Elon Musk sees Tesla's $56 billion payout deal overturned in court

A judge in the US state of Delaware has overturned a $55.8bn (£44bn) pay deal that electric car company Tesla awarded to Elon Musk in 2018.

The lawsuit was filed by a shareholder who said it was an overpayment.

Judge Kathleen McCormick found that Tesla managers, who negotiated the pay package, “may have been blindsided” by Musk’s “superhuman appeal” and did not fully inform shareholders.

She said the deal was “incomprehensible” and ruled that it should be cancelled.

The pay deal, set in 2018, was the largest ever in US corporate history, helping make Musk the richest person in the world. Bloomberg and Forbes estimated his net worth at between $198 billion (£162 billion) and $220 billion (£180 billion), as of November 2023.

Tesla's package tied Musk's compensation to performance goals, such as Tesla's stock price and profitability. He does not receive a salary.

But Richard Tornetta, a Tesla shareholder, launched legal action demanding the award be annulled, arguing that the businessman had been overpaid.

After years of legal wrangling, a week-long trial began in November 2022, with Tesla managers arguing that the huge pay award was designed to ensure that Mr. Musk, one of the world's most dynamic entrepreneurs, would continue to devote his attention to the company.

In addition to being CEO and a major shareholder of Tesla, Musk also owns several other companies including social media platform X, rocket company SpaceX, and brain chip company Neuralink, between which he divides his time.

But in it Judgment 201 pages Delivering on Tuesday, Judge McCormick said Mr Musk's incentives were not the primary reason for the huge pay package. Tesla executives even got “carried away by the rhetoric” surrounding the often controversial CEO.

Furthermore, the judge found that Mr. Musk had “extensive relationships” with Tesla officials tasked with negotiating the pay award. She cited his 15-year business and personal relationship with Compensation Committee Chairman Ira Ehrenpreis.

Mr. Ehrenpreis was a member of the board's compensation committee, which was responsible for negotiating Musk's pay plan, along with Brad Buss, Robin Denholm, and Antonio Gracias, but other board members, including James Murdoch and Linda Johnson Rice, were also found to have participated. In this process.

The judge noted that Gracias and Musk were also “close friends” and had business dealings spanning two decades.

She said Murdoch also became a friend after he bought a Tesla Roadster in 2006 or 2007. The pair have spent family holidays together in Israel, Mexico and the Bahamas.

Judge McCormick noted that Musk and his brother Kimbal, who also serves on Telsa's board of directors, recused themselves from “most of the meetings and all votes on the 2018 pay package.”

But she said five of the six managers who voted on the pay package “were beholden to Musk or had bargaining conflicts.”

She also said that many of the documents cited by Tesla executives as evidence of fair process were “drafted, pushed or endorsed” by Todd Marone, Mr. Musk’s divorce lawyer-turned-general counsel, “whose admiration for Musk moved Marone to tears during his deposition.” .

The judge said Maron was the primary intermediary between Mr. Musk and the committee.

“The Compensation Committee and Musk were not on opposite sides. They did not acknowledge there was a conflict. It was a cooperative and cooperative process,” she wrote.

After the ruling, Tesla shareholder Tornita's lawyer, Greg Varallo, said it was a “good day for the good guys,” in an email reported by Reuters.

In a post on X, formerly known as Twitter, Musk said: “Never incorporate your company in Delaware.”

“I recommend merging in Nevada or Texas if you prefer shareholders to decide things,” he added. He then posted a poll asking his followers whether or not Tesla should “change its state of incorporation to Texas, the home of its actual headquarters.”

The judge's ruling can be appealed to the Delaware Supreme Court.

Many major companies, including the likes of Tesla and Amazon, are registered in Delaware, which is known for its light taxes.

Tesla shares fell about 2.5% in extended New York trading. They have lost more than 20% of their value so far this year.

When Tesla rolled out Musk's original 10-year salary package in 2018, it attracted widespread public interest. Several shareholder advisory groups recommended voting against the plan, saying it was too generous.

Brian Quinn, a professor at Boston University School of Law, told the BBC that “it is difficult to justify a deal like this,” given Musk’s influence on the board.

Professor Quinn added: “He treats Tesla as his own, but even if he calls himself the 'Technology King of Tesla', he is not the majority owner.”

After selling a large portion of his stake in Tesla to buy X, Musk currently owns about 13% of the electric car maker, but recently said he wants a larger stake in the company.