Denying Elon Musk’s $56 Billion Pay Deal Is an Atypical Remedy

Among the thorny issues in the Delaware Court of Chancery’s most recent denial of Elon Musk’s compensation package is whether rescission was the appropriate remedy as opposed to damages. The court’s choice to apply rescission—that is, to cancel Musk’s pay package entirely—seems particularly drastic, because Musk performed his end of the bargain.

Rescission, the court noted, requires a plaintiff to establish “that it is possible for all parties to [a] transaction to be restored” substantially to their pre-transaction position. Applying this principle, the court found Musk’s pay package itself was “not too complex to unscramble” because Musk hadn’t exercised the options to purchase Tesla stock that made up the pay package.

But it seems that Musk can’t be fully returned to 2018 when the pay package was approved. Musk, who has other ventures and opportunities, worked to grow Tesla while the pay package was in place. Under the court’s ruling, Musk effectively goes uncompensated as an executive.

While the court seemed comforted that Musk’s equity stake would have kept him engaged in the same manner that he was, it seems a difficult, if not impossible, question to answer how Musk might have altered his efforts between his many endeavors had the pay package not been in place.

Tesla and its stockholders also can’t be returned to 2018, nor would they likely want to be.

In 2018, Tesla had a market capitalization of roughly $50 billion. At that time, Musk saw that Tesla could “become a trillion-dollar company within a 10-year period,” in which case he would become one of the wealthiest people in the world. “If all that happens over the next 10 years is that Tesla’s value grows by 80 or 90 percent, then my amount of compensation would be zero,” Musk added.

Musk delivered: Tesla is now a trillion-dollar company. In an analysis of returning all parties to their pre-transaction position, it seems incongruent to deprive Musk entirely of his benefit of that bargain, while allowing Tesla and its stockholders to retain their upside.

The Delaware court recognized there “were undoubtedly a range of healthy amounts that the Board could have decided to pay Musk.” Moreover, courts consider rescission an extraordinary remedy that is generally disfavored when monetary damages would suffice. In view of that, why award full rescission, when less drastic remedies, such as damages, were available?

The court largely put this back on Musk, citing the defendants’ failure “to identify any logically defensible delta between the unfair [pay package] and a fair one.” But arguing that some lower figure was the “fair one” would have been untenable, because Tesla’s board had deemed the package fair and was defending that decision at trial.

The question of what package would have been fair could instead have been put on the plaintiff, who didn’t dispute that Musk was entitled to something and was in the position of proving plaintiff’s entitlement to a remedy.

It seems the plaintiff here decided to go “all in” on rescission instead of presenting a damages methodology—likely because doing so would have precluded a rescission award.

In other cases, where plaintiffs made the same tactical decision, courts have denied plaintiffs rescission where it was deemed unwarranted, even though the plaintiffs established transactional unfairness.

Rescinding a contractual arrangement poses difficult questions when years of performance have occurred under the arrangement. Whether the Delaware Supreme Court will provide further clarity on these issues remains unclear.

The case is Tornetta v. Musk, Del. Ch., C.A. No. 2018-0408-KSJM, decided 12/2/24.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Michael C. Holmes is vice chair of Vinson & Elkins with focus on Delaware corporate and partnership litigation.

Jeffrey Crough is partner at Vinson & Elkins and specializes in trial and appellate litigation in Delaware.

Will Stripling is senior associate at Vinson & Elkins’ commercial litigation practice.

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