Tesla Inc. is urging the Delaware Supreme Court to reinstate CEO Elon Musk’s $56 billion (Ksh.7.2 trillion) pay package, arguing that last year’s shareholder vote should have restored the record-breaking compensation plan. The legal battle stems from a January 2024 ruling by the Delaware Court of Chancery, which rescinded Musk’s pay package citing concerns over board independence and alleged insufficient disclosure to shareholders.
Tesla attorney Jeffrey Wall told the court that the 2024 shareholder vote was “the most informed stockholder vote in Delaware history,” and reaffirming it would resolve the case. The appeal highlights critical questions about corporate governance, shareholder rights, and executive compensation standards under Delaware law.
Background of the Case
Chancellor Kathaleen McCormick ruled that the Tesla board lacked independence when approving the 2018 pay package and that shareholders had been insufficiently informed, deeming the compensation unfair. Musk, who owned 21.9% of Tesla stock in 2018, did not attend Wednesday’s hearings.
Tesla’s defense argues that the board acted properly, shareholders were fully aware of the terms, and rescinding the pay deal is an improper remedy, given the company’s growth and shareholders’ gains. Tesla directors also contend that the court misapplied legal standards regarding board independence and shareholder approval.
Implications for Delaware Corporate Law
The case has drawn attention to Delaware’s business-friendly legal environment. Following the ruling, several companies, including Tesla, Dropbox, and Andreessen Horowitz, have moved corporate registration to Texas or Nevada, a trend dubbed “Dexit”. Delaware lawmakers have since overhauled corporate law to retain large companies.
Even if the appeal fails, Musk is set to receive tens of billions under a replacement plan, with Tesla estimating $25 billion in accounting charges for the alternative compensation. The original 2018 stock options plan, designed to incentivize Musk to meet operational milestones, would now be worth closer to $120 billion due to Tesla’s stock appreciation.
Tesla recently proposed a $1 trillion compensation plan to retain Musk while steering the company toward robotics and automated driving, emphasizing his continued strategic value amid growing competition in the EV sector.
The Supreme Court is also reviewing the $345 million legal fee McCormick ordered Tesla to pay to the attorneys representing Richard Tornetta, a shareholder with just nine Tesla shares who challenged the original pay deal. A ruling could take several months, potentially setting a landmark precedent for executive compensation and shareholder governance.
