Elon Musk’s $56 billion salary from Tesla should have been restored by a vote of the company’s shareholders last year, Tesla’s lawyers said in the US Supreme Court of Delaware.
Tesla’s lawyers made the argument Wednesday as one of the biggest corporate legal battles enters its final stages after a lower court judge vacated the Tesla CEO’s record pay in January 2024. The company is also appealing a lower court ruling that rejected a shareholder vote to restore pay packages as legally invalid.
Recommended stories
list of 4 itemsend of list
“This was the most informed shareholder vote in Delaware history,” Tesla attorney Jeffrey Wall told the judge. “Once we reconfirm that, this case will be solved.”
The outcome of the case could have significant implications for the state of Delaware, its widely applied corporate law, and its courts of equity, once a hotbed for business disputes but recently accused of hostility toward powerful entrepreneurs.
The Court of Chancery’s decision to terminate Musk’s compensation became a rallying cry for critics in Delaware. Finance Minister Catherine McCormick ruled that Tesla’s board lacked independence from Mr. Musk when it approved the pay package in 2018 and lacked critical information when shareholders overwhelmingly voted in favor. As a result, she applied strict legal standards and determined that the compensation was unfair to investors.
Musk did not attend the argument, which was held in a special courtroom designed to accommodate 65 people, mostly lawyers.
The defendants, current and former directors of Tesla, deny wrongdoing and say Mr. McCormick misunderstands the facts and the law.
digit
Tesla argued in Dover, Delaware, that five Delaware Superior Court judges have three tools to overturn the lower court’s ruling.
They could find that Musk, who owned 21.9% of Tesla stock in 2018, had no control over board compensation negotiations and that shareholders were well-informed at the time of the approval vote that year. The company found that revoking his salary was an inappropriate remedy because it would not undo the work Musk did or the profits his shareholders earned. Or they could decide that last year’s vote showed that shareholders were willing to accept the toll arrangement despite its legal flaws.
“Shareholders in 2024 knew exactly what they were voting for,” Wall said.
Greg Ballaro, an attorney for Richard Tornetta, a small investor who filed the lawsuit in 2018, said ratification would allow the parties to change the outcome after the lawsuit is over. “The litigation will continue forever,” he told the justices.
Varallo tried to convince the justices that the lower court’s decision was the result of careful fact-finding and was based on settled law. “There is nothing special about this court opinion,” he said. “What makes this truly extraordinary is that we are working on the largest compensation package in human history, awarded to the richest man on the planet and one of the most powerful people on the planet.”
After Musk’s salary ruling, large companies such as Tesla, Dropbox and venture capital firm Andreessen Horowitz switched their legal headquarters to director-friendly states like Texas and Nevada. Delaware lawmakers responded to the corporate defection known as “Dexit” by overhauling corporate law.
If Musk loses his appeal, he still stands to gain tens of billions of dollars in stock from the electric vehicle (EV) company, but in August he agreed to a replacement deal if his 2018 plans don’t recover. Tesla said the replacement plan would have an accounting cost of more than $25 billion.
The company said the replacement award was aimed at focusing the attention of Mr. Musk, who earlier this year said he was forming a new political party in the United States, on Tesla’s transition to robotics and autonomous driving. Tesla is now incorporated in Texas, making it much more difficult for shareholders to challenge board decisions.
new price plan
Last month, Tesla’s board proposed a $1 trillion compensation plan, underscoring confidence in Musk’s ability to lead the company in a new direction, even as slowing demand for electric vehicles leaves the company behind Chinese rivals in key markets.
The justices are also considering an appeal of the pay judgment and the $345 million in legal fees that Mr. McCormick ordered Tesla to pay to lawyers on behalf of Mr. Tornetta, who owned just nine Tesla shares when he sued to block the pay agreement. It usually takes several months for the court to issue a decision.
Tesla estimated in 2018 that its stock option plan would be worth $56 billion if it met its operating and financial goals, and it turned out to be just that. As the stock continued to rise, options are now worth nearly $120 billion, the highest amount ever paid to an executive. According to Forbes magazine, Musk is the richest person in the world with a net worth of approximately $480 billion.
The defendants argued that Mr. McCormick’s mistake in discovering his social and business ties to Mr. Musk undermined his independence, and that Tesla shareholders were informed of the financial terms of the compensation arrangement before approving the plan. The directors argued that she should have reviewed her remuneration package based on a “business judgment” standard that protects directors from second-guessing by the courts.
Directors have long maintained that their pay packages worked as expected. It caught the attention of serial entrepreneur Musk, who turned Tesla from a startup into one of the world’s most valuable companies.
