After Judge cancels $56 bn Tesla pay package, Musk warns ‘never incorporate’ companies in Delaware

In a groundbreaking move, a judge in Delaware has cancelled the whopping $56 billion pay package awarded to Tesla’s CEO, Elon Musk, back in 2018. The decision, given by Judge Kathaleen McCormick in Delaware Chancery Court, comes in response to a challenge from Tesla shareholder Richard Tornetta, who claimed Musk was overpaid.

The judge ruled that Tornetta was “entitled to rescission” and said the parties now need to “confer” and send a joint letter “identifying all issues, including fees, that need to be addressed to bring this matter to a conclusion at the trial level.”

After the ruling, Tesla’s stock, as per AFP, dropped over three per cent in after-hours trading. 

Taking to X (formerly Twitter), Musk posted: “Never incorporate your company in the state of Delaware.” 

In another post, he recommended Nevada or Texas instead.

The Tesla CEO also put up a poll, in his usual fashion, asking followers to decide on what could be a major decision. He posted: “Should Tesla change its state of incorporation to Texas, home of its physical headquarters?” In just three hours the poll already has 496,506 votes, with 89.5 per cent voting ‘Yes’.

The shareholders’ representative, Greg Varallo, thanked the court for its decision, saying, “We are enormously grateful for the court’s thorough and extraordinarily well-reasoned decision in turning back the Tesla board’s absurdly outsized pay package for Musk.”  

He added that the court’s work would “redound directly to the benefit of Tesla investors, who will see the dilution from this gargantuan pay package erased”.

Judge McCormick in her decision highlighted the extraordinary nature of Musk’s 2018 pay plan, calling it “the largest potential compensation opportunity ever observed in public markets by multiple orders of magnitude.” 

The plan, valued at a maximum of $55.8 billion, allowed Musk to get Tesla shares in 12 parts if he met certain goals.

During the 2022 trial in Delaware, Musk defended the pay deal, talking about the tough time when investors “thought we would fail and go bankrupt.”

He said, “We were in quite a tough position at the time. We were losing a lot of money,” adding that “the probability of survival was extremely low.”

Judge McCormick criticised the “deeply flawed” process, leading to the approval of Musk’s pay plan. She pointed to Musk’s “extensive ties” with the people negotiating the deal, like Ira Ehrenpreis and Antonio Gracias, which she said compromised the negotiation.

“Given the collection of people tasked with negotiating on Tesla’s behalf, it is unsurprising that there was no meaningful negotiation over any of the terms of the plan,” she said.

(With inputs from agencies)