Tesla’s Shareholders Should Get to Decide Musk’s Compensation

The Delaware Chancery Court’s decision in January to nullify Elon Musk’s $55 billion compensation package leaves the CEO of Tesla Inc. without any compensation for six years. Even knowing that, Tesla is allowing its stockholders to ratify Musk’s 2018 pay package at its annual meeting on June 13.

Seeking such ratification isn’t just permitted under established Delaware law—it’s a sensible path forward. Shareholders should have say in decisions affecting their investment, including executive compensation.

Musk’s options weren’t worth $55 billion when Tesla announced his compensation plan on Jan. 23, 2018, or when 73% of Tesla’s independent shareholders approved it that March. To earn his pay, Musk had to increase Tesla’s market value from $59 billion to $650 billion within 10 years—a goal so outrageous that some called it a publicity stunt.

After the plan was adopted, the company posted record losses and struggled with Model 3 production targets. Shareholder Richard Tornetta sued in Delaware in June 2018.

By June 2019, Tesla’s shares dropped as low as $12. During this time, Musk received no guaranteed compensation.

The Delaware lawsuit alleged Tesla’s board breached its fiduciary duty by awarding Musk this incentive-based compensation plan. By the time of the 2022 trial, Musk had already reached the final milestone under the plan. The case was litigated only after Tesla became more valuable than General Motors, Ford, Toyota, Mercedes-Benz, Volkswagen, Honda, Nissan, and Hyundai combined.

The essence of the claim was that Musk was a controlling shareholder of Tesla, which subjected his compensation to a higher standard of judicial review unless it was negotiated by independent directors and approved by a vote of unaffiliated shareholders.

Even though the financial details were fully disclosed, the Delaware court concluded Tesla failed to satisfy the procedural hurdles because Musk influenced the committee and information about the conflicts wasn’t fully disclosed to shareholders.

In the wake of the decision, Tesla formed a new special committee and is now asking its shareholders to ratify Musk’s original compensation package with full disclosure of all the court-identified flaws.

Some scholars have argued that awarding Musk compensation for services already rendered isn’t permitted under Delaware law because it amounts to a gift and a waste of corporate assets. I disagree.

Under Delaware law, waste—which shareholders can’t ratify—is “a transfer of corporate assets that serves no corporate purpose; or for which no consideration at all is received.”

This requires a showing that the corporation entered into a transaction and received consideration “so inadequate that no person of ordinary, sound business judgment would deem it worth what [was] paid.” It is rarely accepted by Delaware courts, but a few examples stand out.

In 2018, a Delaware court concluded that CBS’ decision to pay its controlling shareholder Sumner Redstone $13 million after he was deemed incapacitated likely constituted waste—this was obviously a gift, with no rational business purpose.

Musk’s situation is clearly different. The court’s finding that Tesla failed to properly approve the compensation package in 2018 doesn’t mean that Musk isn’t entitled to any compensation for the last six years of service. Musk logged thousands of hours at the helm of Tesla and increased its market value ten-fold. The only question is what he deserved to be paid.

Once we ask this question, the package is no longer a gift or waste. Rather, it is well within the authority of the shareholder-owners to decide the value, especially when considering their need to motivate Musk for the future.

But can Tesla’s shareholders ratify the same package that was deemed excessive by the court? The answer is also yes—Delaware courts offer great deference to decisions embraced by independent directors and minority shareholders, the latter who are the owners and real parties in interest.

It would be strange to conclude that a majority of Tesla’s stockholders, including some very large and sophisticated institutions, lack “ordinary, sound business judgment” on the question of how much Musk should be paid as their CEO.

Delaware law is designed to protect minority shareholders during negotiations with a controller. In this case, Musk has already provided the services and met the milestones set forth in the compensation agreement, and he is now at the mercy of the shareholders. The negotiation power is fully in the shareholders’ hands.

The argument that Tesla’s stockholders can’t ratify Musk’s pay package essentially contends that once an error in the approval process is made, the question of how much Tesla’s CEO should be compensated is now forever out of the hands of the company’s stockholder-owners and solely in the purview of Delaware courts.

This result would be contrary to the spirit and substance of Delaware law, which defers to the informed decision-making of disinterested shareholders whenever possible.

The case is Tornetta v. Musk, Del. Ch., 310 A.3d 430, Opinion 1/30/24.

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

Zohar Goshen is professor of transactional law at Columbia Law School.

Write for Us: Author Guidelines