Photo: Wikimedia Commons / UK Government
Delaware Court of Chancery voided Elon Musk's $55.8 billion compensation package that Tesla shareholders approved in 2018. The controversial decision is considered by Musk "insulting to shareholders." Musk voiced his frustration by recommending to "never incorporate your company in the state of Delaware."
Elon Musk caused a good laugh in 2018 when he advanced a bold compensation package worth $55 billion if Tesla exceeds $650 billion in market capitalization over a ten-year period. At the time, the company was only worth $59 billion, so you understand how crazy impossible the target was. According to the plan Musk proposed to shareholders, he was to be paid only if Tesla reached a series of what appeared like laughably impossible milestones.
The plan set capitalization targets in $50 billion increments, all the way to a market value of $650 billion. In addition to market cap goals, the company also set revenue and adjusted profit goals. The wording was such that Musk would get nothing if Tesla missed any of these targets. Even if Tesla's value would've doubled in 10 years from the then value of $59 billion, the compensation would still be zero. Moreover, Musk would have to hold onto his newly awarded shares for at least five years before he would be allowed to sell them.
As incredible as the plan sounded back then, the craziest thing was that Tesla surpassed a $650 billion valuation after only three years. Thus, the package entered into effect, and Musk was awarded 1% of the company's value in stock options, or 1.68 million shares. After that happened, a disgruntled Tesla shareholder (Richard Tornetta), who only had nine Tesla shares at the time, filed a lawsuit. He claimed that Musk controlled the board, and the shareholders who approved the compensation package weren't made aware of this controlled relationship.
Now, judge Kathaleen McCormick of the Delaware Court of Chancery voided Musk's compensation package on the grounds that it was too high. According to the judge's opinion, "the plan is the largest potential compensation opportunity ever observed in public markets by multiple orders of magnitude—250 times larger than the contemporaneous median peer compensation plan and over 33 times larger than the plan's closest comparison, which was Musk's prior compensation plan.”
Ultimately, the plaintiff argued, and the judge agreed, that the goals Tesla needed to achieve in order for Musk to win the massive payday were easier to attain than what was led to believe. This leaves Tesla and Elon Musk in a predicament, as many wonder what this decision means for them. Will Elon Musk have to give up on a big chunk of his Tesla shares? Most likely, the answer is no. For once, the ruling can be appealed at the Delaware Supreme Court.
Besides that, Tesla can come up with a new compensation proposal that would satisfy this court's decision. Or, if that's not possible, a new compensation package to shield Musk from the consequences of this court decision. This comes at a time when Musk is seeking another compensation package to surpass 25% of voting power. Musk currently owns a 13% stake in the company.
Elon Musk responded to the court decision with a "Never incorporate your company in the state of Delaware" statement. He also started a poll on X on whether Tesla should change its state of incorporation to Texas. Almost 90% of about one million people who voted agreed with this decision.
Elon Musk caused a good laugh in 2018 when he advanced a bold compensation package worth $55 billion if Tesla exceeds $650 billion in market capitalization over a ten-year period. At the time, the company was only worth $59 billion, so you understand how crazy impossible the target was. According to the plan Musk proposed to shareholders, he was to be paid only if Tesla reached a series of what appeared like laughably impossible milestones.
The plan set capitalization targets in $50 billion increments, all the way to a market value of $650 billion. In addition to market cap goals, the company also set revenue and adjusted profit goals. The wording was such that Musk would get nothing if Tesla missed any of these targets. Even if Tesla's value would've doubled in 10 years from the then value of $59 billion, the compensation would still be zero. Moreover, Musk would have to hold onto his newly awarded shares for at least five years before he would be allowed to sell them.
As incredible as the plan sounded back then, the craziest thing was that Tesla surpassed a $650 billion valuation after only three years. Thus, the package entered into effect, and Musk was awarded 1% of the company's value in stock options, or 1.68 million shares. After that happened, a disgruntled Tesla shareholder (Richard Tornetta), who only had nine Tesla shares at the time, filed a lawsuit. He claimed that Musk controlled the board, and the shareholders who approved the compensation package weren't made aware of this controlled relationship.
Now, judge Kathaleen McCormick of the Delaware Court of Chancery voided Musk's compensation package on the grounds that it was too high. According to the judge's opinion, "the plan is the largest potential compensation opportunity ever observed in public markets by multiple orders of magnitude—250 times larger than the contemporaneous median peer compensation plan and over 33 times larger than the plan's closest comparison, which was Musk's prior compensation plan.”
Ultimately, the plaintiff argued, and the judge agreed, that the goals Tesla needed to achieve in order for Musk to win the massive payday were easier to attain than what was led to believe. This leaves Tesla and Elon Musk in a predicament, as many wonder what this decision means for them. Will Elon Musk have to give up on a big chunk of his Tesla shares? Most likely, the answer is no. For once, the ruling can be appealed at the Delaware Supreme Court.
Besides that, Tesla can come up with a new compensation proposal that would satisfy this court's decision. Or, if that's not possible, a new compensation package to shield Musk from the consequences of this court decision. This comes at a time when Musk is seeking another compensation package to surpass 25% of voting power. Musk currently owns a 13% stake in the company.
Elon Musk responded to the court decision with a "Never incorporate your company in the state of Delaware" statement. He also started a poll on X on whether Tesla should change its state of incorporation to Texas. Almost 90% of about one million people who voted agreed with this decision.
Never incorporate your company in the state of Delaware
— Elon Musk (@elonmusk) January 30, 2024
This is insulting to shareholders
— Elon Musk (@elonmusk) January 31, 2024
Should Tesla change its state of incorporation to Texas, home of its physical headquarters?
— Elon Musk (@elonmusk) January 31, 2024
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