Market Analysis

A Delaware judge has ruled that Tesla cannot grant Elon Musk a $56 billion compensation package despite shareholder approval of the CEO's pay deal. Here’s an overview of what might follow for Tesla and its billionaire founder, who continues to seek substantial compensation:

What Is Musk Seeking?

Shortly after his compensation was voided in January, Musk told a special Tesla board committee that he wanted a replacement package of similar value, as disclosed in a securities filing. Additionally, Musk suggested on his platform, X, that he might seek a larger Tesla stake or pursue product development outside the company. Alongside Tesla, Musk heads ventures like SpaceX and Neuralink, which focuses on brain implants.

Appealing the Ruling

Musk and Tesla’s board could appeal the decision to the Delaware Supreme Court, a process that typically takes about a year. This case, involving the largest compensation deal in U.S. corporate history, raises complex legal questions. The trial court judge, Chancellor Kathaleen McCormick, determined Musk exerted control over compensation negotiations despite holding only 22% of Tesla’s stock. Tesla also acknowledged the shareholder vote ratifying Musk’s pay as a "novel" tactic under Delaware law, leaving uncertainty around an appeal's outcome.

Creating a New Pay Plan

Tesla’s board might propose a new pay package, but replicating the original deal could be prohibitively expensive. The 2018 package awarded Musk stock options tied to ambitious performance goals. These options, priced at 2018 levels, became immensely valuable after Tesla’s stock surged tenfold. The company initially recorded a $2.6 billion cost for the plan. Today, a comparable replacement would likely need to be much smaller to stay within the same cost framework.

Reinstating the Old Plan

Tesla could restore the original package of 304 million stock options with the same $23.34 exercise price. However, this would trigger significant financial and legal challenges. A shareholder lawsuit contesting the reinstatement would need to be filed in Texas, where Tesla is now incorporated, rather than Delaware.

Financially, the move would require Tesla to record a $25 billion expense. Additionally, the options’ immediate high value could result in unfavorable tax treatment, with Musk potentially taxed at a rate of up to 57%, including penalties, according to legal experts.

Settling the Lawsuit

Musk could choose to settle the shareholder lawsuit by accepting a reduced portion of the compensation package. However, this would conflict with his usual approach of pursuing litigation over settlements, even when facing significant liability. The court’s view on a potential settlement at this point remains unclear.

Tesla’s next steps will be pivotal in addressing its leadership compensation structure while balancing shareholder and regulatory concerns.

Paraphrasing text from "Reuters" all rights reserved by the original author.