Elon Musk’s 2018 Tesla Compensation Package Ruled Unfair by Delaware Judge

Interior of Tesla vehicle
Interior of Tesla vehicle

A Delaware court has declared Elon Musk’s 2018 compensation agreement, worth $56 billion, as inequitable. This package, pivotal in Musk’s ascent to becoming the wealthiest individual globally, was initially supported by Tesla shareholders and the board. It granted Musk stock options contingent upon reaching specific performance benchmarks. However, following a lawsuit by shareholders, led by plaintiff Richard Tornetta, alleging procedural irregularities, Chancellor Kathaleen McCormick ruled in favor of rescinding the package.

Musk, known for his outspoken nature, took to X (formerly Twitter) to express his displeasure, advising against incorporating businesses in Delaware.

This judgment arrives amid a challenging period for Musk, who seeks a 25% stake in Tesla, the world’s most valuable automaker since the implementation of the pay package. This request is met with skepticism, even by some initial supporters of the 2018 package, particularly after Musk divested billions in Tesla stock to finance his acquisition of Twitter.

Tesla, meanwhile, faces its own difficulties, reporting underwhelming financial results last week. The company’s strategy of significant price reductions led to increased sales but minimal revenue growth, prompting one analyst to describe the investor call as a “train wreck.”

Chancellor McCormick’s written opinion emphasized the necessity for Tesla to prove the fairness of its compensation package, a task deemed unachievable due to the flawed approval process and Musk’s influential ties within the company. Musk’s historical attorney and current general counsel of Tesla, who displayed emotional attachment during his deposition, was part of the group formulating the compensation package.

In her ruling, McCormick metaphorically likened the process to Tesla’s self-driving ambitions, concluding that it led to an unfair outcome and warranted a “recall.” Testimonies during the trial portrayed a crisis-driven Tesla in 2017, with Musk emphasizing the unlikelihood of achieving the plan’s benchmarks at the time.

Despite Musk’s commitment to Tesla and the board’s intention to retain his focus through substantial performance bonuses, McCormick found that the compensation plan’s magnitude could not be justified, even considering Tesla’s ambitious goals and Musk’s unique motivation.

The court’s decision, hailed by the plaintiff’s attorney as a victory for Tesla investors, now obliges Tesla, Musk, and the shareholders to implement McCormick’s ruling, with a joint letter outlining the remaining issues, including fees, to be submitted for finalizing the order.

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