Tesla is a frequent customer in legal battles and the latest verdict hits like a truck for the EV maker. A Delaware judge has declared CEO Elon Musk's $56 billion pay package invalid, a decision that comes after shareholder approval earlier this year.
The decision, delivered by Chancellor Kathaleen McCormick of the Court of Chancery, further complicates the future of the company's leadership compensation structure.
The Judge's Ruling on Musk's Compensation Plan
Chancellor McCormick recently supported her decision made in January wherein she found the pay package excessive and rescinded it. Reuters reports that the package, valued at $56 billion, was tied to the achievement of certain performance and valuation milestones by Musk at Tesla.
However, McCormick has argued since day one that the way compensation was structured, especially because Musk participated in the negotiations with his negotiating team, violated corporate governance.
In her new 101-page opinion, McCormick argued that Tesla's board had no right to reinstate the package once it was stricken.
Tesla, however, said that they plan to appeal the decision to the Delaware Supreme Court. The company insisted that the June shareholder vote to reinstate the package should be left intact because the vote represented a clear desire from Tesla's stakeholders.
In his X post, Musk said that "shareholders should control company votes, not judges."
In addition, McCormick rejected that rationale, pointing out that this vote had needed to take place before the trial had happened in June. She also pointed to the fact that Tesla's leadership had made material misstatements about the vote to further invalidate the decision made.
Read More: Tesla Owners Clap Back: Anti-Musk Stickers Take Over Amid Backlash Against Elon's Politics
Shareholder Unrest and What Legal Consequences Might Come
In spite of the legal reversal, many investors in Tesla still share complaints about the ruling. Retail investors and fans of Musk also continue to voice their disappointment with the decision.
Powerful voices such as that of Omar Qazi, one of Tesla's major investors, say that the decision disempowers shareholders, suggesting that the will of the majority should not be superseded by a judge.
Backers of Musk continue to express support for the compensation package they believe is warranted due to the CEO's role in making Tesla the success it is today.
Musk's defense and Tesla have maintained that his performance-based pay scheme was fair and necessary to make his individual interest in line with that of the company. However, critics argue that it is overcompensation that will be a bad practice towards corporate accountability and transparency.
Wider Financial and Market Effects
Tesla's stock, whose value had skyrocketed, declined by 1.4% in after-market trading after the verdict. This minor decline may be attributed to the persistent uncertainty surrounding Musk's pay but also to the overall implications for Tesla's market perception.
Musk's compensation package, originally designed to align his interests with the company's growth, had already caused a huge commotion due to its massive value, which was over 30 times larger than the next biggest executive compensation plan.
The decision also draws attention to the broader issue of executive compensation at Silicon Valley companies that is relatively common - stock options and performance-based incentives - and where Tesla's controversial compensation deal may well become a cautionary tale on the potential consequences of high-stakes corporate governance.
Tesla Hopes That Its Appeal Won't Put to Waste
According to CNN, Tesla will appeal the decision to the Delaware Supreme Court, hoping that a higher court will overturn McCormick's decision. The appeal process may take up to one year to fully resolve the case, meaning that Tesla and Musk will continue to be locked in uncertainty over the pay of the latter.
Meanwhile, the firm will carry on its defense, insisting on the fact that Musk has sufficiently transformed the company to warrant this massive pay package.
The legal saga seems to be never-ending for Elon Musk as pressure keeps on pumping up—instead of profit.
With Tesla's future at stake, the outcome of this legal battle will have some consequences not just for Musk, but for the whole EV industry.
