Chancery Court Strikes Down Musk’s $55 Billion Tesla Compensation Plan
On January 30, 2024, the Delaware Chancery Court voided Musk’s $55 billion incentive-based compensation plan, which Chancellor Kathaleen McCormick deemed “the largest compensation plan in the history of public markets.” In holding that rescission of the plan is warranted, the Court agreed with the arguments made by plaintiff stockholder in his derivative claim, calling out the plan’s disclosure deficiencies, unfair terms, and its “deeply flawed” approval process.
The incentive-based compensation plan afforded Musk a $55 billion pay package if Tesla achieved certain market cap and financial milestones. The plan was challenged in 2019 in a shareholder’s derivative claim against Musk and current and former Tesla board members. The Tesla shareholder alleged that three of the first milestones were easily achievable and that the Board failed to fully inform shareholders as to key details about the plan and its process, and therefore, the plan was “excessive and the product of breaches of fiduciary duty.”
Chancellor McCormick found that that the proxy statement concerning the compensation plan contained inaccuracies as to the independence of directors and misleading omissions about the plan’s process. Although the defendants claimed that the Board’s objective was to “position Tesla to achieve transformative growth” and to secure “Musk’s continued leadership,” the Chancellor noted that Musk’s 21.9% ownership stake at the time of the plan’s approval already provided enough incentive, as he “stood to gain over $10 billion for every $50 billion in market capitalization increase.” Furthermore, Musk’s “self-driving” involvement in the plan’s creation and approval raised concerns, as Musk “dictated the timing of the process, making last-minute changes to the timeline or altering substantive terms immediately prior to six out of the ten board or compensation committee meetings during which the plan was discussed.”
Consequently, the chancellor ruled that the plan was unfair and that “rescission is reasonable, appropriate, and practicable.”