In throwing out Elon Musk’s US$55bil (RM260.17bil) Tesla pay deal, a Delaware judge began her legal opinion with a simple question: “Was the richest person in the world overpaid?”
After about a year’s consideration and 200 pages of legal reasoning, her answer was clear: Yes. Yes he was.
Chancery Court Chief Judge Kathaleen St. J. McCormick on Tuesday agreed with a Tesla investor who claimed the 2018 pay package failed to clearly show what was required of Musk to earn the money and that the board was rife with conflicts of interest when it approved the deal to retain him as chief executive officer.
The ruling threatens to drop Musk to the third-richest person in the world, after spending the past couple of years as No 1. The judge’s decision also comes just days after Musk told analysts he wants to expand his stake in the electric carmaker to avoid being ousted, to maintain control of the company and expand further into artificial intelligence.
Here are some takeaways from the judge’s historic opinion:
Biggest payday ever
“The plan is the largest potential compensation opportunity ever observed in public markets by multiple orders of magnitude,” McCormick wrote. It was 250 times bigger than the median of his CEO peers. It was more than 33 times the runner-up plan – Musk’s 2012 compensation. The judge called the payout “an unfathomable sum,” “historically unprecedented” and “incredible”.
Still, McCormick noted, “Musk does not dally in the conventional amenities of ordinary billionaires. For example, he owns only one home.” She then pointed to his deposition where he testified: “I tried to put it on Airbnb, but they banned Airbnb in Hillsborough. They’re so uptight.”
Conflicted board members
The judge called Tesla’s process of approving the pay package “deeply flawed” because the board members on the compensation committee tasked with negotiating on the company’s behalf were “beholden” to the CEO. That included former General Counsel Todd Maron, who had worked as Musk’s divorce attorney; Antonio Gracias, who had been a friend of Musk’s for two decades and vacationed with him regularly; and compensation committee chair Ira Ehrenpreis, who had a 15-year relationship with Musk, the judge said.
“It is unsurprising that there was no meaningful negotiation over any of the terms of the plan,” McCormick wrote. “They did not take a position ‘on the other side’ of Musk,” the judge said. “It was a cooperative venture. There were no positional negotiations. Musk proposed a grant size and structure, and that proposal supplied the terms considered by the compensation committee and the board until Musk unilaterally lowered his ask six months later. Musk did not seem to care much about the other details. They got ironed out.”
Funding Mars trips
Musk has spent years in pursuit of his ambitions to go to Mars through SpaceX, which has become a juggernaut in the commercial space industry. He vowed to use options from the 2018 package to fund the Mars colonisation if it was upheld.
Musk testified that he views colonising Mars as part of his ambition to save humanity, fearing that artificial intelligence has the potential of reducing humans to “the equivalent of a house cat” or to eliminate them entirely.
“Colonising Mars is an expensive endeavour,” McCormick said. “Musk believes he has a moral obligation to direct his wealth toward that goal, and Musk views his compensation from Tesla as a means of bankrolling that mission.” Citing his trial testimony, she said Musk views his work at Tesla as worthwhile only if the money it generates can be applied to “making life multi-planetary”.
‘Starry eyed’ board
In defending Musk’s compensation, Tesla lawyers failed to explain why the plan was necessary to motivate the CEO to achieve “transformative growth”, the judge said. Musk had no intention of leaving Tesla, and his ownership stake was sufficient motivation to keep him focused on growth, she said.
“Swept up by the rhetoric of ‘all upside’, or perhaps starry eyed by Musk’s superstar appeal, the board never asked the US$55.8bil question: Was the plan even necessary for Tesla to retain Musk and achieve its goals?” McCormick wrote.
‘Superstar’ CEO’s control
In assessing whether the pay deal was properly created, the judge said she had to determine, “Does Musk control Tesla?”
In earlier Delaware litigation involving the company, no other judge had sought to determine if Musk controlled Tesla, so McCormick vowed to “boldly go where no man has gone before” by answering the question and whether Musk’s influence had created a conflict over his compensation.
McCormick noted Musk held 21.9% of Tesla’s equity, his status as “Superstar CEO” and his “extensive ties with the persons tasked with negotiating on Tesla’s behalf”.
“At least as to this transaction, Musk controlled Tesla,” the judge said, calling the process leading to his pay deal “deeply flawed”.
The judge offered kind words to Musk’s legal team, led by lawyers from the powerhouse firm Cravath, Swaine & Moore, who were “left with the unenviable task of proving the fairness of the largest potential compensation plan in the history of public markets”.
“If any set of attorneys could have achieved victory in these unlikely circumstances, it was the talented defense attorneys here,” McCormick wrote. “But the task proved too tall an order.”
Like a defective car
In the end, the judge concluded that Musk and Tesla had failed to properly justify the huge pay package, which she compared to a flawed car design.
“In the final analysis, Musk launched a self-driving process, recalibrating the speed and direction along the way as he saw fit,” McCormick wrote. “The process arrived at an unfair price.”
The investor suing to block the plan, on behalf of Tesla and its investors, “requests a recall,” she said before granting it. “The plaintiff is entitled to rescission.”