Tesla $56bn payout that made Elon Musk one of the richest was illegal, not fair to shareholders, rules judge

A judge in Delaware, US has invalidated the $55.8 billion pay package granted to Elon Musk by Tesla in 2018. The lawsuit challenging the payout was filed by a shareholder who argued that it constituted an excessive payment. Judge Kathaleen McCormick ruled that the approval of the pay package by the Tesla board was “deeply flawed.”

Elon Musk, Tesla’s CEO and a major shareholder took to his platform X to express his disappointment in the judgement, advising against incorporating companies in the US state of Delaware.

Never incorporate your company in the state of Delaware

— Elon Musk (@elonmusk) January 30, 2024

The annulled pay deal, the largest in corporate history, played a pivotal role in making Musk one of the wealthiest individuals globally.

During the trial, Tesla directors contended that the deal aimed to ensure Musk, a dynamic entrepreneur, remained committed to the company.

However, the judge concluded that Tesla and Musk’s attorneys failed to demonstrate that the stockholder vote was fully informed, highlighting Musk’s extensive ties with those negotiating on Tesla’s behalf.

In her ruling, Judge McCormick criticized the compensation as an “unfathomable sum” that was unfair to shareholders. She noted that the compensation package had been negotiated by directors who were swayed by Musk’s “superstar appeal.”

Greg Varallo, an attorney for the Tesla shareholder who initiated the lawsuit, celebrated the ruling as a “good day for the good guys.” However, the judge’s decision can be appealed to the Delaware Supreme Court.

The ruling brings into focus the issue of remuneration awarded to CEOs and other staff in leadership roles. Compensation and salaries of top executives across industries have been at an all time high, especially in tech.

What has been disheartening is that as CEO, MD and VP salaries at tech companies hit record highs year after year, several people in mid-junior segments, especially managers are being laid off, sometimes without rhyme and reason. There have been several reports that the people who have been affected in tech layoffs since 2022, were some of the highest-performing members of their teams.

Following the news, Tesla’s shares experienced a 3 per cent decline in extended New York trade, contributing to a more than 20 per cent loss in their value for the year.

Musk, known for his active presence on social media, also suggested changing Tesla’s state of incorporation to Texas, where the company’s physical headquarters is located. He conducted a poll on his platform to gauge followers’ opinions on the matter.

Musk’s various business ventures include SpaceX, Neuralink, and the social media platform X, where he recently increased his stake.

He expressed concerns about Tesla’s vulnerability to a takeover by “dubious interests” and stated his desire for greater control over the company’s direction, particularly in the context of its investments in AI technology. Musk currently owns about 13 per cent of X and has indicated a desire for a larger stake in Tesla.

(With inputs from agencies)