Elon Musk's $56 billion Tesla pay package at US court. What will be welcome?

Elon Musk's $56 billion pay package from Tesla should have been legally recognized when it was restored by a vote of the company’s shareholders last year, a Tesla attorney argued to the Delaware Supreme Court on Wednesday. One of the biggest corporate legal battles entered its final stage nearly two years after a lower court judge rescinded the Tesla CEO's record compensation.

"This was the most informed stockholder vote in Delaware history," Jeffrey Wall, an attorney for Tesla, told the justices. "Reaffirming that would resolve this case," Wall said.

The case's outcome could have substantial consequences for the state of Delaware, its widely used corporate law, and its Court of Chancery, a once-favored venue for business disputes that has recently been accused of hostility towards powerful entrepreneurs. The January 2024 Court of Chancery ruling striking down Musk's pay has become a rallying cry for Delaware critics. Chancellor Kathaleen McCormick ruled that the Tesla board lacked independence from Musk when it approved the pay package in 2018 and that shareholders lacked key information when they voted overwhelmingly in favor of it. As a result, she applied a demanding legal standard and found the pay unfair to investors.


The defendants, current and former Tesla directors, denied wrongdoing and said McCormick misinterpreted the facts and the law.

After the Musk pay ruling, large companies, including Tesla, Dropbox, and the venture capital firm Andreessen Horowitz, switched their legal homes to Texas or Nevada, where courts are friendlier toward directors. Delaware lawmakers responded to the corporate departures, a trend known as "Dexit," by overhauling its corporate law. If Musk loses the appeal, he will still reap tens of billions of dollars in stock from the electric vehicle company, which agreed in August to a replacement deal if his 2018 plan is not restored.

Tesla estimated in 2018 the stock options plan would be worth $56 billion if the company met operational and financial goals, which it did. Because the stock continued to appreciate, the options are currently worth closer to $120 billion, by far the largest executive compensation ever. Musk is the world's richest person with a fortune of around $480 billion, according to Forbes.

The defendants have argued that McCormick erred in finding social and business ties to Musk compromised their independence and said Tesla shareholders were informed of the economic terms of the pay deal before they approved the plan. The directors said she should have reviewed the pay package under the "business judgment" standard, which protects directors from second-guessing by courts.

The directors have long argued the pay package performed as hoped - it focused the attention of Musk, a serial entrepreneur, and he transformed Tesla from a startup into one of the world's most valuable companies. Several months after McCormick's ruling, Tesla received shareholder approval a second time for the plan, which McCormick rejected as legally invalid. Tesla is also appealing that decision.

FAQs

Q1. What is Elon Musk's pay package?
A1. Elon Musk's $56 billion pay package from Tesla.

Q2. Who is Elon Musk?
A2. Elon Musk is CEO of Tesla.