A Delaware court has voided
Tesla
CEO Elon Musk’s pay package, which awarded him some 300 million options that vested based on hitting performance milestones.
Tesla stock was down in after-hours trading while investors digested the news, which poses a challenge for Tesla’s board and leadership.
Shares were off 2.5% at $186.79 in premarket Wednesday trading, while
S&P 500
and
Nasdaq Composite
futures were off 0.6% and 1.1%, respectively.
The fact that Tesla stock is down might seem counterintuitive for anyone not following Tesla closely. On the surface, the company saved tens of billions of dollars in management compensation. But Tesla functions best when Musk is focused on it, and investors don’t want to see him less invested in the success of his electric-vehicle company.
Tesla stock dropped roughly 25% while Musk was buying Twitter, now X, and underperformed the Nasdaq by a few percentage points over that span.
There is no question that Musk is richly compensated. That package is worth roughly $50 billion based on current Tesla prices, but it would be worth nearly $56 billion if the company was valued at $650 billion, as it has been in the past. That level was a key milestone in the 2018 performance award.
It is hard to find examples of any CEO getting that much money in one pay award. But shareholders voted to approve it and the decision was made all the way back in 2018.
Lawyers trying to overturn the pay package argued in part that disclosures were inadequate, but the 2018 proxy statement has many pages explaining the award and the milestones Musk needed to reach to earn the options. The pay award passed with 81% of the vote.
Tesla didn’t immediately respond to a request for comment about the implications of Judge Kathaleen McCormick’s decision which dared to “boldly go where no man has gone before,” as she put it in her opinion. McCormick criticized the board’s “deeply flawed” process, and pointed out that members of the compensation committee had longstanding relationships with Musk. Tesla was “unable to prove that the stockholder vote was fully informed because the proxy statement inaccurately described key directors as independent and misleadingly omitted details about the process,” she added.
It wasn’t clear what options Tesla or Musk might have in terms of pursuing an appeal.
“This is a head-scratcher decision in the eyes of the Street but now it unlocks the Board to create a new comp package for Musk that can supersede this looking ahead and lock Musk in for Tesla through 2030,” says Wedbush analyst Dan Ives.
“I guess they will have to redo the pay package,” says Carl Tobias, a law professor at the University of Richmond, adding this is the same judge who forced Musk to close the acquisition of Twitter. “She was critical of [Telsa’s] corporate governance,” adds Tobias. “It is an important precedent for corporate governance.”
What Tesla’s board will do now is tough to say. Musk recently said he wanted 25% voting control of Tesla. He added on Tesla’s fourth-quarter conference call that a supervoting class of stock would be acceptable to him.
Supervoting stock would have to be voted on by shareholders as well. What ends up happening is hard to say. For now, investors should expect a new pay package, voted on by shareholders that keeps Musk, and Tesla investors, happy.
Removal of Musk’s options from his net worth pushes Musk down the list of richest people. Now Musk is worth some $155 billion, which is good enough for third place, according to Bloomberg, behind
LVMH’s
Bernard Arnault and
Amazon.com’s
Jeff Bezos.
Write to Al Root at [email protected]
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