A recent ruling by a Delaware judge has declared Elon Musk's 2018 compensation package, which contributed to making him the world's wealthiest individual, as unfair and in need of reversal. This $56 billion package, approved by shareholders and Tesla's board, granted Musk stock options based on specific performance targets for the company. Shareholders contested the legitimacy of the process leading to the package.
In a surprising move, Musk took to X, the social media platform he acquired in 2022 (formerly known as Twitter), to express his dissatisfaction with the ruling.
He tweeted, "Never incorporate your company in the state of Delaware."
This legal decision adds to the ongoing challenges for the Tesla CEO. Musk has sought a 25 percent control over Tesla, now the world's most valuable automaker, following his substantial stock sale to fund the $44 billion acquisition of Twitter. However, investors, including some who initially supported the 2018 compensation package, remain skeptical of Musk's bid for increased control.
Tesla recently reported disappointing quarterly financial results linked to significant price cuts that boosted sales volume but had minimal impact on revenue growth. The aftermath of these results was described by one analyst as a "train wreck."
Chancellor Kathaleen McCormick, in her written opinion, granted plaintiff Richard Tornetta "rescission," indicating that the compensation package should be annulled. The plaintiff's attorneys presented a three-pronged case, asserting that key milestones in the plan were not as challenging as claimed, the compensation committee and board were not truly independent, and the plan's origin was misrepresented in disclosures.
Plaintiff's attorney Greg Varallo praised the court's decision, stating, "The Court’s hard work will redound directly to the benefit of Tesla investors, who will see the dilution from this gargantuan pay package erased."
McCormick emphasized that the responsibility now lies with Tesla, Musk, and the shareholders to implement her ruling. She criticized the flawed approval process for the compensation package, citing Musk's close ties with representatives of the company and characterizing the process as a self-driving journey recalibrated by Musk along the way, ultimately leading to an unjust outcome.
During the trial in November 2022, Musk presented Tesla as facing a crisis in 2017, with production delays on the Model 3 sedan. He argued that the benchmarks in the compensation plan seemed unlikely at the time. Former Tesla board member Antonio Gracias testified that the lavish bonuses aimed to keep Musk focused on Tesla's work. However, McCormick's opinion indicated that Musk had no intention of leaving the company, and the package did not obligate him to dedicate a specific amount of time to Tesla.
The court ultimately ruled against the largest compensation plan in the history of public markets.
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