A Delaware judge’s decision to void the pay package that helped make Elon Musk the richest person in the world leaves Tesla’s board of directors with some tough decisions to make.
Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery on Tuesday ordered Tesla to cancel stock options granted to Musk, the electric car company’s chief executive, worth about $50 billion. Now the company’s directors must come up with a new compensation plan that can be legally approved and satisfy Musk, who recently demanded that the board substantially increase its ownership of Tesla.
Tesla and Musk could appeal the court decision. Musk said Thursday that he would look to incorporate the company in Texas, a state he believes could be more hospitable to businesses.
What happens to Musk’s stock options?
As part of a compensation package Tesla finalized in 2018, Musk received options to buy 304 million shares now worth more than $50 billion. He has met the necessary milestones to receive those options, but Musk does not appear to have converted them into Tesla stock. If he had done so, he would be prohibited from selling them for five years.
Chancellor McCormick said in her decision that Tesla must cancel the options, although she has not yet issued a formal order forcing the company to do so.
Even without the shares in that package, Tesla has made Musk incredibly rich. He owns approximately 411 million Tesla shares worth around $78 billion. A securities filing last year said he had pledged 238 million shares for personal loans.
Can Tesla just pack up and leave Delaware?
Musk, clearly angry, threatened to reincorporate Tesla in another state. On X, the social media platform he owns, said Thursday that Tesla “will immediately proceed to hold a shareholder vote” to incorporate in Texas, where it has its corporate offices and a large factory.
Delaware is a popular place for companies to incorporate due to its simplified legal system. Cases are heard by judges rather than juries, and there is only one level of appeal: to the Delaware Supreme Court.
Musk incorporated X, his social media company, in Nevada, whose laws make it much more difficult to sue directors. That company, previously called Twitter, had been incorporated in Delaware before Musk acquired it.
But his plan to move Tesla to Texas could meet resistance from shareholders if they see the move as an attempt to reduce their power.
The relocation “doesn’t give you a magic ticket,” said Gregory Varallo, a lawyer in Wilmington, Delaware, who argued the case against Musk’s pay package for shareholders.
How Could Tesla Stock React?
If the stock options Tesla had granted Musk in the 2018 package are voided, the company would have fewer shares outstanding. That would, in theory, increase the value of shares owned by other people or companies.
But any boost this gives to the stock price could be offset by investor fears that Musk will leave the company or focus less on its operations. Tesla’s share price fell about 2 percent on Wednesday after Ms. McCormick’s ruling, which was released after the stock market closed on Tuesday.
In the long term, a company’s share price depends on its profits and cash flow. Tesla shares have plunged more than half from their peak and are down more than 20 percent this year largely because its profit margins have plummeted and the company expects sales to grow much more slowly this year.
What can the Tesla plate do?
Chancellor McCormick said Musk played too big a role in crafting the terms of his pay deal and that the board of directors, which is legally obligated to serve the best interests of all shareholders, was not sufficiently independent of him. One of the directors is his brother, Kimbal, and several others are long-time friends and associates. He also said the salary package was excessive and paid him much more than was necessary to motivate him to do a good job.
As a result, the directors might have to make changes that convince a judge that any new compensation package they award him was worked out in an arm’s-length negotiation between them and Musk. Any renewed salary deal could also have to pay him much less.
Tesla’s board needs to find a way to keep Musk focused on the business while exerting more control over his “erratic” behavior, said Kristin Hull, founder of Nia Impact Capital, an investment firm in Oakland, California.
“We want it to play a really important role,” Dr. Hull said, but added: “There needs to be some checks and balances and that’s what this decision is about.” The fund owns a small number of shares.
Robyn Denholm, Tesla’s chairman, did not respond to a request for comment. Neither did the other seven board members.
Will Musk be able to oppose the decision?
Tesla and Musk can appeal to the Delaware Supreme Court, which some legal experts say would likely uphold the ruling.
But some legal experts said lawyers for the company and Musk could try to argue that McCormick’s ruling went too far and should be overturned. Musk’s lawyers, for example, could argue that he was not the majority shareholder that Chancellor McCormick suggested he was. He owned about 22 percent of Tesla when the package was hatched, which didn’t give him enough votes to control the company. The chancellor also said his “superstar” status gave him undue influence on the board.
“The Supreme Court could make any decision” regarding that argument, said Michal Barzuza, a law professor at the University of Virginia, referring to the Delaware Supreme Court.
Tesla could also try to take its appeal to the U.S. Supreme Court, but it might have a hard time getting the high court to take up the case because it doesn’t raise any obvious constitutional or federal issues.
Lawyers who represented Musk in the case did not respond to requests for comment.
What does this mean for Tesla as a company?
The decision would change Tesla’s focus on designing, manufacturing and selling cars only if it prompts Musk to leave the company or play a less active role. Musk has shown signs of being restless. Prior to the decision, Musk had demanded that Tesla’s board increase its stake in the company from 13 percent to 25 percent.
If he didn’t get what he asked for, he said, he would work on robotics and artificial intelligence products elsewhere. Musk has already created an independent artificial intelligence company called xAI. He also runs SpaceX and is the founder of Neuralink, which is developing implants that allow people to control computers with their brains.
It’s difficult to see how Tesla’s board could satisfy its demand for a much larger stake in the car company in light of the Delaware decision.
Few, if any, CEOs are as closely identified with their products, or seen as such an essential part of their companies’ success, as Musk. In his decision, McCormick suggested there was a downside to his status as a “superstar” CEO. “He creates a ‘distortion field’ that interferes with the board’s oversight,” he said.
