In a major win for Elon Musk, Delaware’s Supreme Court has restored the Tesla CEO’s $56 billion pay package from 2018. The compensation plan was struck down by Delaware Chancery Court judge Kathaleen McCormick last year who said that the tech billionaire had improperly influenced board members to come up with the compensation plan. Reversing the last year’s order, the Delaware Supreme Court said that it is reversing the Court of Chancery’s rescission remedy and awarding $1 in nominal damages. The court concluded that Elon Musk is entitled to a stock-based compensation plan now valued at about $140 billion, making him the world’s highest-paid CEO.
What the Delaware Supreme Court said in its order reinstating Elon Musk’s 2018 pay package
Announcing the order, the Delaware Supreme Court said “In 2018, the Tesla, Inc. Board of Directors and Tesla stockholders approved an equity compensation plan for Elon Musk, the company’s chief executive officer. The plan included twelve tranches of stock options that vested after reaching market capitalization and operational milestones. A Tesla stockholder filed a derivative lawsuit against Musk and the Tesla directors who approved the plan. The Plaintiff alleged that Musk, as a controlling stockholder, forced the Tesla Board to grant him excessive compensation. Following a five-day trial, the Court of Chancery agreed.” “We reverse the Court of Chancery’s rescission remedy and award $1 in nominal damages. The Plaintiff’s attorneys are awarded fees and expenses based on quantum meruit and a four times multiplier and post-judgment interest on the revised fee award from December 2, 2024. Any disputes regarding fees and expenses should be brought to the Court of Chancery for resolution. Jurisdiction is not retained,” the court said.“The court relied on Valeant Pharmaceuticals v. Jerney147 in support of its finding that the Defendants had the burden of offering a viable alternative to total rescission. That case is distinguishable. In Valeant, the Court of Chancery considered a plan to give options to parent company executives in an entity that was to be spun-off where the executives would have no involvement in the ongoing enterprise. There, the former director and president of the company were sued, together with the former Chairman and CEO and other members of the board, after they decided to pay themselves large cash bonuses in connection with a later-aborted corporate restructuring. The only non-settling defendant was the president who received a $3 million bonus,” the court order reads. Explaining further, it says “First, unlike the rescission remedy here, the trial court in Valeant ordered the remedy of disgorgement of the president’s $3 million bonus. Disgorgement and rescission are remedies that have different purposes and prerequisites. The goal of rescission is to unwind a transaction and restore the consideration exchanged by the parties to their original positions, whereas disgorgement prevents unjust enrichment by a fiduciary who has breached their duty of loyalty. “Disgorgement focuses on the defendant’s gain from illegal conduct. It is the act of giving up something (such as profits illegally obtained) on demand or by legal compulsion”,”.“Unlike rescission, disgorgement does not require that all parties to the challenged transaction be returned to the status quo ante. In Valeant, the president’s unjust enrichment was remedied by depriving him of the bonus, and the court did not consider whether he was restored to his prior position.”“Second, in Valeant, the court rejected limiting the director’s bonus to the “extent that the bonus was unfair,” finding that the director had already been adequately compensated for his years of service. Valeant distinguishes Technicorp International II, Inc. v. Johnston, where the court had permitted reasonable compensation for eleven years of service to unfaithful fiduciaries after stripping them of profit from their misdeeds.” “Unlike in this case, the disgorgement of the president’s entire bonus in Valeant was not a rescission of his entire compensation package. Rather it rescinded a bonus paid to management based solely on the development of a stand-alone entity. The court referred to the bonuses as “event bonuses” which “could be viewed as compensation for past services.”“Unlike Musk, whose compensation was tied to performance and achievement of specific milestones, the bonuses in Valeant “were being paid to parent company managers who would have no further involvement in the ‘spun’ company.” This fact prompted the court to conclude that “[w]hen viewed from this perspective, it is difficult to see how such large bonuses could be justified.” By contrast, the court here rescinded the entirety of the Musk’s compensation package, even though Musk had achieved all the required milestones in the six years since it was approved.”
