A Delaware judge ruled in favor of Tesla investors who sued to challenge the $56 billion pay package for Tesla CEO Elon Musk, a court filing showed.
"This decision dares to ‘boldly go where no man has gone before,’ or at least where no Delaware court has tread," the opinion stated. "The collection of features characterizing Musk’s relationship with Tesla and its directors gave him enormous influence over Tesla."
In her ruling, the judge said, "The plaintiff is entitled to recission," and directed the two parties to confer on a final form of order to implement her decision and to submit a joint letter identifying all issues, including fees, that need to be addressed to bring the matter to a conclusion at the trial level. The ruling may be appealed to the Delaware Supreme Court.
She added that Tesla was "unable to prove that the stockholder vote was fully informed because the proxy statement inaccurately described key directors as independent and misleadingly omitted details about the process." That left the company "with the unenviable task of proving the fairness of the largest potential compensation plan in the history of public markets" – a task she said "proved too tall an order" despite a group of talented defense attorneys.
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Tesla’s agreement with Musk is by far the largest compensation ever provided to an executive and is a major factor in making him one of the world’s wealthiest individuals. It allows Musk to buy Tesla stock at heavily discounted prices as escalating financial and operational goals are met – though it requires him to hold the acquired stock for five years.
Musk qualified for all 12 tranches, or performance targets, in the compensation plan and wasn’t guaranteed any salary.
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The company argued during a week-long trial that Tesla was paying to ensure one of the world’s most dynamic entrepreneurs continued to dedicate his attention to the electric vehicle maker. Antonio Gracias, a Tesla director from 2007 to 2021, said the package is a "great deal for shareholders" because he said it led to the company’s extraordinary success.
Gracias was a compensation committee member who had longstanding business relationships with Musk and was close enough to him personally that he vacationed with the billionaire’s family, the judge noted.
Attorneys for the plaintiff, investor Richard Tornetta, said the Tesla board never told shareholders that the goals were easier to achieve than the company was acknowledging and that internal projections showed Musk was on track to qualify for large portions of the pay package.
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They also argued that the Tesla board had a duty to offer a smaller pay package or look for another CEO and that they should have required Musk to work full-time at Tesla instead of allowing him to work on other projects as well.
Musk acquired social media company Twitter in 2022, which he renamed X last year, and has launched several other startups including brain implant company Neuralink, tunneling venture the Boring Company and commercial space company SpaceX.
Musk took to X to respond to the ruling and wrote, "Never incorporate your company in the state of Delaware."
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Tesla shares were down as much as 3.6% in after-hours trading following the ruling. Year-to-date the stock is off over 22% after the automaker forecaster slower growth in 2024.
The ruling will put Tesla’s next round of compensation negotiations with Musk in the spotlight. He recently said he would be uncomfortable expanding Tesla’s AI work without having 25% voting control of the company. At the time of his comments in mid-January, Musk owned about 13% of the company.
Tesla did not immediately respond to a request for comment.
Reuters contributed to this report.
