On Tuesday, a Delaware judge found that Tesla’s board exceeded their fiduciary duties by offering CEO Elon Musk a $55.8 billion pay package. Shares in the electric car company subsequently fell moderately after hours trading.
Chancellor Kathaleen McCormick issued a 200-page ruling in which she found that one shareholder’s suit against the board for failing to disclose conflicts of interests and provide sufficient disclosures had merit.
Judge Kathaleen McCormick’s Share Slide
Elon Musk made no attempt to downplay his lucrative compensation package when he appeared before Delaware court to defend it, and in a 201-page ruling from the Chancellor of the Chancery Court Kathaleen McCormick’s opinion she did not subscribe to it, writing instead that neither board or compensation committee were acting in their own best interests when negotiating their plan and that shareholders were misinformed when asked for a vote by asking the board for one.
Tesla was dealt a serious setback by this ruling, just one of several setbacks it has experienced recently, such as falling demand for electric vehicles and an investigation by US federal prosecutors into Twitter’s handling of security issues. Musk has experienced his share of defeat at the hands of this same judge who oversaw his failed bid for Twitter in 2022 – this case will likely be appealed.
Judge McCormick’s Decision
On Tuesday, Chancellor Kathaleen McCormick of Delaware’s Court of Chancery issued her ruling against Tesla founder Elon Musk’s record compensation package and is known for impartially yet strictly applying corporate law. McCormick has successfully defended her court from critics from Trump administration as well as safeguarded small investor interests.
Plaintiff lawyers alleged in this lawsuit that the board of directors who approved Elon Musk’s pay was not independent. Plaintiff lawyers claimed the compensation committee negotiated directly with him through deceptive practices before presenting him the plan with misleading disclosures and an inaccurate proxy statement to shareholders.
McCormick accepted the plaintiff’s arguments in her 201-page decision and voided the 2018 compensation package, which involved vesting tranches of stock options as Tesla met performance benchmarks. Loss of these options may reduce Musk’s net worth to $154.3 billion and make him the world’s third richest person.
Judge McCormick’s Recommendation
Delaware Chancery Court Judge Kathaleen McCormick agreed with Tornetta’s claims, ruling that the board failed to disclose all aspects of his 2018 executive compensation package due to conflicts of interest and that its evaluation was excessive. She further declared his pay package excessive.
At trial, Tesla directors argued that their company must pay to ensure one of the world’s most dynamic entrepreneurs remained fully focused on building electric car technology. Furthermore, they claimed that Musk set goals easier to attain than disclosed.
But the judge disagreed and determined that the process leading up to Musk’s compensation package approval was deeply flawed. She pointed to extensive personal and business ties between Musk and those tasked with negotiating on his behalf – such as 15-year relationships between board member Ira Ehrenpreis and committee chair Antonio Gracias dating back decades – who were involved with negotiations for him.
Judge McCormick’s Conclusions
Delaware judge Kathaleen St Jude McCormick issued her decision, ruling against Elon Musk’s compensation package that made him an instant billionaire and world’s wealthiest person. This will likely impact how executive pay is determined at public companies throughout America.
McCormick found in her 200-page ruling that the Tesla board failed to show that its 2018 plan was fair to shareholders. That plan allowed Elon Musk to secure 12 tranches of stock options that would vest if its market capitalization increased by $50 billion and it met specific revenue goals.
Judge McCormick found that the board breached their fiduciary duties by permitting Musk to dictate terms of his compensation package, noting his longstanding business relationships with compensation committee members Ira Ehrenpreis and Antonio Gracias; she noted also his former divorce attorney Todd Maron as general counsel Todd Maron was on their compensation committees respectively. Additionally, McCormick faulted them for failing to engage in arm’s length negotiations before approving a plan with haste.
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