A judge has once again rejected Musk’s multi-billion-dollar Tesla pay package. Now what?

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DETROIT (AP) — For the second time, a Delaware judge has thrown out a pay package that Tesla awarded its CEO, Elon Musk, that was once worth $56 billion.

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On Monday, Chancellor Kathleen St. Jude McCormick rejected a request from Musk’s lawyers to overturn the ruling she announced in January that struck down the compensation plan. The judge then ruled that Musk effectively controlled Tesla’s board of directors and designed the huge pay package during the sham negotiations.

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Lawyers for a Tesla shareholder who sued to block the pay package have asserted that shareholders who voted for the 10-year plan in 2018 were given misleading and incomplete information.

In their defence, Tesla board members asserted that shareholders who ratified the pay plan for a second time in June had done so after receiving full disclosures, thus remedying all the problems the judge mentioned in her ruling in January. As a result, they said Musk deserved the pay package because he raised Tesla’s market value by billions of dollars.

McCormick rejected this argument. In her 103-page opinion, she ruled that under Delaware law, Tesla’s lawyers had no grounds to overturn their January ruling “based on the evidence they presented after trial.”

What will Musk and Tesla do now?

On Monday night, Tesla posted on X, the social media platform owned by Musk, that the company would resume. The appeal will be filed with the Delaware Supreme Court, which is the only appellate court in the state that Tesla can pursue. Experts say the ruling is likely to come in less than a year.

“The ruling, if not overturned, means that the judges and plaintiffs’ attorneys are running Delaware corporations instead of their rightful owners — the shareholders,” Tesla said.

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Later, on X, Musk launched a blistering attack on the judge, asserting that McCormick is “a far-left activist masquerading as a judge.”

What do experts say about the case?

Legal authorities generally indicate that McCormick’s judgment was sound and followed the law. Charles Elson, founding director of the Weinberg Center for Corporate Governance at the University of Delaware, said that in his view, McCormick was correct in ruling that after Tesla lost its case in the original trial, it had created new inappropriate evidence by requiring shareholders to certify. Pay package for the second time.

If she allowed such a claim, he said, it would cause a major shift in Delaware’s laws against conflicts of interest, given the unusually close relationship between Musk and Tesla’s board of directors.

“Delaware protects investors, and that’s what it did,” said Elson, who has followed the court for more than three decades. “Just because you’re a ‘super CEO’ doesn’t put you in a separate category.”

Elson said he believes investors will be reluctant to invest money in Delaware companies if there are exceptions to the law for “special people.”

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What will the Delaware Supreme Court do?

Elson said that in his opinion, the court is likely to uphold McCormick’s ruling.

Can Tesla appeal to the federal courts?

Experts say no. Rulings on state laws are usually left to the state courts. Brian Dunn, program director of the Institute for Compensation Studies at Cornell University, said that in his experience, Tesla has no choice but to remain in the Delaware courts to obtain this compensation package.

Tesla has moved its legal headquarters to Texas. Does this matter?

The company could try to reshape the pay package and seek approval in Texas, where it might expect friendlier judges. But Dunn, who spent 40 years as an executive compensation consultant, said some other shareholders are likely to challenge the award in Texas because it is excessive compared to other CEO pay plans.

“If they just want to come back and hand him $56 billion, I can’t believe no one would want to sue him,” Dunn said. “It’s an unreasonable amount of money.”

Will the new pay package be larger?

Almost certainly. Tesla shares are trading at 15 times the exercise price of stock options in the current package in Delaware, Morgan Stanley analyst Adam Jonas wrote in a note to investors. Tesla’s stock price has doubled in the past six months, Jonas wrote. At the stock’s closing price on Monday, Musk’s package is now worth $101.4 billion, according to Equilar, an executive data firm.

Musk requested a subsequent pay package that would give him 25% of Tesla’s voting shares. Musk said he’s not comfortable moving into AI with the company if he doesn’t have 25% control. He currently owns about 13% of Tesla shares outstanding.

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