Elon Musk made good on his promise to appeal a controversial decision by a Delaware judge who wiped out his $56 billion performance-based compensation plan as the Tesla (TSLA) CEO leads a revolt that is roiling that state’s politics.
The billionaire, along with current and former Tesla directors, argued in an appeal to the Delaware Supreme Court on Tuesday that a refusal by Delaware Chancery Court judge Kathaleen McCormick to reinstate Musk’s pay despite approvals from Tesla shareholders contained multiple errors that should lead to the ruling’s reversal.
“Yes, Tesla has a chance” to succeed with its new appeal, said Tulane University law professor Ann Lipton. But “the situation is complicated by the fact that the entire decision has turned into a political football.”
McCormick initially voided the pay pact in January 2024 and did so for a second time last December based on the claims of a single shareholder who alleged in a purported class-action lawsuit that Musk’s influence over Tesla made him a de facto controller of Tesla.
McCormick concluded that “extensive ties” between Musk and the people negotiating the pay package and a lack of public disclosure about Musk’s relationships with those who approved the deal made it invalid under Delaware’s corporate laws.
Elon Musk and President Trump in a Tesla at the White House on Tuesday. (Pool vía AP) ·ASSOCIATED PRESS
Musk responded by pledging to pull the incorporations of his many companies, including Tesla, out of Delaware.
These so-called “Dexits” were followed by decisions from executives at other companies to reincorporate elsewhere, including Bill Ackman’s hedge fund Pershing Square Capital Management, as some aired their frustrations with Delaware’s powerful Chancery Court.
The recent high-profile departures are roiling a state that, for roughly the past century, has been the dominant place to incorporate because of its so-called corporate-friendly laws, specialized business courts, and ease of filing company documents.
The state’s newly elected governor, Matt Meyer, launched a working group to study mounting complaints, and lawmakers are trying to push through a bill that would limit investor lawsuits by allowing corporate boards to further insulate their directors, officers, and controlling shareholders from liability.
The measure is not retroactive and, therefore, wouldn’t absolve Musk or other litigants from past determinations.
Semafor reported last week that the legislation was prompted by warnings from key corporate attorneys that big-name companies, including Walmart (WMT), might move out of the state.
The political drama in Delaware could play a role in what the state’s highest court decides to do about Musk’s pay.
Lipton, the Tulane professor, cited the many complications: “Musk attacking the Delaware courts, his allies threatening to leave the state, and the state legislature on the verge of passing a new statute that reads like a direct rebuke to the Delaware courts.”
“It’s not clear to me whether that’s likely to influence the Delaware Supreme Court — in either direction,” she added.
What Musk and the Tesla directors are arguing in their appeal is that the lower court applied the wrong, heightened legal test to evaluate actions taken by Tesla’s board around the compensation plan.
They said McCormick incorrectly subjected the board’s actions to the “entire fairness” standard, then misapplied it. That standard is applied to protect shareholders when a controlling shareholder negotiates a self-interested deal with the board.
Musk’s status as a limited minority stockholder at the time of the negotiations, they said, should not have led to his designation as a controlling shareholder.
The judge’s bench is seen in a courtroom at the Delaware Supreme Court. REUTERS/Andrew Kelly ·REUTERS / Reuters
New York University School of Law professor Marcel Kahan said the Supreme Court will decide what particular issues to address in the case and he suspects that it will want to clarify the definition of “controlling shareholder.”
That matter is now the subject of the controversial proposed legislation in Delaware to amend the state’s corporate law. The proposed changes would exempt shareholders with less than 33.3% ownership.
“My guess is the court will want to put its five cents in on ‘controller creep,'” Kahan said, referring to the court’s expansion of circumstances that can subject a shareholder to “controller” status.
“I would not at all be surprised if the court comes to a different finding on whether Musk is a controlling shareholder than the Chancery court,” Kahan added.
Musk and the Tesla directors are also arguing that McCormick’s invalidation of a second Tesla shareholder vote about Musk’s compensation constituted yet another error because the vote showed that the electric vehicle company’s shareholders “resoundingly rejected” her initial finding that Musk was overpaid.
The fact that Tesla stockholders have since received a return of more than $700 billion on their investment in Musk, they said, shows the compensation plan exemplified alignment between executive and stockholder interests.
With McCormick’s decision, shareholders “have lost their say in compensating the company’s once-in-a-generation CEO” and “lost certainty in the company they own.”
Delaware Chancellor Kathaleen St. Jude McCormick, the judge who voided Elon Musk’s pay. (Eric Crossan via AP) ·ASSOCIATED PRESS
“The bottom line of the Court of Chancery’s decisions is that a compensation plan resulting in spectacular growth should be revoked because it was somehow unfair to the very stockholders who benefited from that growth and overwhelmingly approved the plan — twice.”
For Musk to keep his $56 billion, said Kahan of New York University, the court would have to reverse both McCormick’s finding that Musk was a controlling shareholder at the time he negotiated his pay deal with Tesla’s board and her finding that the shareholder revote failed to “cleanse” — take steps to legally validate — the flawed transaction.
As for cleansing, he said, “I can see the court saying, ’You were a little too tough here.'” Cleansing solely shifts the burden of proving whether $56 billion was fair from the defendants to the plaintiffs.
“If $56 billion is too high, it doesn’t follow that zero is the right amount, right? Zero may be too low.”
In that case, the court could send the case back to the lower court and instruct it to pick an amount of fair compensation.
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on X @alexiskweed.
