(BBC News) A judge in the U.S. state of Delaware has annulled a $55.8-billion pay deal awarded to Elon Musk in 2018 by the electric car company Tesla.
The lawsuit was filed by a shareholder who argued that it was an overpayment.
Judge Kathaleen McCormick found Tesla directors, who negotiated the pay package, were “perhaps starry eyed” due to Musk’s “superstar appeal” and did not fully inform shareholders.
She said the deal was “unfathomable” and ruled it should be cancelled.
The pay deal was the biggest in U.S. corporate history, helping to make Musk the richest person in the world. Bloomberg and Forbes in November 2023 estimated his net worth to be between $198 billion and $220 billion.
Tesla’s package tied Musk’s compensation to performance targets, such as Tesla’s share price and profitability, but he does not receive a salary.
Tesla shareholder Richard Tornetta felt the tycoon was being overpaid. Despite owning just nine Tesla shares, he launched legal action calling for the award to be rescinded. He said shareholders were not given enough information about how easily Musk’s performance goals would be achieved.
Following years of legal argument, a week-long trial commenced in November 2022 in which Tesla directors argued the huge pay award was designed to ensure that Musk, one of the world’s most dynamic entrepreneurs, would continue to dedicate his attention to the company.
As well as being the chief executive and a major shareholder of Tesla, Musk owns several other companies, including the social media platform X, the rocket company SpaceX, and the brain chip firm Neuralink.
But in her 201-page ruling released on Tuesday, Judge McCormick said that incentivizing Musk was not the main reason for the oversized pay package. Rather, the Tesla directors had been “swept up by the rhetoric” surrounding the often controversial chief executive, she said.
Moreover, Musk had “extensive ties” with members of Tesla’s compensation committee, she said, citing his 15-year business and personal relationship with committee chair Ira Ehrenpreis.
Musk was also “close friends” with another committee member, Antonio Gracias, with business dealing stretching back two decades, she said.
Board members James Murdoch and Linda Johnson Rice were not on the compensation committee but were found to have been involved in the process.
The judge said Murdoch had become a friend of Musk after he purchased a Tesla Roadster in 2006 or 2007. The pair took family holidays together to Israel, Mexico, and the Bahamas.
Judge McCormick noted Musk along with his brother Kimbal, who also sits on Tesla’s board, recused themselves from “most of the meetings and all of the votes on the 2018” pay package.
But she said five of the six directors who voted on the pay package “were beholden to Musk or had compromising conflicts.”
She also said many of the documents the Tesla directors cited as proof of a fair process were “drafted, pushed out, or endorsed” by Todd Maron, Musk’s divorce-attorney-turned-general-counsel. His “admiration for Musk moved Maron to tears during his deposition,” she noted.
“The Compensation Committee and Musk were not on different sides. They did not acknowledge the existence of a conflict. It was a cooperative and collaborative process,” she wrote.
Following the release of the ruling, Greg Varallo, an attorney for Tornetta, said it was a “good day for the good guys,” in an email reported by the Reuters news agency.
Musk responded to the judgement with a post on X.
It said: “Never incorporate your company in the state of Delaware.”
“I recommend incorporating in Nevada or Texas if you prefer shareholders to decide matters,” he added. He then posted a poll asking his followers whether or not Tesla should “change its state of incorporation to Texas, home of its physical headquarters.”
Many big companies, including Tesla and Amazon, are registered in the state of Delaware, which is known for having light taxation.
