Elon Musk can't catch a break

First it was, as one analyst called it, a 'trainwreck' of an earnings call. Now, Delaware court has ruled that his $56 billion pay package should be undone.

Jan 31, 2024 - 12:30

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For a while on Tuesday, it looked as though Tesla (TSLA) - Get Free Report and its boss Elon Musk might have seen the worst after a disastrous earnings call.

Maybe not.

The shares had bottomed at $180.06 on Jan. 25, a day after fourth-quarter results and a lack of clarity of what was ahead for the company enraged nearly all of of its investors, fan and non-fan alike.

A judge weighs in on Musk's pay package

After a small uptick on Jan. 26 and a 4.2% gain on Monday, the stock opened at $195.33 on Tuesday. It moved up to $196.36 by 10.36 a.m., a 9% rally off that Jan. 25 low.

The shares closed at $191.59. But then they were staggered when a Delaware court ruled that a pay package for Musk worth an estimated $56 billion, needed to be unwound.

Unwound is actually more complicated and worse than it sounds.

Not only is the contract Musk signed void, Chancellor Kathaleen Saint Jude McCormick ruled that Musk and the Tesla board must negotiate on how Musk will give the money back.

The shares slumped back to $186.70 in after-hours trading.

Afterward, a more-than-annoyed Musk tweeted on the Musk-owned social-media site, formerly Twitter:

"Never incorporate your company in the state of Delaware."

Texas or Nevada had a more shareholder-friendly legal structure, he noted a bit later.

More Tesla:

The issue for Musk and his board is this: The Tesla board wanted to keep Musk, the company founder, on board. It was his vision that created the company, and they didn't want to lose the passion or expertise.

So, in 2018, they wrote a contract that gave Musk options ultimately valued at some $51 billion if fully exercised and if the market cap of the company reached $650 billion.

Tesla's Model Y is the top selling car model.
Tesla

It's an issue still alive at Tesla. Musk was and is a serial entrepreneur, owner and/or founder of X, Space X, neuroscience company Neuralink and the tunneling firm Boring Co.

He has said he might leave Tesla to develop more artificial intelligence technologies and robotics unless he can control 25% of the shares. His worry is that shareholder activities might get in his way.

Was Musk's deal unjust enrichment?

Some shareholders weren't thrilled at the pay package and sued, arguing that Tesla's board had basically given Musk everything he wanted. Therefore, they had breached their duties to the maker of electric vehicles and solar panels, basically enriching Musk at their expense.

Result, they argued was a waste of corporate assets and unjust enrichment for Musk.

Musk insisted the company was struggling when talks on the new contract began. The Tesla Model 3 had been hit with production delays, he testified in a November 2022 trial before McCormick. In fact, he considered the chances of the contract paying off unlikely.

McCormick, a Harvard graduate with a Notre Dame law degree, agreed with the shareholders, however. "The process leading to the approval of Musk’s compensation plan was deeply flawed," she wrote.

“Musk was the paradigmatic ‘Superstar CEO,’ who held some of the most influential corporate positions (CEO, Chair, and founder), enjoyed thick ties with the directors tasked with negotiating on behalf of Tesla, and dominated the process that led to board approval of his compensation plan,” she wrote.

The case went to trial in late 2022.

Musk's lawyers argued that there were 12 steps for Musk to get full vesting in the shares, which were met in 2022, a year in which Tesla shares fell 51%.

Musk can appeal to the Delaware Supreme Court.

Musk has been the world's richest man until Tesla's recent stock swap. If the contract is reworked, Bloomberg News noted, he could drop to maybe third richest.

A huge number of companies, including two thirds of the companies in the Standard & Poor's 500 Index, incorporate in Delaware. The state has a corporate-friendly tax system, and the Chancery Court has an historical expertise in business litigation.

The chancellor is really the chief judge in this court, a body unique to Delaware.