Updated: Dec 5, 2024 11:23 IST Elon Musk, CEO of Tesla was handed a major blow by a Delaware court. The court has rejected a substantial pay package for Elon which is currently valued at approximately $101 billion. The court arrived at this decision despite the approval of the package by Tesla shareholders. The pay package that was originally valued at $56 billion was approved by shareholders earlier this year. The pay deal includes 303 million Tesla stock options and became the subject of a legal challenge. Detailed Case Ruling Delaware court judge Kathleen McCormick had previously ruled in January, that the compensation plan was unjust. The judge based her argument on the fact that Musk and Tesla’s board could not demonstrate the package’s reasonableness. The judge also stated that the pay package was unjust to shareholders. Therefore attempts by Musk’s legal team to overturn this decision were unsuccessful. This was despite shareholders re-approving the plan in June. were unsuccessful. ---Advertisement--- The pay package is so high in amount due to the sole reason, that it is unlike traditional compensation structures. Elon Musk, CEO of Tesla does not receive a salary or bonuses from Tesla. The billionaire instead of recieving a salary, is awarded stock options that allow him to purchase Tesla shares. The shares are alloted at prices significantly below market value to the billionaire CEO. The judge reckoned that this pay arrangement was problematic particularly since Musk admitted to having negotiated the deal with himself. The judge also criticized Tesla’s board for accepting Musk’s terms without safeguarding shareholder interests. However the board of Tesla has defended the enormous pay package demanded by Elon Musk. The board argued that the package is completly justified as it was crucial to maintain Musk’s focus on managing the company. The billionaire CEO is not managing Tesla but rather is involved in leading multiple other ventures. These ventures including SpaceX, Neuralink, the Boring Company, and X (formerly Twitter)are equally large as Tesla. ---Advertisement--- However the court arrived at the decision by concluding that the pay package exceeded boundaries of financial fairness and reasonableness. Elon And Tesla Disappointment Judge McCormick has also instructed Tesla to pay $345 million in attorney fees to the law firms. The detailed instructions are to compensate the lawyers representing shareholders in the legal case. The original amount of $6 billion earlier demanded, is still one of the largest fees awards in securities litigation history. Tesla Inc. has expressed disappointment on the judgment given by Chancellor Kathleen McCormick of the Delaware Court of Chancery. The board said through a public statement that the ruling is wrong and that Musk and Tesla now have the option to appeal the decision to the Delaware Supreme Court, a process that could take up to a year to unfold. If successful, the appeal could potentially overturn McCormick’s ruling, but the uncertainty remains high. Tesla says that the supermajority of shareholders who voted to reinstate the pay package has been violated. The decision taken by the Delaware court may force the board of Tesla to formulate a new compensation structure for the CEO. Tesla’s Increasing Challenges The court’s judgment sheds light on the complexities of corporate governance. The complexities present especially when a company’s founder and CEO holds significant control over its decision-making process. McCormick’s previous opinion found that Musk had improperly influenced the pay negotiations, effectively controlling the process. The CEO through his dominance on the board may have forced decisions which Tesla shareholders had not been fully informed about. The ongoing legal battle has sparked frustration among Tesla’s retail investors, who largely supported Musk’s compensation package in the June shareholder vote. Many of these investors have voiced their anger on social media, claiming that McCormick’s decision undermines shareholder rights. Omar Qazi, a prominent Tesla investor and social media user (@WholeMarsBlog), mentioned on X (formerly Twitter), “Beyond the pedantic details of legal procedure, the bigger issue here is that the voice of shareholders is being overruled.” Qazi, who has over 551,000 followers, urged that the appeal process should take shareholder opinions into account. Despite the ongoing legal drama, Elon Musk remains deeply involved in several high-profile ventures, including his work with SpaceX, Neuralink, and a new role with former President Donald Trump’s push to streamline government spending. Musk has shown no signs of slowing down, and his future compensation from Tesla could shape his continued leadership of the company. Impact on Company Decisions With the court’s ruling, Tesla faces the challenge of determining Musk’s future compensation. While the company has already expressed intentions to appeal, a potential new pay plan could be costly for the automaker. The original pay package, which granted Musk 304 million stock options based on aggressive performance goals, had led to a $2.6 billion charge when implemented. A replacement package with similar terms would likely cost less than 10 per cent of the original value. Additionally, any attempt to reinstate the previous pay package could trigger significant accounting and tax implications for Tesla, potentially costing the company $25 billion. These costs are tied to the extraordinary value of the stock options Musk would receive, which would be taxed at a steep rate given the current market conditions. As the case moves toward appeal, the legal and financial stakes remain high for both Musk and Tesla. With the Delaware Supreme Court poised to take up the case, the coming months could offer a clearer picture of how corporate governance will evolve in the Tesla saga and the broader tech industry.