Elon Musk, CEO of Tesla and X, speaks at the Atreju political conference organized by Fratelli d’Italia (Brothers of Italy), in Rome, December 15, 2023.
Antonio Masiello | Getty Images
Two weeks after the Delaware court’s ruling Tesla must cancel Elon Musk’s $56 billion pay package, the company’s board remains mum on what the decision means for shareholders or what’s next for the plumber CEO.
In her 200-page opinion on Jan. 30, Chancellor Kathaleen McCormick called the pay plan the largest in public company history and said it was agreed to by people “who were beholden to Musk.” Since then, Musk has attacked the court, was posted “Never incorporate your company in the state of Delaware” on social media platform X and said Tesla will hold a shareholder vote to move its incorporation location to Texas.
Tesla has yet to issue an SEC statement to inform shareholders of the decision.
The decision came shortly after Musk said he was pushing for even more control of Tesla, posting on X in mid-January that he wanted about 25 percent voting control before turning the company into a leader in artificial intelligence and robotics. Musk is already building an AI company called xAI outside of Tesla.
The next step in the damages case is an “executive order” to be struck between the court, Musk’s team and lawyers representing shareholder Richard Tornetta, a former heavy metal drummer who was the plaintiff in the 2018 lawsuit filed on behalf of of all. Tesla Investors.
As shareholders await answers, Tesla’s table of eight peoplewhich includes Musk, his brother Kimbal, Chairman Robyn Denholm and former Tesla chief technology officer JB Straubel has remained silent, avoiding any public comment.
CNBC sent requests for additional information to Tesla’s investor relations, Musk and some board members. They all went unanswered.
Greg Varallo, who was Tornetta’s lead counsel and heads Bernstein Litowitz Berger & Grossmann’s Delaware office, told CNBC that in theory Musk and his legal team could still pursue a last-minute settlement. While Varallo said he doesn’t know Musk’s plans, he said he expects Musk to appeal the decision to the Delaware state Supreme Court.
“I’d give you pretty high odds on that,” Varallo said.
Kobe Castiel, a law professor at Tel Aviv University, also predicts that Musk will appeal the decision. Kastiel did not participate in the trial, but co-authored one Document 2023 with his colleague Assaf Hamdani in the University of Washington Law Review titled “Superstar CEOs and Corporate Law” that referenced the McCormick decision.
“Given the high stakes involved, it is possible that Tesla will appeal the decision,” Kastiel said in an email. Absent a successful appeal, “any new compensation agreement with him would have to be evaluated” in light of McCormick’s ruling, Castiel said.
“Multiple options will be returned”
In the 2018 CEO compensation plan, Tesla’s board awarded Musk twelve installments of stock options that would expire in 2022 and were based on milestones, including several focused on stock price increases.
Between the beginning of 2018 and the end of 2022, Tesla shares soared nearly 500% as Musk promised to turn Tesla into not just a dominant electric vehicle brand, but a robot taxi company and solar juggernaut, among other things. The S&P 500 gained 44% in that time, while the Nasdaq rose 52%.
Eric Talley, a professor at Columbia Law School, told CNBC that if the government stands down, Musk will lose his options, but not the stock he previously held. The move will reduce the number of shares outstanding, potentially boosting the value of each share held by investors.
“A bunch of options would go back into Tesla’s coffers, which is extremely accretive to the stock,” said Talley, who was not involved in the case. On the other hand, Talley pointed out, “Tesla has a very grumpy CEO who might want to take his ball and go home. So far, trading shows that those two factors have been a wash.”
Tesla shares are down slightly after the Delaware court ruling in late January. They are down close to 25% for the year, while the leading indicators are up.
Musk expressed a strong preference for moved its operations out of Delaware after the court’s ruling and encouraged others to do so.
He moved the embed location for his Delaware, Nevada-based brain computer interconnect company Neuralink, filings were revealed last week. He’s also been a big supporter of Texas in recent years, personally relocating there from California and building massive complexes for SpaceX and Tesla in the state, which has no personal income taxes and a much lower corporate tax rate.
Author Walter Isaacson, who published a 688-page biography of Musk last year, told CNBC’s “Squawk Box” on Monday that if the decision is not overturned, “it will hurt Delaware.”
“People will say, ‘Wait, wait, you mean five years after something happens, eight years after something happens, you’re going to go back and undo it?'” Isaacson said.
Tulane Law School professor Ann Lipton had a different take.
“It’s a very thorough opinion, and the Supreme Court should give a lot of weight to the trial court’s factual findings,” Lipton said.
As for what shareholders should demand from Tesla’s board now, Kastiel said, “Tornetta and recent media reports about Musk have highlighted the importance of accurate and detailed disclosure of ties between shareholders and of controlling directors’.
There’s a more fundamental concern at play, Kastiel said, about corporate governance in cases where a “superstar CEO” runs the show.
“Since the CEO is perceived as a star and the company depends on the CEO’s vision and leadership, even nominally independent directors—those who do not have strong ties to the CEO—will find it difficult to monitor the CEO’s behavior.” he said.
Kastiel also said the ruling likely makes Musk and Tesla more vulnerable to other types of lawsuits.
“Plaintiffs may have a better chance of advancing their claims by possibly leveraging Tornetta’s findings to argue that a majority of Tesla’s board is not independent of Musk,” he said. “To mitigate this risk, Tesla will need to significantly strengthen the independence of its board and appoint new independent directors who do not have strong ties to Musk.”
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