Musk’s $55 Billion Loss Threatens Soaring Pay for Superstar CEOs

This week’s court ruling invalidating Elon Musk‘s $55 billion pay package at Tesla Inc. signals tougher court oversight of iconic corporate founders who dominate a company’s affairs through force of charisma rather than majority ownership.

The decision to undo the largest stock option award ever for a US chief executive jeopardizes Musk’s status as the world’s richest man. It could have even more far-reaching consequences for other high-profile corporate leaders who hold only minority stakes.

“It’s a reminder to the superstar CEOs of the world that they still have fiduciary duties,” said Greg Varallo, lead counsel for the investor who brought the litigation. “No matter how much esteem they hold themselves in or how important they think they are, they still have to look out for shareholders first.”

The ruling will likely weigh on shareholders and corporate directors as they negotiate, approve, and potentially litigate future pay packages. Musk has repeatedly urged Tesla to hand him another huge equity award, for example, after he sold a significant portion of his stake to fund the $44 billion acquisition of Twitter Inc.

“What happens the next time they give him another big package?” said Charles Elson, a retired University of Delaware law professor. “It’ll be another suit. And they’ll be locked in that for another 10 years, with the precedent of rescission.”

Three of Musk’s attorneys—Cravath, Swaine & Moore LLP partners Evan Chesler, Daniel Slifkin, and Vanessa Lavely—didn’t immediately respond to an email seeking comment.

‘Distortion Field’

The ruling, representing Musk’s first major court loss, followed more than a year after a trial in Delaware’s Chancery Court overseen by its chief judge, Chancellor Kathaleen St. J. McCormick, who previously presided over the dispute prompted by the billionaire’s failed attempt to back out of buying Twitter.

McCormick’s 200-page opinion zeroed in on the “superstardom” of leaders like Musk. The phenomenon “shifts the balance of power between management, the board, and the stockholders,” she said, creating “a ‘distortion field’ that interferes with board oversight.”

Elson called the decision “a thunderbolt,” saying the ruling will force a reckoning for “copycat” corporate boards that followed Tesla’s lead in handing out multibillion-dollar stock grants.

“It’s going to be interesting to see where those boards are today,” Elson said. “They’re going to have to negotiate their way out of it.”

Varallo—a partner at Bernstein Litowitz Berger & Grossmann LLP—said Musk’s grant was so astronomical that it warped the entire universe of CEO pay data, leading to inflated compensation for other chief executives. “If you remove the skewing effect of this one data point, you could see the data set that comp consultants use come a little bit closer to earth,” he said.

Corporate Control

McCormick’s decision was the first to answer a question dodged by other judges: whether Musk’s influence made him Tesla’s controlling stockholder, subject to the highest levels of judicial scrutiny, despite a stake of only 22% at the time.

He “wielded the maximum influence that a manager can wield over a company,” McCormick said. “Musk occupied the most powerful trifecta of roles within a corporation—CEO, chair, and founder.”

She cited overwhelming evidence showing Musk controlled the compensation decision—including his own candor at trial, when he said he was “negotiating against myself,” and the testimony of board members who acknowledged “they were there to cooperate with Musk, not negotiate against him.”

That’s where the CEO superstardom idea fits in, said Eric Talley, a Columbia University law professor. The judge seemed to use the label as “shorthand for charismatic CEOs who—almost as part of the definition of who they are—influence other people” more than their stockholdings alone would suggest, according to Talley, who likened the concept to a charisma tax.

Though the idea of personal charisma as a tool of corporate control isn’t new, “the superstar CEO framework is now baked into a major Delaware opinion by the chancellor herself,” he said. “It’s hard to imagine anyone who’s got a more influential personality than Elon Musk—maybe Donald Trump.”

The decision to treat Musk as a controlling stockholder put him at a legal disadvantage, forcing him to prove the pay package was “entirely fair” unless his conflicts of interest were “cleansed” by the approval of an independent board and fully informed stockholder vote. McCormick found they weren’t.

The board “acted under a controlled mindset,” and investors weren’t told about Musk’s lead role in setting his own pay, the judge said.

She “saw the elephant in the room” and “finally called it an elephant,” Elson said.

Peerless

But Paul Weitzel, a University of Nebraska law professor, said the judge went awry in finding that other board members were beholden to Musk by virtue of their interests in his businesses.

“That’s insane,” he said. Musk didn’t have any personal authority over their pay, according to Weitzel. Instead, their fortunes were linked to his simply through their investments.

“Saying that a director owning stock options makes the director beholden to the CEO” would be “a major shift in the law,” he said in a post on X. The framework would make virtually every director “beholden,” gutting the ordinary standard of review, Weitzel added in an email.

Talley called the shareholder vote a tossup, saying it’s arguable that only the economic terms had to be disclosed. But the ruling “is pretty consistent with the textbook legal approach,” he said. “These kinds of omissions have been found to be material in other cases.”

According to Talley, the same evidence—of the board’s “almost religious faith” in Musk and his control over the talks—made it nearly impossible for him to satisfy the entire-fairness test.

The framework involves showing that both the process and the price were adequate, but “the way you’ve gotten there in the first place is by documenting that the process was terrible,” he said. “So now Musk has to try to fight entire fairness with one hand tied behind his back. He has to fall back on the substantive fairness of the richest executive compensation deal ever handed out.”

Meanwhile, Musk’s nearest peers—Mark Zuckerberg and Jeff Bezos—take no compensation other than any increase in the value of their stock, Talley said.

McCormick, for her part, rejected Musk’s comparison “to compensation structures common in the portfolio companies backed by venture capital.” The clear problem is that Tesla is publicly traded, she said.

The Appeal

Musk will almost certainly ask Delaware’s Supreme Court to reinstate his award. But while the state’s justices could find grounds to reverse McCormick, “if they want to get there,” the judge took steps to appeal-proof her ruling, said Ann Lipton, a Tulane University law professor.

The higher court would have to overturn reams of factual findings that it’s supposed to review under a deferential standard, according to Lipton.

“The label of controller is doing some work, but not all the work,” she said. “If everything else about her opinion stands, but he’s not a controller, the opinion stands.”

Still, “there are arguments,” particularly the idea that the close ties between Musk and the board were known to shareholders, Lipton said. “You can argue that, and they will.”

Weitzel took a brighter view of Musk’s chances. “No way that gets upheld,” he said.

McCormick’s decision to knock out the whole package—rather than cutting it down to size—left Musk totally uncompensated for his work at Tesla. According to Talley, that opens a “weird” path: Musk could sue Tesla for the fair value of his labor.

Elson said he expected any lawsuit along those lines to be “a loser.”

Hot Potato for Delaware

Musk has responded indirectly on X, suggesting he’d like to reincorporate Tesla in Texas, where its headquarters are, or Nevada, a state trying to woo corporations away from Delaware. A poll posted by Musk showed most of his 170 million followers back a move to Texas. He previously relocated X to Nevada.

Lipton said McCormick had “dropped a hot potato” on a state supreme court that’s “very protective of Delaware being a place where companies want to incorporate.” The state is home to nearly 70% of Fortune 500 companies.

“We live in a world of these complex voting structures and dual-class share structures,” and “they don’t want to make it look like this is an unfriendly place to do business for a controlling shareholder,” according to Lipton. “But this is so high-profile, and Musk is out there tweeting,” she said. “That makes it very hard for the Delaware Supreme Court to look like they’re bowing to his demands.”

According to Elson, relocating X was straightforward because Musk had taken the company private, while moving Tesla would require the backing of its investors.

“As a shareholder, would you approve it if the genius says, ‘Either you pay me or I’ll blow myself up?’” Elson said.

—With assistance from Jennifer Kay.