Elon Musk sees $56bn Tesla pay deal cancelled in court
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Written by Mariko Oi and Michael Race, this blog post aims to be rephrased in plain English using different vocabulary: Mariko Oi and Michael Race composed this blog with the aim of restating it in simple English, employing alternate language.
Journalists who cover business news, reporting for the BBC.
A US judge in Delaware has cancelled Elon Musk's $55.8 billion compensation package, which was awarded in 2018 by the electric vehicle company Tesla.
A legal case was initiated by a stockholder who claimed that the payment made was excessive.
According to Judge Kathaleen McCormick, the members of Tesla's board of directors who were responsible for negotiating the company's pay package were likely blinded by admiration for CEO Elon Musk. McCormick believes that the board failed to provide all necessary information to shareholders.
According to her, the agreement was incomprehensible and she decided that it ought to be voided.
Mr Musk recently secured the largest pay agreement in American corporate history, which played a significant role in elevating him to become the wealthiest individual globally. According to Bloomberg and Forbes, his net worth is estimated to range between $198 billion to $220 billion by November 2023.
Mr Musk's compensation package for Tesla is linked to specific performance targets that include the company's share price and financial viability. However, he doesn't receive a regular salary.
Richard Tornetta, a shareholder of Tesla, believed that Elon Musk was receiving an excessive amount of compensation. Although he only possessed nine Tesla shares, he filed a lawsuit to request that the reward be cancelled. Tornetta claimed that investors were not provided with adequate details on the feasibility of Musk's performance targets.
After many legal disputes, a trial lasting for seven days began in November 2022. In this trial, Tesla executives asserted that the immense compensation granted to Mr. Musk was created to guarantee that the business would continue to receive his undivided attention. Mr. Musk is recognized globally as a highly energetic and successful entrepreneur.
Mr. Musk is not just the CEO and a large stakeholder of Tesla, he also possesses various other companies like the social network X, the space exploration enterprise SpaceX, and the cerebral microchip company Neuralink. He manages to divide his time among them all.
However, Judge McCormick's ruling, which was published on Tuesday and consisted of 201 pages, stated that motivating Mr. Musk was not the primary goal of the inflated compensation plan. Instead, the Tesla board was influenced by the powerful language and charisma of the frequently contentious CEO, according to the judge.
Additionally, according to her, Mr. Musk had significant connections with individuals on Tesla's compensation committee, referencing his close association with committee chair Ira Ehrenpreis for over 15 years in both professional and personal matters.
According to her, Antonio Gracias, a committee member, was also someone who had business dealings with Mr. Musk for over twenty years. They were even described as "close friends".
James Murdoch and Linda Johnson Rice, who were not part of the remuneration committee, were discovered to have participated in the procedure.
According to the judge, Mr. Murdoch and Mr. Musk became buddies when Mr. Murdoch bought a Tesla Roadster between 2006 and 2007. They went on vacations with their families to various places like Israel, Mexico, and the Bahamas.
The statement made by Judge McCormick mentioned that Mr. Musk and his brother Kimbal, who also serves on Tesla's board, refrained themselves from participating in "most of the meetings and all of the votes on the 2018" payment plan.
However, she stated that out of the six directors who participated in the decision-making process regarding the pay package, five had an obligation to Musk or conflicting interests.
The author additionally stated that a lot of the papers used by the directors of Tesla to demonstrate a fair procedure were created, promoted, or approved by Todd Maron. Maron was initially a divorce attorney for Musk but later became the general counsel. The author mentioned that Maron was deeply moved to tears during his deposition due to his reverence for Musk.
The Committee in charge of Compensation and Musk were in agreement and did not have any disagreements. They worked together and partnered to achieve their goals, according to what she wrote.
After the decree was made public, Greg Varallo, who represents Mr. Tornetta, a shareholder of Tesla, expressed his approval and mentioned that it was a positive outcome for those who were honest and upright. His comments were relayed via email to Reuters.
After the judgement, Mr Musk shared his thoughts on X, which was previously known as Twitter.
The blog suggested to avoid forming your business in Delaware.
"He suggests choosing Nevada or Texas as your place of incorporation if you want the shareholders to have a say," he stated. After that, he put up a survey to his supporters asking if Tesla should "shift its state of incorporation to Texas, the location of its actual head office".
Numerous prominent corporations such as Tesla and Amazon are officially listed in Delaware, a state recognized for its favorable tax laws.
Tesla's trading in New York experienced a decline of approximately 2.5%. This year, their stocks have suffered a decrease of more than 20% in their value.
In 2018, Tesla introduced Mr. Musk's initial payment plan, which generated significant public interest. Numerous shareholder advisory groups suggested rejecting the proposal, claiming that it had an excessively lavish nature.
According to Boston College Law School Professor Brian Quinn, it's difficult to find sound reasons for a deal like this, considering how much control Mr. Musk has over the board.
According to Prof Quinn, although he refers to himself as the "Techno-king of Tesla" and cares for the company as if it were his own, he is not the main owner.
Mr. Musk sold a significant portion of his ownership in Tesla to obtain X. Currently, he possesses approximately 13% of the electric vehicle manufacturer. However, he expressed his desire to obtain a larger share in the company.
