Elon Musk’s 2018 US$56 billion pay package voided by judge, a big setback in 25% shareholding goals

A Delaware court has decided that Elon Musk’s Tesla compensation plan from 2018 was not developed in a fair process due to his significant influence over Tesla and the directors involved in the plan’s approval. Delaware judge Kathaleen McCormick ruled that rescission is an appropriate remedy.

Musk’s US$56 billion compensation plan was the largest package ever developed in the history of public companies and involved 12 tranches of Tesla stock options, which would vest if the company’s market capitalization increased by $50 billion and Tesla achieved a revenue target.

Rescission is a legal remedy in contract law that effectively cancels a contract and returns the parties involved to the positions they were in before the contract was made. It’s used in situations where a contract is deemed voidable due to reasons such as misrepresentation, fraud, undue influence, or mutual mistake.

When a contract is rescinded, both parties are released from their obligations under the contract, and any benefits already conferred by the contract are to be returned. This remedy is aimed at restoring the parties to their pre-contractual state as much as possible.

Above is a screencap from the full document which you can read here. From what we understand, the main issue here is that the people who negotiated the CEO’s pay package on Tesla’s behalf were under the influence of the CEO. So even though shareholders voted in favour of the compensation plan, we have no idea if they could have been voting for a less generous plan.

So what can Musk do at this point? For one, he could appeal. Tesla could also renegotiate the 2018 plan, but this time ensuring that the board members involved in the renegotiation are independent, particularly from Musk, to avoid conflicts of interest. This might involve bringing in new board members or utilising an independent committee.

This is certainly a setback in Musk’s goals to achieve 25% shareholding of Tesla. Previously Musk expressed his discomfort with the idea of Tesla becoming a leader in AI and robotics if he does not have at least 25% of shares in the company.

He currently has approximately 13% after selling shares of tens of billions of USD to buy Twitter, which he then renamed to X. He said owning the current 13% shares is not enough motivation to “show up for work”, referencing other shareholders like Fidelity who currently own a similar amount of shares but are not expected to work.

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