A United States Court has rejected Tech billionaire Elon Musk’s whopping $55.8bn compensation package at Tesla, stopping an attempt to restore the pay deal through a shareholder vote on Monday.
In a court filing, Chancellor Kathaleen McCormick of Delaware’s Court of Chancery ruled that Tesla’s attempt to ratify Musk’s compensation package through a June shareholder vote could not override her January decision, striking down the package as excessive and unfair to shareholders.
McCormick found multiple flaws in Tesla’s ratification attempt, including “material misstatements” in documents provided to shareholders about the effect of their vote.
“The motion to revise is denied,” McCormick wrote.
“The large and talented group of defense firms got creative with the ratification argument, but their unprecedented theories go against multiple strains of settled law,” she added.
However, in a statement on X (formerly Twitter) platform, Tesla said it would appeal the verdict.
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“Shareholders should control company votes, not judges,” said Musk,in a separate post.
Tesla vowed to appeal the ruling, saying the decision was “wrong.”
“This ruling, if not overturned, means that judges and plaintiffs’ lawyers run Delaware companies rather than their rightful owners, the shareholders,” the company said in a post on X.
Judge McCormick said the pay package would have been the largest ever for the boss of a listed company.
While acknowledging their calculation method was technically sound under Delaware law, which bases fees on the percentage of benefit achieved, McCormick ruled that such a large award would constitute an excessive windfall.
Shareholders originally backed the Musk compensation plan in March 2018, specifically designed to reward the 53-year-old founder for Tesla’s significant growth.
But in a lawsuit, Tornetta accused the defendants of failing in their duties when they authorized the pay plan and alleged that Musk dictated his terms to directors, who were not sufficiently independent from their star CEO.
He also accused Musk of “unjustified enrichment” and asked for the annulment of a pay program that helped make the entrepreneur the richest man in the world.
Tesla failed to prove the pay package, which dates back to 2018, was fair, she said.
A shareholder vote on the payment passed by 75% in June, but the judge did not agree the pay should be so large despite what she called Tesla’s lawyers’ “creative” arguments.
“Even if a stockholder vote could have a ratifying effect, it could not do so here,” she wrote in her opinion.
The court also awarded $345 million in attorney fees, significantly less than the $5.6 billion requested by the lawyers of plaintiff Richard Tornetta, a Tesla shareholder.
Some observers said a ruling in favour of Mr Musk and Tesla would have dealt a blow to conflict of interest laws in Delaware.
“The idea of conflict rules is to protect all investors,” not just minority investors, said Charles Elson of the University of Delaware’s Weinberg Centre for Corporate Governance.
Mr Elson said Judge McCormick’s opinion was well-reasoned.
“You had a board that wasn’t independent, a process that was dominated by the chief executive, and a package that was way out of any sort of reasonable bounds,” he said. “It’s quite a combo.”
Mr Elson said he expects Tesla might try to reconstitute a similar pay package in Texas where the company moved its legal base earlier this year after the pay ruling.
During a trial in 2022, Musk countered that investors in Tesla were some of the “most sophisticated in the world” and able to keep tabs on his management.
He said Tesla had been the laughingstock of the auto industry, and it was only the massive success of the company’s Model 3 that turned things around.
Musk insisted that he played no role in coming up with the package nor discussed his deal with the board members, some of them close friends, who ultimately signed off on it.
The Delaware Court of Chancery has been a pillar of US capitalism for more than a century and is the jurisdiction where roughly two-thirds of American Fortune 500 companies are registered.
Musk had on Monday reposted other X users’ posts, calling for companies to leave Delaware.
