Elon Musk’s $55 billion pay package at Tesla Inc. was struck down by a judge in Delaware after a shareholder challenged it as excessive. If this ruling survives a likely appeal, it could significantly affect Elon Musk’s wealth.
The decision from Tuesday implies that more than five years after Tesla’s co-founder was awarded the biggest executive compensation plan in history, Tesla’s board will have to reconvene and formulate a new proposal.
Musk’s worth, currently around $51.1 billion, leaves his fortune uncertain after this ruling. The options were one of his most valuable assets, and his worth would decrease to $154.3 billion without them – making him the third richest individual globally. Musk has spent most of the past few years in the Number 1 spot, according to the Bloomberg Billionaires Index.
The Delaware Chancery Court Chief Judge, Kathaleen St. J. McCormick, agreed with the investor who argued that the 2018 package had inadequate disclosures about the performance benchmarks Elon Musk was required to meet. Furthermore, it was suggested that the board had conflicts of interest in approving it.
The stock options from Musk’s compensation plan have gradually vested over the past few years, thanks to performance targets being met. However, he has not exercised any of the options yet, as the regulatory filings indicate.
Musk experienced another legal setback before the judge’s decision, wherein he failed to convince an appeals court in May to release him from a 2018 agreement with the US Securities and Exchange Commission that his Twitter posts about Tesla be screened. Despite skirting corporate norms on occasion, Musk has won several other court battles.
In the compensation case, Richard Tornetta, a Tesla shareholder, alleged that board members did not exercise independence when setting up the CEO’s pay package, allowing him to engineer aspects of his pay plan to his liking.
The process demonstrated significant conflicts of interest, making the board’s consideration of Musk’s pay package flawed. The lack of any evidence of adversarial negotiations between the Board and Musk concerning the extent of the grant was a glaring omission, the judge noted.
Musk’s defense fell short in explaining why the unprecedented compensation plan was essential to motivate the CEO to accomplish “transformative growth.” The judge pointed out Musk had no intention of leaving Tesla, and his ownership stake was ample motivation to keep him focused on growth.
The billionaire entrepreneur had urged Tesla’s board in January, whilst awaiting the Delaware court’s decision, to organize another considerable stock award for him, years after he sold a hefty proportion of his shares in the company to purchase Twitter.
Since the case Tornetta has brought is aimed at Tesla directors over Musk’s pay package, any recovery will return to the company rather than the shareholder. It remains to be seen whether Musk will appeal Tuesday’s ruling, or if Tesla’s board will devise a new pay package.
Find more details on this story at Bloomberg Law.