A landmark decision by Chancellor Kathaleen St. J McCormick of the Delaware Court of Chancery has left Tesla’s board of directors facing a daunting challenge after she ordered the cancellation of Elon Musk Tesla payout of $50 billion in stock options. Elon Musk recently demanded that the board substantially increase his share holding in Tesla.
The Chancellor on Tuesday ordered Tesla to cancel stock options awarded to Musk, the electric car company’s chief executive, worth about $50 billion. Now Tesla board of directors must figure out a new payout plan for Elon Musk that can pass legal muster and satisfy him.
Elon Musk compensation lawsuit
As part of compensation payout Tesla finalized in 2018, Elon Musk received options to buy 304 million shares that are now worth more than $50 billion. While he has met the goals needed to receive those options, Musk does not appear to have converted them into shares of Tesla. If he had, he would be barred from selling them for five years.
With regards to Elon Musk Tesla payout, Chancellor McCormick said in her decision that the company must cancel the options. Although she has not yet issued a formal order requiring the company to do so.
Even without the stock that Elon Musk gets as pay package, Tesla has made him unimaginably rich. He owns roughly 411 million Tesla shares that are worth around $78 billion.
Musk threatened to move Tesla
Musk, clearly angry, threatened to reincorporate Tesla in another state. On X, the social media platform that he owns, he asked his followers to vote on whether Tesla should incorporate itself in Texas, where it has its corporate offices and a large factory.
“I recommend incorporating in Nevada or Texas if you prefer shareholders to decide matters,” he said.
Impact on Stock market
If the stock options Tesla had awarded Musk in the 2018 package are voided, the company would have fewer shares outstanding. That, in theory, would increase the value of the stock owned by other people or businesses.
But any lift this gives the stock price could be offset by investor fears that Mr. Musk might leave the company or become less focused on its operations.
Tesla Stock update
Tesla’s share price fell by about 2% on Wednesday after Ms. McCormick’s ruling, which was released after the stock market had closed on Tuesday.
What can Tesla board of directors do?
Chancellor McCormick said Musk played too great a role in devising the terms of his payout, and the board, which is legally obligated to serve the best interests of all shareholders, was not sufficiently independent of him. She also said the pay package was excessive and paid him much more than was needed to motivate him to do a good job.
As a result, directors might have to make changes that will convince a judge that any new compensation package they award him was put together in an arms-length negotiation between them and Mr. Musk. Any revamped pay deal might also have to pay him a lot less.
Musk can appeal
Tesla and Musk can appeal to the Delaware Supreme Court, which some legal experts said would likely uphold the ruling.
Tesla could also seek to take its appeal to the U.S. Supreme Court, but might have a tough time getting the high court to take the case because it does not raise any obvious constitutional or federal issues.
Future of Tesla
The decision would change Tesla’s approach to designing, manufacturing and selling cars only if it prompts Musk to leave the company or play a less active role. Before the decision, Musk had demanded that the Tesla board increase his stake in the company to 25%, from 13%.
If he didn’t get what he was asking for, he said, he would work on robotics and AI products elsewhere.
It’s hard to see how the Tesla board could meet his demand for a much bigger stake in the car company in light of the Delaware decision.
Few, if any, chief executives are so closely identified with their products, or seen as such an essential part of their companies’ success, as Musk.
In her decision, Ms. McCormick suggested his status as a “superstar” chief executive has a downside. It “creates a ‘distortion field’ that interferes with board oversight,” she said.
