It’s hard to imagine that even Elon Musk, the world’s richest person, would find himself fighting for compensation.
Before rushing to criticize Musk for quibbling over pocket change, consider that the compensation package in question is worth $56 billion – approximately 400 billion yuan.
Indeed, human experiences can be vastly different.
Unfortunately, with the Delaware judge’s ruling, this $56 billion compensation package has been declared void. This means Musk must once again embark on his quest for compensation.
Musk Won His Bet on Tesla’s Future but Lost His Reward
To understand the origins of this massive compensation package, we need to go back six years.
In 2018, Tesla’s board of directors set a 10-year performance target for Musk.
Upon achieving these targets, Musk would receive stock options divided into 12 separate tranches. For each set of goals met, the board would grant Musk 1% of outstanding stock.
Musk could receive up to 303 million options (adjusted for stock splits), equivalent to about 12% of Tesla’s total shares in 2018.
Earning this compensation wasn’t simple – Musk needed to meet 28 targets. These included 12 market capitalization milestones increasing in 50 billion increments up to 650 billion, eight revenue-related goals, and eight earning-related targets.
Remarkably, Musk actually achieved these goals.
Tesla reached a $650 billion market cap by late 2020 and met all eight earning targets, with just one revenue target remaining. According to the 2023 proxy statement, Musk had qualified for all options except 25 million shares.
At the time’s stock price, the total bonus amounted to $56 billion.
For perspective, according to Forbes’ 2018 billionaires list, Musk’s net worth was barely approaching $20 billion then.
Essentially, this reward plan was Musk betting on his own capabilities, with Tesla’s entire future as the stakes. He wagered he could increase Tesla’s market value from 60 billion to at least 650 billion – a 983% increase – while making the company profitable within a decade.
The outcome was clear: Musk won his bet.
Moreover, due to Tesla’s recent stock surge, the compensation package’s value briefly reached $101 billion, or approximately 736.118 billion yuan – that’s 736,118,000,000 yuan. Take a moment to appreciate this number, longer than most phone numbers.
However, this massive compensation plan had issues from the start.
In June 2018, Richard Tornetta, a minor Tesla shareholder, filed a lawsuit arguing that the board failed its fiduciary duty, the compensation was excessive, and the process was seriously flawed. He questioned whether Musk, as a major shareholder, had improperly influenced the board.
How minor a shareholder was Tornetta? He owned just 9 shares.
Yet Tornetta persisted, pursuing legal action with help from others until November 2022, when Delaware’s Court of Chancery began hearing the case.
The plaintiff’s lawyers argued that Tesla’s stock option plan was overly generous and that board members were too closely tied to Musk to adequately protect shareholder interests.
They also contended that the performance targets set by Tesla’s board weren’t particularly challenging, aligning closely with internal growth projections from banks and rating agencies.
The case was presided over by Delaware Chancery Court Judge Kathaleen McCormick – a name worth noting as she would feature prominently in later developments.
After lengthy deliberations and evidence gathering, in January, Judge McCormick ruled to void the compensation plan.
Key points of the ruling included:
- Insufficient board independence, with members too closely connected to Musk
- Incomplete and inaccurate shareholder disclosures about Musk’s commitments to other companies
- Board’s failure to justify the compensation plan’s fairness and negotiation process
Musk responded angrily on X, posting “Never incorporate your company in the state of Delaware.”
Meanwhile, Tesla called the decision “fundamentally unfair and against shareholder wishes,” announcing plans to relocate its headquarters from Delaware to Texas and seek a new shareholder vote.
Shareholders Win Case, but U.S. Judge Rejects Twice
The question arose: Would Tesla shareholders in 2024 approve what they had in 2018, now known as humanity’s largest compensation package?
A divide emerged between institutional investors’ opposition and retail investor support.
Major opposition came from proxy advisory firms ISS and Glass-Lewis, along with government-linked investment institutions including Norway’s sovereign wealth fund, one of Tesla’s top ten shareholders.
They unanimously considered the plan too aggressive and dilutive to individual shareholders.
Glass Lewis stated in a report, “The scale of this award package raises concerns, both in pure dollar terms and shareholder dilution. The company’s justifications fail to address these serious concerns.”
Critics also focused on Musk himself.
By June 2024, Tesla’s stock had declined significantly, its EV market dominance faced challenges, and Musk was criticized for directing too much attention to other ventures, particularly X (formerly Twitter), which he acquired in 2022.
Given Musk’s leadership roles at Tesla, SpaceX, X, Neuralink, and xAI, questions arose about his commitment to Tesla.
However, prominent Tesla investors like Ron Baron, Cathie Wood, and Scottish Mortgage Investment Trust expressed support.
Musk actively courted shareholders through X, offering private tours of Tesla’s Texas factory and launching verbal attacks against opponents.
“They are oath-breakers,” he declared.
Musk even threatened to leave Tesla to ensure the vote’s passage.
The outcome was predictable.
At Tesla’s June shareholder meeting, two key proposals were voted on: Musk’s compensation package and relocating the company’s registration from Delaware to Texas.
Both passed, with about 72% of voting shares supporting the compensation plan.
But the story wasn’t over. Despite shareholder approval and board agreement, the court again halted proceedings.
This led to Monday’s new ruling.
Unfortunately for Musk, Delaware Judge Kathaleen McCormick upheld her January decision, maintaining that Musk wasn’t entitled to the $56 billion compensation package.
Notably, McCormick, the first woman to lead Delaware’s Court of Chancery (America’s premier venue for corporate litigation), had previous encounters with Musk.
In July 2022, she presided over Twitter’s lawsuit against Musk when he attempted to back out of his $44 billion acquisition agreement. She rejected his delay tactics and expedited the trial, ultimately leading Musk to complete the acquisition before trial.
She later explained that her swift handling of the Twitter case aimed to protect the company and shareholders from uncertainty-related damage.
The judge’s gavel proved more powerful than Tesla shareholders’ signatures.
Regarding this ruling, McCormick stated that Tesla’s board lacked authority to “restore” Musk’s compensation package.
In her 101-page opinion, she wrote:
“Even if shareholder ratification might have a curative effect, it cannot apply in this case… While the board could certainly have decided to pay Musk reasonable compensation, they yielded to his demands without proving these terms were entirely fair.
If courts allowed losing parties to create new facts to modify judgments, litigation would become endless.”
She determined Musk controlled the compensation negotiations, noting that shareholder votes could occur pre-trial and that companies couldn’t approve transactions involving conflicted controllers.
She also highlighted several material misstatements in Tesla’s voting declarations, maintaining that this vote couldn’t serve as a cure-all for Musk’s compensation.
Musk immediately erupted on X, declaring “Shareholders should decide company votes, not judges” and calling it “absolute corruption.” Tesla announced plans to appeal, arguing the judge erroneously overturned the majority shareholders’ decision.
Following McCormick’s final ruling this week, Musk’s only recourse is appealing to Delaware’s Supreme Court, a process that could take up to a year.
Interestingly, the case generated $345 million in attorney fees.
McCormick ordered Tesla to pay 345 million to the plaintiff’s lawyers – far below their initial 6 billion request but still one of the largest fee awards in securities litigation history.
She noted that these fees could be paid in cash or Tesla stock.
This $56 billion tug-of-war is far from over, and even the world’s richest man must taste the bitterness of fighting for compensation. So, the question remains: would you support Musk’s massive compensation package?
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