On Friday, Judge Kathaleen McCormick of the Delaware Court of Chancery raised significant doubts about whether Tesla’s recent shareholder vote could restore the $56 billion pay package for CEO Elon Musk. Earlier this year, McCormick had invalidated the package, finding that Tesla’s board had failed in its duty by approving such a massive compensation plan. The judge questioned whether the new vote could override her previous ruling.
Tesla’s Legal Arguments
Tesla’s legal team argued that the shareholder vote in June, which reapproved Musk’s 2018 pay package, should prompt McCormick to reconsider her decision. They claimed this vote was a demonstration of “stockholder democracy,” which should be enough to reverse her earlier findings. However, the attorneys conceded they had no legal precedent to support their argument that shareholders could overturn a court ruling.
The controversy centers around a compensation package of about 300 million shares, which McCormick nullified in January. She determined that the board’s close ties with Musk compromised their ability to fairly assess his pay. The original vote to approve the package was tainted, as it did not disclose these conflicts of interest.
The June Shareholder Vote
After McCormick’s decision, Musk criticized the ruling, leading Tesla to put the 2018 pay package to a second shareholder vote in June. This time, the package was approved. Tesla then requested McCormick to review the case again, based on this new vote.
Legal and Strategic Implications
McCormick called the June vote a “risky legal strategy,” suggesting it might be more prudent for Tesla to create a new pay package for Musk. “If this board wants to approve a large payment to Musk, it should be part of a new fiduciary decision,” McCormick noted. She added that honoring the finality of her previous ruling might be preferable, and that shareholders could vote on a new package rather than repeatedly revisiting the old one.
Consideration of Share Award Reinstatement
Tesla’s attorneys argued that they weren’t seeking to completely overturn McCormick’s January decision but rather hoped she would reinstate the share award based on the new vote while upholding her findings about the board’s failings. David Ross, representing Tesla, emphasized that shareholders were well-informed of the issues with the 2018 package through a detailed 200-page ruling included in their proxy materials.
Judge’s Scrutiny and Legal Theories
Throughout the hearing, McCormick challenged Tesla’s legal arguments, probing for the doctrines and precedents they relied on. She observed that the legal theories presented in the proxy materials were more aggressive than those argued in court, commenting that they were “very creative.”
Greg Varallo, representing the shareholder who initiated the lawsuit, argued that Tesla’s only option now is to appeal McCormick’s decision to the Delaware Supreme Court.
Ongoing Belief in Musk’s Compensation
Despite McCormick’s findings on board conflicts, both Tesla and many shareholders continue to believe that Musk deserves his high compensation. This ongoing belief highlights the tension between corporate governance standards and shareholder preferences in determining executive pay.
As Judge McCormick deliberates on whether to reinstate Musk’s compensation package, the case underscores the complexities of corporate governance, the role of shareholder votes, and the legal challenges surrounding executive pay. The outcome could set a significant precedent for future disputes in executive compensation and shareholder influence in corporate decisions.
