Elon Musk and Tesla Tries to Revive $55 Billion Payment Package After Court Rejection

By: Jaenney Lee

Edited by: Lauren Levinson and Anna westfall

In January 2024, Chancellor Kathleen St. June McCormick ruled against Elon Musk regarding his possession of a landmark compensation package awarded by Tesla’s board of directors that is potentially worth more than $55 billion. The litigation began in 2018 when a shareholder lawsuit targeted Tesla CEO Musk and the company directors. They were charged with violating their obligations to the manufacturer of solar panels and electric cars, which led to the wastage of company funds and Musk’s unfair gain. [1] 

The payment package, according to the shareholder’s attorneys, should be void since Musk controlled it and resulted from fictitious talks with directors who were not impartial. Additionally, they claimed that shareholders who received inaccurate and deceptive disclosures in a proxy statement accepted it. [2]

On the other hand, the defense attorney argued that a compensation committee negotiated the payment plan with accurate disclosures,  where board members were independent of Musk. They added that Musk was not a controlling shareholder as his owned share was less than one-third of the company at the time. [3] 

The payment package was unique because it contained a large portion of stock options divided into twelve equal portions. The options’ payoff depended on on Tesla meeting three sets of progressively challenging growth objectives for its market value, revenue, and adjusted earnings (adjusted for specific expenses). Musk would get a portion of the prize money each time Tesla surpassed both the market value target and one of the other two objectives. When the package was first proposed in 2018, the goals seemed unachievable. However, as much as the achievement looked impossible, the payoff was equally promising – leading two-thirds of shareholders to approve the payment package. By the end of 2022, Tesla and Musk met enough goals for Musk to receive the entire $55 billion package.[4]

Tracing back to when he achieved to receive the entire package, the Court of Chancery in the state of Delaware, where Tesla’s headquarter is located, mentions that “Tesla’s stockholders claim that Elon Musk caused Tesla to overpay for SolarCity through his alleged domination and control of the Tesla board of directors.”[5] Additionally, the board members are required to put shareholders’ interests ahead of their own, which makes hiring, firing, and checking and balancing the CEO some of their important roles. However, as Musk gradually became a big shareholder due to the payment package, it became harder for Musk to be independent from the board members.[6] 

A month after the judge’s ruling, Musk stated that he would try to move Tesla’s corporate listing to Texas, where he has already moved company headquarters from Delaware. Moreover, with Neuralink, his privately held brain implant company, he moved the corporate listing from Delaware to Nevada. However, legal experts say that such a movement would not affect the payment case as the case remains to be actions taken while Tesla was incorporated in Delaware.[7][8]

Nearly four months after the ruling, on April 18, 2024, Tesla and Musk are attempting to revive his $55 billion payment plan by exploiting a cryptic corporate law rule. This is an unprecedented strategy that might land the business in litigation once more. Musk is making use of a little-known provision in Delaware corporation law that permits businesses to correct procedural errors that would nullify boardroom decisions. [9]

Professor Eric Talley of Columbia Law School stated that the purpose of the clause is not to overturn significant court decisions, but rather to serve as a “Band-Aid” for minor administrative errors.[10]

Musk’s strategy is not to address the shortcomings McCormick found in the negotiations for the payment plan. Rather,  proposed that they had an independent director of a “special committee,” Kathleen Wilson-Thompson, who reviewed the 2018 payment package and stated that it was in the “best interest of shareholders” to resolve the board conflicts. “We suggest simply subjecting the original 2018 package to a new shareholder vote, accompanied by extensive disclosure as to the process undertaken and the potential conflicts of interest that were considered at the time,” the special board committee’s report said.[11]

Furthermore, this process allows the shareholders to vote again for the payment package, and give them 120 days to challenge the proposal if it is approved again. Talley mentions that if shareholders approve, it may facilitate Musk’s appeal victory in the Delaware Supreme Court by shifting the burden of proof to the plaintiffs, who would then have to show that Musk’s compensation was unreasonable.[12]

While Musk and Tesla argue that the majority of the stockholders did not agree with the court’s decision in January, McCormick states that Musk would not be able to prove that shareholders were adequately informed about the deal for his appeal this time.[13]

Notes:

1. CHASE, RANDALL. 2024. “Elon Musk Pay Package from Tesla Denied by Delaware Judge.”January 30, 2024. 

2. CHASE, RANDALL. 2024. “Elon Musk Pay Package from Tesla Denied by Delaware Judge.” January 30, 2024. 

3. CHASE, RANDALL. 2024. “Elon Musk Pay Package from Tesla Denied by Delaware Judge.” January 30, 2024. 

4. Melin, Anders. “What You Need to Know about Elon Musk’s Voided $55 Billion Pay Package.” February 2, 2024.

5. Melin, Anders. “What You Need to Know about Elon Musk’s Voided $55 Billion Pay Package.” February 2, 2024. 

6. “IN RE TESLA MOTORS, INC.  STOCKHOLDER LITIGATION.” n.d. No. 181, 2022

7. KRISHER, TOM. “Tesla Wants Shareholders to Reinstate $56 Billion Pay Package for Musk Rejected by Delaware Judge.” April 17, 2024. 

8. Lukpat, Alyssa, Theo Francis, and Denny Jacob. “Tesla Tries to Revive Elon Musk’s Big Payday after Court Rejected It.” April 17, 2024. 

9. Lukpat, Alyssa, Theo Francis, and Denny Jacob. “Tesla Tries to Revive Elon Musk’s Big Payday after Court Rejected It.” April 17, 2024.

10. Hals, Tom, and Jody Godoy. “Tesla Tries Legal ‘Band-Aid’ to Revive Musk’s Huge Pay Deal.” April 18, 2024. 

11. Hals, Tom, and Jody Godoy. “Tesla Tries Legal ‘Band-Aid’ to Revive Musk’s Huge Pay Deal.” April 18, 2024. 

12. Lukpat, Alyssa, Theo Francis, and Denny Jacob. “Tesla Tries to Revive Elon Musk’s Big Payday after Court Rejected It.” April 17, 2024. 

13.  Lukpat, Alyssa, Theo Francis, and Denny Jacob. “Tesla Tries to Revive Elon Musk’s Big Payday after Court Rejected It.” April 17, 2024. 

 Bibliography:

Chase, Randall. 2024. “Elon Musk Pay Package from Tesla Denied by Delaware Judge.” AP News. AP News. January 30, 2024. 

Hals, Tom, and Jody Godoy. 2024. “Tesla Tries Legal ‘Band-Aid’ to Revive Musk’s Huge Pay Deal.” Reuters. April 18, 2024. 

“In The Supreme Court Of The State Of Delaware.” In Re Tesla Motors, Inc.  Stockholder Litigation. n.d. No. 181, 2022 C.A. No. 12711

Krisher, Tom. 2024. “Tesla Wants Shareholders to Reinstate $56 Billion Pay Package for Musk Rejected by Delaware Judge.” Opb. OPB. April 17, 2024. 

Lukpat, Alyssa, Theo Francis, and Denny Jacob. 2024. “Tesla Tries to Revive Elon Musk’s Big Payday after Court Rejected It.” WSJ. The Wall Street Journal. April 17, 2024. 

Melin, Anders. 2024. “What You Need to Know about Elon Musk’s Voided $55 Billion Pay Package.” The Seattle Times. February 2, 2024.