Musk’s $56 Billion Pay Appeal Puts Delaware Courts in a Corner

Delaware’s top court is stuck between Elon Musk and a hard place.

The state’s judges have been getting it from all sides since the chief of its elite business tribunal voided Musk’s $56 billion pay deal with a ruling that said he exploited his “superstar” status to engineer board approval. The billionaire has led the charge with his social media bullhorn.

With the compensation decision finally confronting the Delaware Supreme Court on Wednesday, Musk will get his money either way: If he loses, he has a fresh $1 trillion deal lined up in Tesla Inc.‘s new home state of Texas. But even after leaving Delaware, Musk is continuing to make his mark on a court system still reeling from the ruling’s fallout.

“Judges in Delaware are under siege,” said retired University of Delaware law professor Charles Elson. “The court itself is really at an inflection point.”

The tycoon’s barrage turbocharged concerns across the venture capital ecosystem about a crackdown forcing tech’s most prolific dealmakers to slow down and stop breaking things. Musk’s fusillade was a visible force driving a legislative overhaul this year aimed at restoring the Delaware Chancery Court’s foundering reputation with corporate insiders.

His multi-front assault on the ruling also included the Tesla relocation, a shareholder vote to retroactively “ratify” the 2018 pay package, and his formal appeal. But it’s not just Musk assailing Delaware, which funds a quarter of its budget with billions in fees on 2 million business entities.

Fears of an exodus from America’s corporate capital are real, although the scale of the “DExit” threat remains an open question amid surging competition from Texas and Nevada. This year’s Delaware overhaul followed news that visionary founders like Mark Zuckerberg and Marc Andreessen were eyeing the exits.

Musk’s appeal leaves the state’s high court without easy options.

Upholding the decision by Chancellor Kathaleen St. J. McCormick would take stiff spines and stubborn indifference to power—the features that make Delaware’s courts among the world’s most admired.

The state’s justices have to be worried that a win for Musk would show “attacking a judge works,” Elson said.

By the same token, said Columbia law professor Eric Talley, they know tuning out the “ragefest” and pushing hard in the other direction might backfire with a key constituency: business leaders who have Musk’s criticisms ringing in their ears.

Wednesday’s arguments may point to a somewhat less painful way out—if they’re looking for one.

The hearing focused on the remedy of total rescission, the idea that Musk controlled the pay package, and the shareholder ratification vote held after McCormick’s initial decision.

Reversing on control or ratification would require “opening up the patient again” to make new law that could do collateral damage to the Delaware brand, according to Talley. The court might prefer a “narrow and technocractic” ruling overturning McCormick’s decision to rescind the whole package without considering the value of Musk’s work, he said.

The CEO famously slept on Tesla’s factory floor, as his lawyer noted during Wednesday’s court proceedings.

“Then they’d just have to figure out how you put Humpty Dumpty back on the wall” by devising replacement compensation, Talley said.

There’s another potentially straightforward off-ramp that barely came up at the appeal hearing, said University of Colorado law professor Ann Lipton: finding the transaction fair despite its flaws.

“It was a lot of money,” Lipton said. “But at the end of the day, he got extraordinary results for a shareholder base that loves it. We’re done here.”

Musk’s attorney stressed Wednesday that the package gave Musk “nothing unless he doubled Tesla’s value"—the equivalent of creating another Ford or GM—and the full portfolio only if he managed it many times over. Tesla’s stock grew tenfold during the vesting period, a fair deal “under any definition,” the lawyer said.

But appellate courts have limited leeway to review factual findings like McCormick’s conclusion that it was easier than it seemed to hit the Tesla performance benchmarks triggering each tranche of options.

And it’s not even clear finding the path of least resistance for placating Musk would save Delaware’s golden goose.

“It’s too important to split the baby,” Elson said.