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In retrospect, it was personal. The fact that Elon Musk’s personal lawyer had acted as general counsel of Tesla made all the difference. On Monday, a Delaware corporate law court ruled that a 2018 remuneration plan, worth as much as $55.8bn, was improperly awarded to the electric vehicle tycoon. The governance process supporting the Tesla share grants was “unfair” to ordinary shareholders, the court ruled.
One key factor was that the then-general counsel had personal ties to Musk. Judge Kathaleen McCormick said she could not distinguish whose interests the company lawyer had been ultimately representing.
Also the amount of the pay deal appeared equally egregious to the court. Musk was ordered to return the shares. The billionaire has never been known for his fidelity to corporate decorum, so the court’s perception of a supine boardroom should hardly surprise. But the clear judgments on what constitutes appropriate remuneration for a successful public company chief executive were more controversial and intriguing.
The court stated the pay deal was 250 times the relevant median benchmark for chief executives. The board’s lawyer countered that for Musk to receive the full amount, Tesla had to both hit challenging operational and financial targets. Additionally, Tesla grew in value by a staggering $600bn. In exchange, Musk merely got 6 per cent of the company’s outstanding stock, noted the board’s counsel.
Tesla was duty-bound, said the court, to negotiate hard with Musk as if with an arms-length counterparty. The judge noted that Musk already owned a fifth of the company and every $50bn increase in equity value was worth $10bn to Musk personally. As such, he had plenty of motivation to expand Tesla without imposing such acute, incremental dilution upon its public shareholders.
In 2018, Tesla’s market capitalisation was roughly $60bn. Today it is above $500bn and had been as high as $1.2tn in 2021. Shareholders had ratified the Musk deal in 2018. His histrionics and Twitter distraction aside, they have done very well even as the court decided that the board’s failures rendered that shareholder vote meaningless.
Ironically, Musk has angled for another big Tesla stock grant after selling billions to buy Twitter. His new problem is that, if his appeals fail, his $55bn share pile will return to the company.
The Tesla board argued in court that private equity firms took bigger pounds of flesh for remuneration than Musk did. The analogy might hint at why Musk tried and failed to execute a management buyout before.
That attempt too drew the ire of regulators. Oddly, as long as Tesla remains a publicly listed company, Musk may have to defend himself from his shareholders, the ones pleased with the bargain they have made with him.