If the board were to simply pay him a lump sum for his past work, “what exactly do the shareholders get from that?”
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