- By Mariko Oi & Michael Race
- Business Correspondents, BBC News
A judge in the US state of Delaware has struck down a $55.8bn (£44bn) pay deal awarded to Elon Musk in 2018 by electric car giant Tesla.
A partner sued for overpayment.
Judge Kathleen McCormick said Tesla directors, who negotiated the pay package, were “perhaps starry-eyed” because of Musk's “superstar appeal” and did not fully inform shareholders.
He said the agreement was “incomprehensible” and ruled that it should be annulled.
The pay deal, which was decided back in 2018, was the largest ever in US corporate history and helped make Mr Musk the world's richest man. Bloomberg and Forbes estimate his net worth between $198bn (£162bn) and $220bn (£180bn) in November 2023.
Tesla's package tied Mr Musk's compensation to performance targets such as Tesla's stock price and profitability. He doesn't get paid.
But Tesla shareholder Richard Tornetta argued the CEO was being overpaid. Despite owning just nine Tesla shares, he took legal action to have the award voided. He said shareholders had not been given enough information about how easily Mr Musk's performance targets would be met.
After years of legal wrangling, a week-long trial began in November 2022 where Tesla directors argued that the massive pay award was designed to ensure that Mr Musk, one of the world's most dynamic entrepreneurs, would continue to devote his attention to the company.
As well as being Tesla's chief executive and major shareholder, Mr Musk splits his time between owning and owning a number of companies, including social media platform X, rocket company SpaceX and brain chip company Neuralink.
But within her 201 page judgment Published on Tuesday, Judge McCormick said incentives for Mr Musk were not the main reason for the oversized pay package. Instead, Tesla directors were often “swept away by the rhetoric” surrounding the controversial chief executive.
Also, Mr Musk had “extensive relationships” with Tesla officials, negotiating the pay award, the judge found. He cited his 15-year business and personal relationship with Ira Ehrenbreis, chairman of the compensation committee.
Mr Ehrenprice sat on the board's compensation committee responsible for negotiating Musk's pay plan, along with Brad Buss, Robin Denholm and Antonio Gracias, but other board members, including James Murdoch and Linda Johnson Rice, were also found to be involved in the process.
The judge noted that Mr Gracias and Mr Musk were also “close friends” and had business dealings dating back two decades.
Mr Murdoch also became a friend after buying a Tesla Roadster in 2006 or 2007, he said. The couple took family vacations together to Israel, Mexico, and the Bahamas.
Judge McCormick noted that Mr Musk, along with his brother Kimball, who sits on Telsa's board, had recused themselves from the remuneration package for “most meetings and all votes for 2018”.
But he said five of the six directors who voted on the pay package were “Musk favorites or compromises.”
He added that many of the documents cited by Tesla directors as evidence of due process were “drafted, fired or approved” by Todd Maron, Mr Musk's divorce lawyer-turned-general counsel. tears during his deposition”.
The judge said Mr Maron was the primary between Mr Musk and the group.
“The Compensation Committee and Kasturi are not on different sides. They do not acknowledge the existence of a conflict. This is a cooperative and joint operation,” he wrote.
Following the verdict, Greg Varallo, a lawyer for Tesla shareholder Mr Tornetta, said in an email reported by Reuters that it was a “good day for the good guys”.
In a post on X, formerly known as Twitter, Mr Musk said: “Never incorporate your company in the state of Delaware”.
“If shareholders want to decide things, I recommend incorporating in Nevada or Texas,” he added. He later released a poll asking his followers if Tesla should “shift its corporate headquarters to Texas, home of its physical headquarters.”
The judge's decision can be appealed to the Delaware Supreme Court, but before that happens, the judge must finalize the ruling and decide to award compensation to the attorneys who represented Mr. Tornetta.
Many large companies such as Tesla and Amazon are registered in the state of Delaware, which is known for its light taxation.
Shares of Tesla fell about 2.5% in extended New York trading. They have lost over 20% so far this year.
When Tesla presented Mr Musk's original 10-year pay package in 2018, it attracted widespread public attention. Several stakeholder advisory groups recommended voting against the plan, saying it was too generous.
Brian Quinn, a professor at Boston College Law School, told the BBC that given Mr Musk's influence, “it's hard to justify a transaction like this”.
“He treats Tesla like his own, but even though he calls himself the 'Techno-King of Tesla,' he is not the majority owner,” Professor Quinn added.
After selling most of his shares in Tesla to buy the X, Mr Musk currently owns about 13% of the electric carmaker, but recently said he wanted a bigger stake in the company.