A ruling by Delaware's state counsel that essentially eliminates Elon Musk's $55.8 billion pay package could have broader implications for the rest of corporate America.
Late Tuesday, Delaware Court Counsel Kathleen McCormick canceled Tesla's TSLA,
The CEO's pay package is siding with a shareholder plaintiff who sued the electric car maker over Musk's compensation package from 2018, claiming it was dictated by Musk and was the “product of sham negotiations.” The suit alleged that Tesla managers breached their fiduciary duty by awarding Musk his companies' plan.
In a strongly worded 201-page document, McCormick appeared to realize that it might set a precedent in Delaware, where the majority of American companies are based, regarding corporate governance.
“This issue has been brought before Delaware courts three times before, when more astute judges found ways to avoid resolving it altogether,” McCormick wrote. “This decision boldly dares to go where no court has gone before, or at least where no Delaware court has stepped.”
She said the central issue in the case, imposed by the plaintiff, is whether Musk controls Tesla. She wrote that he had done so in this deal. In addition to his 21.9% stake at the time, Musk, dubbed the “super CEO,” had close relationships with the managers tasked with negotiating on behalf of Tesla, and dominated the process that led to the board’s approval of his compensation plan. “Musk's extensive relationships with every board member of Tesla's compensation committee at the time were revealed during the trial, including with former Tesla general counsel Todd Marrone.
For example, Maron was also Musk's former divorce lawyer, and McCormick wrote that Maron's “admiration for Musk moved him to tears during his testimony.” In fact, Maron was the primary intermediary between Musk and the committee, and it is unclear to what extent. A side Maron saw himself as.
The issue of Musk's close ties to the Tesla board has been raised before, most notably in the 2016 lawsuit filed by investors over Tesla's acquisition of SolarCity, with allegations that he forced Tesla board members to accept an expensive purchase of the solar company. Managed by his cousins. Last year, the Delaware Supreme Court ruled that the deal was fair to shareholders and “negotiations were conducted at a distance.”
“I think it will be an important issue and one that other boards will need to pay attention to,” said Carl Tobias, a professor at the University of Richmond School of Law. “Other board members would be concerned if anything similar happened at their companies, and they have not protected shareholders or the company from an overzealous CEO.”
It is not yet clear whether Tesla will appeal the ruling to the Delaware Supreme Court. “Never incorporate your company in Delaware,” Musk tweeted to X after the ruling.
Stephen Diamond, an associate professor of law at Santa Clara University School of Law, noted that the impact of the decision on Tesla's current board will be limited, given the change in board composition.
“This will certainly make future negotiations over Musk’s compensation appear at least more adversarial,” he said in an email. “The decision also explicitly moves the needle in Delaware corporate law when it comes to CEOs — even when they do not own a majority of the outstanding shares, they may be considered to control the company, and that could lead to more careful scrutiny of board conduct.”
It's not yet clear if or how this case could impact Musk's current attempt to gain more control — or as he said, “influence” — over Tesla, which he talked about on X and in the company's conference call with Analysts. Musk currently owns just under 13% of the company's shares.
Still, Tuesday's ruling was a rare check on Musk's authority.
