Chancellor rules against Musk in shareholder dispute over $55 billion Tesla pay package

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Elon Musk
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Delaware Chancellor Kathaleen McCormick ruled agianst Tesla’s celebrity CEO Elon Musk in a shareholder suit claiming that his $55 billion compensation package was excessive.

The 200-page ruling came as a surprise to some as Chancery Court typically sides with executives in shareholder suits. Musk’s 2018 pay package is believed to be the largest in history.

McCormick confirmed that the court gives wide latitude on company pay packages, but viewed Musk as a special case with his ability to convince a board comprised of allies and friends were listed as outside directors.

“The collection of features characterizing Musk’s relationship with Tesla and its directors gave him enormous influence over Tesla,” McCormick wrote. “In addition to his 21.9% equity stake, Musk was the paradigmatic ‘Superstar CEO,’ who held some of the most influential corporate positions (CEO, Chair, and founder), enjoyed thick ties with the directors tasked with negotiating on behalf of Tesla, and dominated the process that led to board approval of his compensation plan. At least as to this transaction, Musk controlled Tesla.” 

The decision led Musk to post the following on X (formerly Twitter) – the company he was forced to buy under a previous Cancery decision. Musk attempted to back out of the signed deal to acquire the social media company for $44 billion, well above estimates of its valuation.

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Musk can appeal the decision to the State Supreme Court, which has occasionally overturned Chancery rulings.

McCormick’s ruling outlined the history of Musk’s role at Tesla electric vehicle and technology company.

The Hollywood Reporter, which typically does not cover non-entertainment CEOs, wrotee that the $55 billion pay package is a major source of his wealth.

Depending on Tesla’s stock price, Tesla vies for the title of the richest man in the world. Tesla stock has been hammered over other issues that include the company’s price cutting and competitive threats from other automakers. Shares were down about 25 percent so far this year, but up about 6% during the past year.

Recently Musk has been demanding a new compensation package with a larger stake in the company. Otherswise, he would move technology out of Tesla. That also contributed to the decline in the stockprice.

Musk’s lawyers argued in Chancery Court that he deserved the 2018 pay package as a transformative CEO who engineered a successful company that still commands a high stock price, even with recent decline.

Musk joins TransPerfect CEO Philip Shawe who wsa unhappy with the fees paid to a custodian when the 50-50 owners of the company could not agree on a buyout. TransPerfect later moved its state of incorporation to Nevada but continues to contest the fees paid to the custodian.

Shawe has also waged a campaign against the Delaware court system and Chancery Court in particular.

Shawe was later allowed to buy out his partner. and former fiancee.

Citizens for Judicial Fairness, a group that arose during the dispute with TransPerfect and a group that critics claim is funded by Shawe, issued the following statement criticizing the ruling”

“Another heavy-handed intervention by the Chancery had led to another high-profile company ready to leave Delaware. Chancellor McCormick has followed the precedent set by former Chancellor Bouchard with another reckless invasion of a company’s internal decisions, driving more large companies out of Delaware, and more risk to Delaware’s main source of funding. We have been begging for transparency in Delaware Courts and awareness for the power this Court holds on companies and workers throughout the Country. We hope that the spotlight that Musk can shine on this unscrupulous Court will be a wake-up call for overhaul of a Court that has long benefitted its partner law firms and not the people of Delaware. We will be doubling down on our efforts to shine a light on this sordid state of affairs over the coming months.”

A copy of the 200-age decison from McCormick is below.

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