A judge in Delaware said on Tuesday that Tesla CEO Elon Musk did not deserve the multibillion-dollar pay package that directors gave him in 2018, even though that was what the company’s board and the vast majority of owners wanted.
It’s possible that Chancellor Kathaleen McCormick set the stage unintentionally for Delaware’s power to fall faster and for a competitive business court network to grow in Texas. After all, Musk doesn’t seem ready to keep putting up with abuse in the Diamond State.
Several years ago, Musk and the other directors of Tesla were sued by shareholders.
In her opinion on Tuesday, McCormick put the issue this way: “Was the richest man in the world overpaid? That’s what the stockholder complainant in this derivative case says. Richard Tornetta says that the directors of Tesla, Inc. broke their duty of care when they gave Elon Musk a performance-based equity pay plan.
Musk was given 12 sets of stock options as part of his 2018 compensation deal. He would be able to exercise more options after meeting certain operational and stock market capitalization goals. Up to $55.8 billion was put into the pay plan.
At the time, the New York Times called it the “bravest pay plan in the history of business” because Musk would only get paid if he reached a set of “jaw-dropping milestones.”
Musk would have to make owners rich first by increasing Tesla’s market value from $50 billion to $650 billion. Only then would he be able to fill his own pockets. Everyone wins, both in theory and in real life.
According to the Associated Press, lawyers for the defendants told the DE Chancery Court that the payment plan was fairly negotiated by a committee with independent members. The committee also set very high goals and the plan was passed by a legally unnecessary vote of shareholders.
This judge, who was chosen by Biden supporter and Delaware Gov. John Carney (D), said it was “too tall an order” to “prove the fairness of the largest possible compensation plan in corporate history.”
According to McCormick, the judge who stopped Musk from backing out of the deal to buy Twitter, the South African billionaire “had good ties with the directors who were responsible for negotiating on behalf of Tesla and led the process that produced the board approval.”
It was clear that the Compensation Committee and Musk were on the same side, the judge said. “They didn’t admit that there was a conflict.” The process was open and team-based.
In the end, McCormick threw out the pay deal.
On X, Musk wrote, “Never incorporate your corporate in the state of Delaware.” He didn’t like the news.
Musk didn’t want to let McCormick have the last word, so he asked his over 170 million fans on X, “Should Tesla change to Texas, home of its current physical headquarters?”
Axios reported that in June 2023, Texas Gov. Greg Abbott (R) signed HB 19, which set up business courts in the state to handle complicated business issues. The courts will open on September 1, 2024, says the law company Sidley Austin LLP.
“The creation of these new courts may lead to Texas being more attractive for resolving business disputes,” stated the law firm.
Over 1.1 million X users voted in Musk’s poll, and most of them wanted Tesla to change its legal state to Texas. In the end, 87.1% were in favor and 12.9% were against.
After the huge win, Texas Gov. Greg Abbott (R) wrote to Elon Musk, “Elon, it’s over.” The poll desk says that Texas won by a huge margin.
In a tweet, Ted Cruz of Texas said, “Hell yes.”
After many people and groups, including the Texas Association of Business, joined the celebration, Elon Musk said, “The public vote is clearly in favor of Texas!” Tesla will hold a vote right away to change the company’s founding state to Texas.
Garland Kelley, a lawyer from Texas, told Axios that Tesla’s re-incorporation in the Lone Star State could see “a bit of legal competition” start between Delaware, which is run by Democrats, and Texas.
Over 65% of the Fortune 500 companies are based in Delaware right now.
“If you are a new company or existing company and you’re unhappy with the court decision in Delaware, do you have a different option? The Texas Business Court is that alternative” Kelley said.
Seven judges will be chosen by Abbott with the Senate’s advice and approval to make up the Texas business court. Judges must have worked as lawyers for at least ten years before they can be appointed.
Musk may also be vulnerable to more claims after reincorporating. For example, Tripadvisor has been sued because it wants to leave Delaware and become a company again in Nevada.