Elon Musk has said: Should Tesla, $TSLA, change its state of incorporation to Texas, home of its physical headquarters?
Tesla CEO Elon Musk has faced a setback as a Delaware judge, Chancellor Kathaleen St. Jude McCormick, ruled against his entitlement to a landmark compensation package valued at over $55 billion. This decision follows a shareholder lawsuit that was initiated more than five years ago, accusing Musk and Tesla directors of breaching their duties, leading to a waste of corporate assets and unjust enrichment for Musk.
The lawsuit argued that the compensation package should be invalidated as it was allegedly influenced by Musk, emerging from deceptive negotiations with directors who lacked independence from him. The shareholders contended that the package gained approval from shareholders based on misleading and incomplete disclosures in a proxy statement.
In response, defense attorneys asserted that the pay plan underwent fair negotiations by an independent compensation committee and included lofty performance milestones that were subjected to scrutiny by Wall Street investors. They emphasized that the package was approved by shareholders, even though it was not obligatory under Delaware law, and challenged the claim that Musk was a controlling shareholder due to his ownership being less than one-third of the company at the time.
Elon Musk, reacting to the ruling on the social media platform X (formerly known as Twitter), which he owns, offered business advice, stating, "Never incorporate your company in the state of Delaware."
During the trial, held in November 2022, Musk denied dictating the terms of the compensation package and claimed not to have attended meetings where the plan was discussed by the board, its compensation committee, or the working group involved in its development.
Chancellor McCormick, while acknowledging Musk's denial, determined that, as a controlling shareholder with potential conflicts of interest, the pay package must be subjected to a more rigorous standard. She highlighted flaws in the process leading to the plan's approval, citing Musk's extensive ties with committee members and individuals involved in negotiating on Tesla's behalf.
McCormick concluded that rescinding Musk's compensation package was the appropriate remedy, stating, "Musk launched a self-driving process, recalibrating the speed and direction along the way as he saw fit. The process arrived at an unfair price. And through this litigation, the plaintiff requests a recall."
Greg Varallo, a lead attorney for the shareholder plaintiff, praised McCormick's decision to reverse the "absurdly outsized" Musk pay package.
