Elon Musk’s $55.8 Billion Equity Compensation Package Invalidated by Delaware Court

In early 2024, the Delaware Court of Chancery ruled in favor of Tesla stockholders and struck down Elon Musk’s multibillion-dollar pay package. The chief Delaware judge presiding over the case, Chancellor Kathaleen McCormick, issued a 200-page decision that described the process for approving the pay package as “deeply flawed.” As a result, the court ordered a complete rescission of the grant.

The case raised questions into whether Musk’s close relationships with certain board members resulted in a lack of scrutiny and oversight in approving Musk’s pay package. In January 2018, the Tesla board of directors unanimously approved a large pay package consisting of performance-based stock options. The grant had a $2.6 billion grant date fair value and a potential maximum value of $55.8 billion.

Musk’s equity compensation grant was structured so that the stock options would vest upon the achievement of certain financial and operational milestones, such as exceeding certain market capitalization, revenue, and adjusted EBITDA thresholds.

Tesla’s 2018 proxy statement filing notified stockholders that there would be a vote on the grant. Tesla disinterested stockholders (excluding Musk’s and his brother’s stock ownership) approved the compensation package by a 73% vote. This was despite Institutional Shareholder Services (ISS) and Glass Lewis, two major proxy advisory firms, recommending that stockholders vote against it.

The relative difficulty of achieving these performance milestones was a key point of contention during the Delaware trial. The grant, which consisted of 12 tranches of stock options, began vesting in 2020 and was fully vested by the end of 2022. In the court case, the plaintiff argued that the market capitalization, revenue, and adjusted EBITDA performance conditions were not difficult to achieve.

The court evaluated the board’s decision under the “entire fairness” standard, the highest level of judicial review. The court concluded that neither the Tesla compensation committee nor the board of directors as a whole negotiated Musk’s compensation plan with the best interests of the company in mind. Instead of negotiating with Musk on an arms-length basis, the compensation committee and board of directors appeared to give Musk what he wanted without much pushback.

The court also concluded that the defendants, which included Musk, Tesla, and six directors, failed to demonstrate the process for approving the grant was “entirely fair.” Chancellor McCormick wrote, “In the final analysis, Musk launched a self-driving process, recalibrating the speed and direction along the way as he saw fit. The process arrived at an unfair price.”

The plaintiffs also successfully demonstrated that the stockholder vote to approve Musk’s compensation package was not fully informed. The court noted that the proxy statement misleadingly described certain directors as independent and failed to mention their significant personal and professional connections with Musk. The court also noted that the proxy statement failed to state material details about the process for approving Musk’s equity compensation grant, including the extent of Musk’s influence in setting the terms of the grant and material conversations between Musk and Ira Ehrenpreis, the chair of the compensation committee.

Musk’s compensation package was “the largest potential compensation opportunity ever observed in public markets by multiple orders of magnitude—250 times larger than the contemporaneous median peer compensation plan and over 33 times larger than the plan’s closest comparison, which was Musk’s prior compensation plan,” wrote Chancellor McCormick.

“Rarely, if ever, does a Delaware court rescind a compensation agreement. To my memory it hasn’t happened,” stated Charles Elson, a leading authority on corporate governance issues at the University of Delaware. Elon Musk’s case is a rarity in both its scope and scale.

More than 60% of Fortune 500 companies are incorporated in Delaware. While Musk suggested that Delaware law is overly strict, Delaware is likely to remain the state of choice for incorporating companies. The Delaware General Corporation Law (DGCL) is robust and Delaware courts are experienced with dealing with some of the most sophisticated business law cases.

While Musk’s pay package was undoubtedly unique, the Delaware court’s decision raises important considerations for how boards and independent directors evaluate and approve CEO compensation packages. Going forward, companies should make sure to undertake a rigorous process before approving large CEO equity grants. This includes thoroughly benchmarking peer compensation packages and saving written records of the board’s analysis. Companies should also make sure that equity compensation awards serve clear business objectives of the company. Finally, companies should confirm that independent directors are in fact acting independently and are not being unduly influenced by an executive to approve compensation packages.