Elon Musk’s potential US$56 billion ($85 billion) payout from Tesla is dead, for now.
Kathaleen McCormick, a judge from the Delaware Court of Chancery, where Tesla is incorporated, ruled yesterday the US$56 billion package wasn’t decided upon by a fair process both at the board level, and when it was presented to shareholders.
In her post-trial opinion, Chancellor McCormick said the board was “swept up by the rhetoric of ‘all upside’, or perhaps starry eyed by Musk’s superstar appeal” and, as such, “never asked the US$55.8 billion question: was the plan even necessary for Tesla to retain Musk and achieve its goals?”
By ruling in favour of the class action lawsuit brought by Richard Tornetta, Chancellor McCormick acknowledged her “decision dares to ‘boldly go where no man has gone before’, or at least where no Delaware court has tread”.
The judge’s main reasons for revoking the US$56 billion compensation deal are Mr Musk’s effective control of the board and the compensation committee, the deal being neither fair nor necessary, and that shareholders approved it without knowing how the deal came about.
In her opinion, many on the board and compensation committee were either friends of Mr Musk, or who owed much of their personal wealth to him.
- Ira Ehrenpreis, chair of the compensation committee, who has known Elon and Kimbal Musk for 15 years and attended Kimbal’s wedding
- James Murdoch, who has holidayed with Mr Musk at least three times
- Robyn Denholm, now chair of the board, but formerly the chief operating officer and chief financial officer of Telstra, who earned roughly US$280 million ($424 million) in Tesla stock sales, making her outside income of about US$3 million ($4.6 million) per annum seem like small change
There’s also Antonio Gracias, who meets up with Mr Musk at least once a month outside of work, and has vacationed on multiple occasions with him, including on David Copperfield’s island in the Bahamas.
His and Mr Musk’s families have a “long-standing tradition of spending Presidents’ Day weekend together”, while
Mr Gracias’s private equity funds also made billions in Musk-related stocks mainly through early invitations through Mr Musk himself.
In addition to this, Todd Maron, Tesla’s general counsel, was Mr Musk’s divorce attorney, and said the compensation process was “cooperative” and it was “unclear on whose side Maron viewed himself”. Meanwhile Mr Ehrenpreis didn’t view the situation as “adversarial”, and Mr Gracias stated there was no “positional negotiation”.
The deal, agreed in 2018, gave “Musk the opportunity to secure 12 total tranches of options” with a total maximum value of US$55.8 billion ($84.6 billion).
In order to secure a tranche, “Tesla’s market capitalisation must increase by US$50 billion ($75.8 billion) and Tesla must achieve either an adjusted EBITDA target or a revenue target in four consecutive fiscal quarters”.
This was approved later approved by shareholders, but according to Chancellor McCormick this vote wasn’t fully informed, as it “inaccurately described key directors as independent and misleadingly omitted details about the process”.
Indeed, in Chancellor McCormick’s estimation granting Mr Musk potentially the biggest payout in corporate history may have been unnecessary, as he was sufficiently incentivised given his 21.9 per cent shareholding at the time. Every time he increased Tesla’s sharemarket value by US$50 billion, he would personally stand to gain US$10 billion.
Despite the suggestions the Tesla board were worried about the amount of time Mr Musk was devoting to his other companies, including SpaceX, The Boring Company, and Neuralink, there were no carrots or sticks to keep the CEO focussed on the automaker.
It’s unclear how the final (potential) compensation amount was arrived at, except that the tranche amount equated to one per cent of Tesla’s outstanding shares at the time of the deal. Nor did the company do any benchmarking or analysis to assess if the package was “fair” or at a market rate.
This isn’t the first case involving Mr Musk that Chancellor McCormick has been involved with. She handled the lawsuit brought by Twitter against him when he tried to back out of buying the social media site for US$44 billion ($67 billion).
Mr Musk had claimed the site’s user numbers were unfairly inflated by bots, and tried to wriggle out of the purchase or paying the billion dollar break fee.
He capitulated a week before the trial was about to start, and took Twitter private. The purchase was partially funded by outside investors, with the rest of the money coming from Mr Musk, who raised funds by selling some of his Tesla stake, and borrowing money against some of his remaining holding.
After the decision was made, Mr Musk, predictably, went on the website formerly known as Twitter to voice his objections. Neither Tesla nor Musk have indicated whether they will appeal this ruling.
Earlier this month, Mr Musk posted on the social media site stating he wanted Tesla to increase his shareholding to 25 per cent so that he would continue working on AI and robotics for them, but that a formal proposal for such a move would have to wait until the outcome of this court case.
According to Forbes, around 68 per cent of all Fortune 500 companies, and 90 per cent of firms headed for a sharemarket listing, are registered in Delaware.
Despite its small population and ranking as the second smallest US state, Delaware has long been viewed as business friendly with low corporate taxes, simplified filing processes, and a special corporate court, the Court of Chancery, that deals only in business law.