The judge upholds the decision to nullify Elon Musk's $56 billion salary package, despite the support from Tesla's shareholders.
Judge Kathaleen McCormick of the Delaware Chancery Court has denied Tesla's request to modify her ruling that overturned CEO Elon Musk's $56 billion compensation package.
The judge of the Delaware Chancery Court, Kathaleen McCormick, has rejected Tesla's request to modify her decision regarding the $56 billion compensation package for CEO Elon Musk, despite shareholders voting at this year's annual meeting to "revalidate" the agreement. In a lengthy 103-page document published on Monday, McCormick explains that the attempt by Tesla's legal team —which Musk has called "harsh"— contained multiple flaws that were fatal on their own. The judge stated that "the large and talented group of defense firms was creative with the ratification argument, but their unprecedented theories contradict multiple principles of established law."
Tesla announced that it would appeal the decision in a post on X, and it was expected to do so before the Delaware Supreme Court since McCormick's initial opinion was issued in January. Since then, the company has relocated from Delaware to Texas. Additionally, Musk has taken on a close role with the elected president Donald Trump, raising questions about his priorities amid a new administration in the United States.
The judge also awarded the plaintiff's lawyers a fee of $345 million, which can be paid in cash or in Tesla stock. This amount, while high, is still only a fraction of the $5.6 billion that those lawyers had previously requested. Tesla granted this compensation package to Musk in 2018 when the electric company was facing a crisis. This agreement outlined a series of stock price milestones that Tesla needed to achieve for Musk to unlock the full value of the package, milestones that the company easily surpassed in the following years by ramping up the production of the Model 3 and Model Y.
A former corporate defense attorney, Richard Tornetta, sued Tesla over the agreement. His lawyers argued that shareholders were misinformed since the company and its board of directors were under Musk's significant influence, resulting in imbalanced negotiations. During the trial, McCormick explained in her January opinion that she found the essence of Tornetta's argument to be credible.
Tesla put the opinion to a vote at its shareholder meeting in June, seeking to re-litigate the agreement in the court of public opinion. The company issued a new proxy statement that included McCormick's January opinion, hoping to adequately inform shareholders to vote again. The revalidation was approved by a margin of more than two to one, and Tesla's lawyers tried to use this to persuade the judge to change her mind. However, McCormick maintained that Tesla's legal team "has no procedural basis for changing the outcome of an adverse post-trial ruling based on evidence generated after the trial." This was one of the "fatal flaws," according to her.
Among other flaws, McCormick noted that Tesla's legal team considered the vote a "common ratification," an affirmative defense that cannot be raised after the issuance of a post-trial opinion. Regarding the idea of common ratification, McCormick challenged it, pointing out that while Tesla's lawyers argued that "shareholders have the power to adopt any corporate act they deem in their own interest," this notion is "generally dubious and, without a doubt, false in the context" of how Tesla's governance was essentially controlled by Musk. Ultimately, she stated that “even if the shareholder vote could have a ratification effect on the grant, it could not be effective here due to multiple and material misstatements in the proxy statement.”
“The novelty by itself is not necessarily harmful, but the defendants' novel request contradicts the policy bases of all the relevant procedural rules and the law of the case doctrine — purpose, efficiency, consistency, and integrity of the judicial process,” McCormick concluded.
