The entire push to give Tesla CEO Elon Musk a pay package now worth $100 billion was sealed by a judge this week.
In 101 pages opinionDelaware Court Counsel Kathleen McCormick He refused to back down from a previous decision to cancel Musk’s pay. She wrote that the arguments presented by the defense representing Tesla and some of its board members were essentially “creative,” but they missed the mark. McCormick had previously voided Musk’s pay in a previous ruling, and after losing at trial, Tesla held a new shareholder vote on pay in June 2024 in an attempt to pay him what Tesla’s board said he was owed. Tesla Chairman Robyn Denholm told shareholders that the board was behind the compensation package, and urged investors to re-approve Musk’s pay as a way to reverse the court decision, which shareholders did overwhelmingly in a vote that received 72% support in June 2024.
Tesla told investors that the vote, which it called a “common law ratification,” could negate allegations that the board breached its fiduciary duty in granting the pay plan. “When properly implemented, common law ratification ‘goes back’ to validate the challenged law as of its initial enactment,” Tesla books For shareholders.
The court categorically rejected this approach.
“There are at least four fatal flaws,” McCormick wrote in her decision. “The large and talented group of defense firms has innovated the argument for certification, but their unprecedented theories run counter to multiple strains of settled law.” (McCormick wrote in her decision that Tesla had “counseled” the day it filed a proxy statement in April, in which it asked shareholders to certify Musk’s pay by adding five additional law firms to the list of attorneys representing defendants in the pay lawsuit.) ).
In a mail On X day, Tesla wrote that the court was wrong and that it planned to appeal the decision.
“This ruling, if not overturned, means that the judges and plaintiffs’ attorneys are running Delaware corporations instead of their rightful owners — the shareholders.”
So what exactly prompted McCormick to make her decision? Here are the “four fatal flaws,” she explained:
Fatal flaw No. 1: Tesla did not have the procedural grounds to overturn the court decision
First, Tesla first put forward the argument that a shareholder ratification vote was a “powerful elixir” that could cure irregularities in its proxy statement in April, McCormick wrote. But Tesla had no reason to overturn the court’s outcome based on the evidence it presented after trial, the opinion said. Tesla’s lawyers later backed away from that position during oral argument in court, dropping the more aggressive language and instead seeking to “modify the remedy” without challenging the court’s findings. However, McCormick wrote, the attorneys requested “a judgment for the defendants on all counts,” which amounted to an overturn of the court’s decision in Tesla’s favor.
“Therefore, the ‘only remedy’ sought by Defendants by the time of oral argument was to ‘modify the remedy’ of rescission and flip the entire outcome of the case in Defendants’ favor,” the judge wrote, emphasizing her point in a playful way. : “That’s it.”
Fatal flaw #2: timing. Ratification of common law cannot be provoked after Opinion after trial
Second, Tesla raised his defense of common law ratification after McCormick wrote that the opinion vacating his pay came after the trial — a full six years after the case was filed, a year and a half after the trial, and five months after the court’s opinion. No court has ever allowed shareholder ratification after settling the facts, with Waheed exception McCormick writes that over the past 70 years.
“Wherever the outer limits of harmless delay lie, defendants have crossed them,” she wrote. “The court declines to exercise its discretion to allow Defendants to raise the defense of shareholder ratification at this late stage.”
Fatal Flaw #3: Tesla’s approach did not adhere to the established legal framework
The third and perhaps most important flaw highlighted by McCormick relates to the legal framework that Tesla relied on. She wrote that a shareholder vote by itself was not enough to ratify “a deal between conflicting observers,” which is how Musk’s grant was described in McCormick’s previous opinion eliminating his salary. “Controlling transactions between observers pose multiple risks to minority shareholders,” she wrote. Especially in this case, there is what is called “tunnel risk”, where someone who controls the company could try to get ahead through transactions with related parties.
Given the high stakes, the Court applies a more stringent standard of review that requires specific steps such as independent special committee review and informed shareholder votes, among other requirements. Tesla’s approach did not adhere to the specific framework required.
It concluded that “Defendants’ failure to adhere to the framework for securing shareholder attestation in the context of a dispute between auditors provides an independent basis for rejecting the attestation argument.”
Fatal flaw #4: Multiple fundamental errors
Finally, McCormick wrote that an April proxy statement asking shareholders to certify Musk’s pay after the court struck it down was “wildly misleading.” She noted that “there are many ways in which a proxy statement distorts the truth” but one notable failure was that much of what Tesla told its shareholders in the proxy statement was either inaccurate or just downright misleading.
All four fatal flaws in the certification argument were enough to defeat the motion to review the decision, McCormick wrote.
“Combined they pack a powerful punch.”
Tesla did not immediately respond to a request for comment.