Elon Musk's $56 Billion Pay Package Rejected for Second Time: Legal Ruling Upholds Corporate Governance Principles

In a significant legal ruling, Tesla CEO Elon Musk’s unprecedented $56 billion pay package has been rejected for the second time by Judge Kathaleen McCormick in a Delaware court. This decision stems from a prolonged legal battle, with the initial rejection occurring in January 2023. Despite the pay deal being initially approved by Tesla’s shareholders and directors in June 2023, Judge McCormick maintained that the board members were unduly influenced by Musk, who is also the head of X (formerly Twitter) and SpaceX.

The judge asserted that Tesla failed to demonstrate the fairness of the compensation package, which was originally instituted in 2018. Musk expressed his discontent with the ruling on X, stating, “Shareholders should control company votes, not judges,” highlighting his belief that judicial intervention undermines shareholder rights. In response to the ruling, Tesla announced plans to appeal, labeling the decision incorrect and warning that, if upheld, it would grant excessive power to judges and plaintiffs’ lawyers over corporate governance instead of shareholders, who are deemed the rightful owners.

Judge McCormick emphasized the groundbreaking nature of Musk’s proposed pay package, underscoring that it would be the largest compensation ever granted to a CEO of a publicly traded company. Despite a shareholder vote approving the package by 75%, the judge ruled that the vote could not legitimize the compensation given the circumstances of board influence.

Furthermore, the shareholder who initiated the litigation against Musk and Tesla will be awarded $345 million in legal fees, but is not entitled to the $5.6 billion worth of Tesla shares initially sought. Legal experts, including Charles Elson from the University of Delaware, analyzed the implications of the ruling, stressing that it reinforced conflict of interest laws designed to safeguard all investors, particularly minority shareholders.

Elson described the situation as a combination of an improperly independent board, a CEO dominating the process, and a compensation package that was substantially out of line with industry standards.

In light of the ruling, Tesla may consider reestablishing a similar pay structure in Texas, following its relocation earlier this year, as it attempts to navigate the legal challenges posed by this denial of Musk’s pay package. This ongoing saga not only highlights the complexities of corporate governance but also brings to light the evolving relationship between executive compensation and shareholder rights.