"Never incorporate your company in the state of Delaware," Elon Musk tweeted on Tuesday afternoon, shortly after a Delaware chancery court voided the executive compensation package of one of the world's richest people.
The compensation package in question was set in 2018, as the New York Times explains, and gave "Mr. Musk the right to acquire about 304 million Tesla shares at a preset price of $23.34 a share if the company achieved certain revenue, profit and share price goals." These goals were split into 12 tranches, and each was achieved by Musk (though, of course, he was the one who set the goals) and the total value of the shares was worth about $51 billion this week.
So why did Chancellor Kathaleen St. J. McCormick void this compensation? “The process leading to the approval of Musk’s compensation plan was deeply flawed,” she said, citing that Musk was effectively able to decide his own pay package as much of Tesla’s board are his close friends and family. Furthermore, Musk presented a “materially deficient” version of this plan to shareholders for a final approval.
Chancellor McCormick’s decision is widely viewed as warning shot to other executives that, yes, there is such a thing as excessive pay. $51 billion (the largest pay package in history) is an exaggerated version of this, but McCormick was struck by “the absence of any evidence of adversarial negotiations between the board and Musk concerning the size of the grant,” cites Time.
Musk and co may still appeal this ruling to the Delaware Supreme Court, but corporate lawyers and Wall Street analysts alike have already taken note of the ruling’s massive potential impact. "The fact that they lost this in Delaware court, it's a jaw dropper," Dan Ives, an analyst with Wedbush Securities, told NPR. “It's unprecedented, a ruling like this. Will this case prompt companies to abandon Delaware for other states? “People have moved out of there because they don’t like the rulings of the judges,” said law professor Carl Tobias. “But most people consider it the gold standard.”
Losing Focus
As Robyn Denholm, chair of Tesla’s board, said, the justification for the multi-billion dollar compensation package was to keep Musk focused on the automaker. “It was around motivating him to achieve things that were bold and audacious,” Denholm testified, “and him putting his time and energy into that as opposed to his other interests.”
In a post on X following the court’s decision, Musk suggested that without his generous stock options, Tesla would no longer be his priority. “I am uncomfortable growing Tesla to be a leader in AI & robotics without having ~25% voting control,” the post began. “Enough to be influential, but not so much that I can’t be overturned. Unless that is the case, I would prefer to build products outside of Tesla.”
And, in her own way, chancellor McCormick seemed to agree that Musk’s compensation was about where he placed his attention.
THE VERDICT:
In an era of extreme wealth inequality and record corporate earnings, excess compensation needs to be reigned in. While Musk's $51 billion compensation package is an exaggerated and obvious example of this, will the ruling against him stand as a precedent, or will it be written off and ignored?
Be a smarter legal leader
Join 7,000+ subscribers getting the 4-minute monthly newsletter with fresh takes on the legal news and industry trends that matter.