Elon Musk's $50 billion Tesla salary was cut. What happens now?
A Delaware judge's decision to invalidate the pay package that helped make Elon Musk the world's richest person leaves Tesla's board of directors with some tough decisions to make.
Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery on Tuesday ordered Tesla to revoke stock options granted to Mr. Musk, the electric car company's CEO, worth about $50 billion. Now the company's directors must come up with a new compensation plan that can pass legal scrutiny and satisfy Mr. Musk, who recently demanded that the board substantially increase its ownership of Tesla.
Tesla and Mr Musk could appeal the court's ruling. Mr. Musk has also indicated that he might try to set up the company in another state that he thinks would be more hospitable to businesses, such as Texas.
What happens to Mr Musk's stock options?
As part of a compensation package Tesla completed in 2018, Mr Musk received options to buy 304 million shares now worth more than $50 billion. Although he achieved the goals necessary to obtain these options, it appears that Mr. Musk has not converted them into Tesla shares. If he had, he wouldn't have been allowed to sell them for five years.
Chancellor McCormick said in her decision that Tesla must cancel the options, although she has not yet issued a formal order requiring the company to do so.
Even without the shares from that package, Tesla has made Mr Musk unimaginably rich. He owns about 411 million Tesla shares worth about $78 billion. Last year, a securities filing said he had pledged 238 million shares for personal loans.
Can Tesla Just Pack Up and Leave Delaware?
Mr Musk was clearly angry and threatened to re-list Tesla in another state. On X, the social media platform he owns, he asked his followers to vote on whether Tesla would locate in Texas, where it has its headquarters and a major factory.
“I recommend incorporating in Nevada or Texas if you prefer shareholders to decide things,” he said.
Delaware is a popular place for companies to locate because of its streamlined legal system. Cases are heard by judges rather than juries, and there is only one avenue of appeal: the Delaware Supreme Court.
Mr Musk has based his X in Nevada, where laws make it much more difficult to sue drivers. But a move there would require a vote by shareholders, some of whom may not want the company to move to a state where they have less power.
A move “doesn't give him a magic ticket,” said Gregory Varallo, a lawyer in Wilmington, Del., who argued the case against Musk's pay package to shareholders.
How might Tesla stock react?
If the stock options Tesla granted to Musk in the 2018 package were voided, the company would have fewer shares outstanding. That would, in theory, increase the value of the shares owned by other people or companies.
But any boost this brings to the stock price could be offset by investor fears that Musk could leave the company or focus less on its operations. Tesla's share price fell about 2 percent on Wednesday after Ms McCormick's statement, which was released after the stock market closed on Tuesday.
In the long term, a company's share price is determined by its profits and cash flow. Tesla is down more than half from its peak and is down more than 20 percent this year, largely because profit margins have fallen and the company expects sales to grow much more slowly this year.
What can the Tesla board do?
Chancellor McCormick said Musk played too big a role in crafting the terms of his pay deal, and that the board, which is legally required to serve the interests of all shareholders, was not sufficiently independent of him. One director is his brother, Kimbal, and several others are long-standing friends and collaborators. She also said the pay package was excessive and paid him far more than was necessary to motivate him to do good work.
As a result, executives may have to make changes that will convince a judge that any new compensation package they award him was the result of poor negotiations between them and Mr. Musk. Any renewed wage agreement might also mean paying him a lot less.
Tesla's board must find a way to keep Mr. Musk focused on the company while exerting more control over his “erratic” behavior, said Kristin Hull, founder of Nia Impact Capital, an investment firm in Oakland, California.
“We want him to play a very important role,” said Dr. Hull, but added: “There has to be some checks and balances and that is what this decision is about.” The fund owns a small number of shares.
Robyn Denholm, chairman of Tesla's board, did not respond to a request for comment. This also applied to the other seven members of the board.
Can Mr Musk appeal the decision?
Tesla and Mr. Musk could appeal to the Delaware Supreme Court, which some legal experts say is likely to uphold the ruling.
But some legal experts said lawyers for the company and Mr. Musk could try to argue that Ms. McCormick's ruling went too far and should be reversed. For example, Musk's lawyers could argue that he was not the controlling shareholder that Chancellor McCormick suggested. He owned about 22 percent of Tesla when the package was conceived, meaning he didn't get enough votes to control the company. The chancellor also said his “superstar” status gave him undue influence over the administration.
“The Supreme Court can go either way with that argument,” said Michal Barzuza, a law professor at the University of Virginia, referring to the Delaware Supreme Court.
Tesla could also try to appeal to the U.S. Supreme Court, but could have difficulty getting the Supreme Court to hear the case because it does not raise clear constitutional or federal issues.
Lawyers representing Mr Musk in the case did not respond to requests for comment.
What does this mean for Tesla as a company?
The decision would only change Tesla's approach to designing, manufacturing and selling cars if it prompts Mr. Musk to leave the company or take a less active role. Mr Musk is showing signs of unrest. Before the decision, Mr Musk had demanded that Tesla's board increase its stake in the company from 13 to 25 percent.
If he didn't get what he asked for, he said, he would work on robotics and artificial intelligence products elsewhere. Mr Musk has already founded an independent artificial intelligence company called xAI. He also runs SpaceX and is the founder of Neuralink, which develops implants that allow people to control computers with their brains.
It is difficult to see how Tesla's board could meet its demand for a much larger stake in the car company in light of the Delaware decision.
Few, if any, CEOs are as closely identified with their products, or seen as an essential part of their company's success, as Mr. Musk. In her decision, Ms McCormick suggested his status as a “superstar” chief executive has a downside. It “creates a 'field of distortion' that distorts board oversight,” she said.