Delaware Chancery Court Judge Kathleen McCormick struck down
Elon Musk's $56 billion Tesla compensation package for the
second time on Monday, while simultaneously addressing an
extraordinary request from the victorious attorneys.
The legal team sought $5.6 billion in fees for their
successful challenge to Musk's pay structure, but McCormick
awarded them $345,000,000 instead, payable in cash or in
Tesla shares. So the legal saga traces its
origins to 2018, when Tesla shareholder Richard Tornetta
filed a lawsuit challenging the unprecedented compensation
agreement. Now, Tornetta's lawsuit alleged
that Musk wielded undue influence over Tesla's board
during the creation of the pay package, and the shareholders
received misleading information before approving the plan.
The compensation structure consisted of 12 performance
milestones, each unlocking additional Tesla shares as the
company's value increased. Now, Judge Mccormick's initial
ruling in January of 2024 determined the process leading
to the plan's approval was fundamentally flawed.
She specifically cited Musk's position as a controlling
shareholder at Tesla created potential conflicts of interest
that compromise the board's independence now.
McCormick wrote that a CE OS celebrity status can make even
truly independent directors quote unduly differential and
created a distortion field that interferes with proper
oversight. Now, Tesla's board attempted to
salvage the compensation package by putting it to another
shareholder vote in June of 2024.
The measure received 72% approval from shareholders,
demonstrating strong support for maintaining Musk's incentive
structure. However, McCormick remained
unconvinced, explaining that no Delaware court had ever reversed
its judgment based on a post trial stockholder vote.
Now, the judge's latest ruling addressed both the compensation
package and the attorney's fee request with careful
consideration of legal precedent and fairness principles.
McCormick acknowledged the legal team's substantial work, noting
they logged 19,499.95 hours, conducted extensive
investigations, managed document discovery and took 17
depositions while facing some of the best law firms in the
country. Now, the attorneys representing
Tornetta came from three prominent firms, Bernstein,
Litowitz, Berger and Grossman LLP, Andrews and Springer, LLC,
and Friedman, Oster and Titel PLLC, and their track record of
securing major recoveries in Delaware courts and successfully
managing high stakes litigation through trial and appeal.
Contribution to Mccormick's decision on their fee award.
Now, Tesla's defense team proposed a considerably lower
fee award of $54.5 million. McCormick found middle ground,
determining that while the plaintiff's attorney's mythology
was sound, awarding $5.6 billion would constitute an
unjustifiable windfall. The final award represents a
25.3 multiplier of the hours worked by the legal team.
You know, the compensation packages.
Original structure reflected Tesla's ambitious growth
targets. The first milestone required
Tesla's market capitalization to reach $100 billion, with
subsequent milestones demanding additional $50 billion
increments. The company needed to achieve a
$650 billion market value for Musk to fully vest in the award,
and Tesla has experienced both triumphs and challenges.
Since the packages implementation, the company's
value has surpassed $1 trillion, far exceeding the original
targets. However, recent headwinds
include slowly electric vehicle sales growth and increased
regulatory scrutiny. A Musk response to the ruling
came through X, where he stated shareholders should control
company votes, not judges. Tesla echoed this sentiment,
posting that the ruling suggests judges and plaintiffs lawyers
run Delaware companies rather than their rightful owners, the
shareholders. Now the legal teams.
Victory marks a notable shift in corporate governance oversight.
Bernstein, Little, Witzberger, and Grossman expressed a
satisfaction with both the ruling and fee resolution while
maintaining readiness to defend the decision if appealed to the
Delaware court system. The case highlights fundamental
questions about executive compensation and corporate
governance. Mccormick's ruling suggests that
even with shareholder approval, compensation packages must
withstand scrutiny regarding the independence of board decisions
and fairness to all stakeholders.
Now, Tesla announced plans to appeal the decision to the
Delaware Supreme Court. The appeal process could
establish important precedents for future executive
compensation cases and the weight given to post trial
shareholder votes in Delaware corporate law.
Now legal experts know that the timing of Mccormick's decision
coincides with broader discussions about executive
compensation and corporate accountability.
The ruling may influence how other companies structure their
executive pay packages and handle board oversight
responsibilities. This case demonstrates the
complexity of balancing shareholder interests with
executive incentives. While Tesla achieved remarkable
growth under Musk's leadership, the court determined that
procedural fairness and board independence cannot be
compromised. Regardless of business success.
Questions remain about how Tesla will structure future
compensation for Musk. Mccormick's ruling leaves room
for the board to create a new package, provided it follows
proper procedures and maintains independence from Musk's
influence. And attorneys for Tesla
shareholders said that their commitment to defending the
court's decision through any appeals process suggesting this
legal battle may continue to shape corporate governance
standards in Delaware courts for decades to come.
And Mccormick's dual rulings on the compensation package and
attorney fees established clear boundaries for executive pay and
legal compensation and corporate litigation, while reinforcing
the court's rule in maintaining proper corporate governance
standards. Now, the Delaware court's
rejection of both Musk's compensation package and the
attorney's multibillion dollar fee request reinforces judicial
authority over corporate governance while establishing
new standards for executive pay and legal compensation and high
stakes corporate litigation. Now, thank you so much for
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