Elon Musk's $56B Tesla (TSLA) Pay Lawsuit Enters Final Stage in Delaware Court
Elon Musk's $56 billion compensation plan for Tesla, approved by shareholders in 2018, is under legal scrutiny in Delaware. A lawsuit filed by shareholder Richard Tornetta led to a court ruling voiding the plan due to Musk's influence over the board. Tesla's lawyers argue for reinstatement, citing shareholder support. The case highlights a trend of companies relocating to states with friendlier corporate laws. If Musk loses, he still stands to gain significantly from a replacement deal. Meanwhile, Tesla shareholders will vote on a new $1 trillion compensation plan for Musk next month, amid a Hold consensus rating on TSLA stock.
Tesla's Legal Battle to Defend Musk's Compensation Plan
In 2018, Tesla's shareholders voted in favor of Musk's pay package, which was worth about $56 billion in stock, provided the company met certain targets, which it did. However, Richard Tornetta, a TSLA shareholder, filed a lawsuit against the massive pay plan. In January 2024, Chancellor Kathaleen McCormick of Delaware's Court of Chancery voided the pay plan, citing Musk's close ties with Tesla's directors and influence over the board. McCormick also stated that Tesla's disclosures to shareholders were insufficient when they voted overwhelmingly in favor of Musk's compensation.
On Wednesday, lawyers representing Tesla and Musk argued that the 2018 pay package approved by the board should be reinstated, as shareholders had voted in favor of it twice, including after McCormick rejected it last year.
"This was the most informed stockholder vote in Delaware history," Tesla's attorney Jeffrey Wall told the justices, according to Reuters. The lawyers also highlighted the rise in Tesla's value over the last few years, which had boosted returns for shareholders. The defendants, current and former Tesla directors, denied wrongdoing and stated that McCormick misinterpreted the facts and the law. Reuters noted that the court typically takes several months to rule.
Ramifications of the Lawsuit over Musk's Pay
Interestingly, following Musk's pay ruling, several large companies, including Tesla, Dropbox, and the venture capital firm Andreessen Horowitz, have shifted their legal headquarters to Texas or Nevada, as courts in these states are friendlier to directors. In response to the notable corporate departures, a trend known as "Dexit," Delaware lawmakers overhauled the state's corporate law. Tesla is now incorporated in Texas, which is viewed as favorable for the company, as it is more difficult for a shareholder to challenge board decisions in this state.
Meanwhile, if Musk loses the appeal, he will still reap tens of billions of dollars in TSLA stock, as the EV company agreed in August to a replacement deal if his 2018 plan is not reinstated. The company has stated that the replacement plan will cost $25 billion or more in accounting charges.
Musk, one of the world's richest individuals, claims that he hasn't received any compensation for seven years of work as Tesla CEO, despite achieving all the performance targets. It is estimated that the 2018 stock options (worth $56 billion at the time) would be worth approximately $120 billion currently. Meanwhile, Tesla shareholders are slated to vote next month on the new $1 trillion compensation plan for Musk over the next 10 years.
Is TSLA Stock a Buy, Sell, or Hold?
Amid intense competition in the EV space, Wall Street has a Hold consensus rating on Tesla stock based on 16 Buys, 13 Holds, and nine Sell recommendations. The average TSLA stock price target of $365.88 indicates a possible downside of about 16% from current levels.
TSLA stock has risen 8% year-to-date, reflecting optimism about the company's robotaxis, full self-driving (FSD) technology, and prospects related to artificial intelligence (AI).
