Elon Musk’s Tesla pay package rejected by US judge

Tesla CEO Elon Musk has been hit with another legal setback after a Delaware judge upheld her decision to void his $56bn pay package, despite Tesla shareholders voting to reinstate it earlier this year.

Judge Kathaleen McCormick of Delaware’s Court of Chancery ruled that Tesla’s board of directors failed to act in the best interests of shareholders when devising Musk’s historic 2018 compensation deal, citing conflicts of interest and material misstatements made to investors.

Tesla plans to appeal the decision, reigniting debates over executive pay and governance in one of the world’s most valuable technology companies.

Musk’s compensation package, originally approved by Tesla’s shareholders in 2018, tied his earnings to ambitious performance metrics, including stock market valuation and revenue targets.

If achieved, Musk would be awarded 12 tranches of stock options, valued at $56bn when the deal was drafted — more than $101bn today, due to Tesla’s share price skyrocketing after Donald Trump won the US presidential election.

Musk hit all the required milestones, driving Tesla’s valuation past $1 trillion in 2021. However, critics argued the package was excessive and lacked sufficient oversight.

McCormick ruled earlier this year that Tesla’s board conducted a “deeply flawed” process to approve the deal, alleging personal conflicts of interest — several board members were described as close allies of Musk, including Musk’s former divorce attorney.

Tesla’s shareholders overwhelmingly voted to reinstate the package in June, prompting the company to argue that the vote rectified earlier concerns.

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However, McCormick rejected this argument, stating that shareholder approval could not override fundamental governance failures or legal precedents.

“The large and talented group of defence firms got creative with the ratification argument, but their unprecedented theories go against multiple strains of settled law,” McCormick wrote in a 103-page opinion.

Tesla’s board have maintained that Elon Musk’s Tesla pay package was essential to retaining the visionary CEO and driving Tesla’s success.

The company described McCormick’s ruling as “wrong” and plans to appeal, asserting that shareholder votes, not judicial rulings, should determine executive pay.

“This ruling, if not overturned, means that judges and plaintiffs’ lawyers run Delaware companies rather than their rightful owners – the shareholders,” Tesla said in a statement on X (formerly Twitter).

McCormick also ordered Tesla to pay $345m in legal fees to the attorneys representing shareholder Richard Tornetta, who originally brought the lawsuit in 2018.

Tornetta accused Tesla’s board of failing to act independently of Musk and misleading shareholders about the pay deal.

The $345m award falls far short of the $5bn initially requested by Tornetta’s legal team but still represents a significant financial penalty for Tesla.