WILMINGTON - A Delaware judge on Jan 30 ruled that Mr Elon Musk’s record-breaking US$56 billion (S$75 billion) Tesla pay package could be tossed, calling the compensation “an unfathomable sum” that was not fair to shareholders, according to a court filing.

Shares of Tesla dropped 3.7 per cent in extended trade.

The decision means that more than five years after the electric carmaker’s co-founder was granted the largest executive compensation plan in history, Tesla’s board will have to start over and come up with a new proposal.

The ruling leaves the future of Mr Musk’s fortune in limbo.

Without the pay package, his net worth would drop to US$154.3 billion, making him the third-richest person in the world after spending most of the past couple of years at No. 1, according to the Bloomberg Billionaires Index.

Judge Kathaleen McCormick of Delaware’s Court of Chancery found that it was negotiated by directors who seemed beholden to their headline-making chief executive and the promise of allowing him to share in the company’s enormous growth.

“The incredible size of the biggest compensation plan ever – an unfathomable sum – seems to have been calibrated to help Musk achieve what he believed would make ‘a good future for humanity’,” she wrote in her 201-page opinion.

“Swept up by the rhetoric of ‘all upside’, or perhaps starry eyed by Musk’s superstar appeal, the board never asked the US$55.8 billion question: Was the plan even necessary for Tesla to retain Musk and achieve its goals?”

Judge McCormick’s opinion directed the Tesla shareholder who challenged the pay plan to work with Mr Musk’s legal team on an order implementing the decision.

“Never incorporate your company in the state of Delaware,” Mr Musk said in a post on X, the social media platform he bought in 2022.

Originally named Twitter, Mr Musk moved its state of incorporation to Nevada from Delaware after his purchase.

“Good day for the good guys,” said an e-mail from Mr Greg Varallo, an attorney for the Tesla shareholder Richard Tornetta who brought the lawsuit in 2018.

The ruling can be appealed to the Delaware Supreme Court.

Mr Musk testified during the compensation trial in November 2022 that the money would be used to finance interplanetary travel.

“It’s a way to get humanity to Mars,” he testified. “So Tesla can assist in potentially achieving that.”

Tesla’s agreement with Mr Musk contributes a significant part of his fortune, which is one of the world’s largest.

Tesla directors argued during a week-long trial that the company was paying to ensure one of the world’s most dynamic entrepreneurs continued to dedicate his attention to the electric vehicle maker.

Mr Antonio Gracias, a Tesla director from 2007 to 2021, called the package “a great deal for shareholders” because he said it led to the company’s extraordinary success.

Mr Tornetta’s lawyers argued the Tesla board never told shareholders that the goals were easier to achieve than the company was acknowledging and that internal projections showed Mr Musk was quickly going to qualify for large portions of the pay package.

The plaintiff’s legal team also argued the board had a duty to offer a smaller pay package or look for another CEO and that they should have required Mr Musk to work full-time at Tesla instead of allowing him to focus on side projects, like SpaceX and X.

The package grants stock option awards allowing Mr Musk to buy Tesla stock at heavily discounted prices as escalating financial and operational goals are met.

He must hold the acquired stock for five years.

Mr Musk qualified for all 12 tranches or performance targets in the plan. He was not guaranteed any salary.

Mr Musk said in a post on X in January that he was uncomfortable leading Tesla unless he had 25 per cent of the voting control.

The billionaire owned around 13 per cent of the company at the time.

Tesla’s value ballooned to briefly top US$1 trillion in 2021 from US$50 billion when the package was negotiated.

Mr Amit Batish at Equilar, an executive pay research firm, estimated in 2022 that Mr Musk’s package was around six times larger than the combined pay of the 200 highest-paid executives in 2021.

In July 2023, Tesla’s directors agreed to return US$735 million to the company to settle shareholder allegations brought in a separate lawsuit filed in 2020 that they overpaid themselves.

The lawsuit challenged options that were granted to directors starting in June 2017.
REUTERS, BLOOMBERG