Elon Musk’s record $56 billion pay package was struck down by Chancery Court Chancellor Kathaleen McCormick of Delaware Chancery Court due to its unfair treatment of shareholders.
She further held that Tesla’s board had become too subservient to Elon Musk and its CEO. Greg Varallo, attorney for shareholder Richard Tornetta told CNBC that this ruling will reshape corporate governance practices.
1. The company’s stock price dropped after the ruling
A Delaware court revoked Tesla CEO Elon Musk’s $56 billion pay package, dealing a severe blow to both its shareholders and Elon himself. The court found that this sum was excessive and that its board did not act in good faith in awarding such compensation.
In her 200-page ruling, Chancellor Kathaleen McCormick called Elon Musk’s compensation package the biggest ever seen in public company history and concluded it was agreed upon by people loyal to Musk; she further asked whether the directors had independent thinking abilities.
Legal experts tell CNBC that it is possible that Elon Musk and his team could pursue an last-minute settlement or file an appeal to the Delaware Supreme Court against their ruling, though no SEC filing has been released to notify shareholders about it.
Tulane law professor Ann Lipton believes the court’s decision will spark widespread discussions regarding compensation across industries. She suggests it will demonstrate how relying solely on claims like “all upside” or seeing Musk as charismatic is insufficient evidence of justification for such large salaries.
2. The company’s board is silent
As shareholders seek answers, Tesla’s eight-member board, including Musk himself, remains silent on this issue. CNBC submitted requests for further information from investor relations at Tesla as well as Musk and some board members; we did not receive responses.
Trial was initiated by shareholder Richard Tornetta’s lawsuit alleging that Elon Musk failed to act with enough independence when creating his new pay package. In her 200-page opinion, Chancellor Kathaleen McCormick called Musk’s compensation package the largest ever seen by public corporations, yet said its terms had been agreed upon by people loyal to Musk.
She found that many of Tesla’s current directors, such as Kimbal Musk and James Murdoch (son of media mogul Rupert Murdoch), lack independence due to personal ties with Elon. This violates corporate law; she added that no questions were ever asked of whether Elon was receiving an excessive compensation package from Tesla’s board.
3. The company’s stock price rose after the ruling
After hearing of this ruling, Tesla shareholders saw this news as good for them and its stock rose by just 0.3% – but still remains down almost 25% year-to-date.
In her 200-page opinion, Chancellor Kathaleen McCormick expressed concern that the 2018 pay package for Elon Musk and other senior directors was excessive and failed to act independently when agreeing upon it. She noted how this plan would make him a billionaire overnight and how its approval was approved by people beholden to him.
Next in the case will be for parties to confer on an implementing order, in which case a judge could potentially revoke all options on Musk’s shares, thus decreasing his total wealth while not eliminating ownership rights altogether. However, due to his vast fortune of $184 billion and complex finances – including loans using his shares as collateral – this may prove challenging; furthermore he has expressed an intent of moving his company’s incorporation out of Delaware altogether.
4. The company’s board is silent
Tesla?s board remains coy about what this court ruling means for shareholders and what will follow next.
Numerous members of SpaceX’s board of directors have long supported and invested in Musk since his PayPal days; director Ira Ehrenpreis has supported and invested in him since those early PayPal days, while lead director Antonio Gracias founded a tech-focused private equity firm; other directors include former SolarCity CFO Brad Buss as well as Robyn Denholm who serves on both 21st Century Fox and Telstra boards.
Critics allege that Musk’s directors were too biased in evaluating his pay package of unvested stock options, failing to question whether it was necessary or appropriate for reaching company goals and failing to adequately explain how it was developed. They further criticized them for failing to address concerns over his behavior such as 120-hour workweeks and unpredictable public responses.
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