Why a judge rejected Elon Musk’s $50 billion Tesla pay package

Tesla shareholders have voted twice to hand CEO Elon Musk a compensation package valued at more than $50 billion, which would make him the highest-paid executive ever.

For a second period, a Delaware judge ruled this week that they can’t do it.

The renewed attempt to secure compensation for Musk suffered from “fatal flaws,” Chancellor Kathaleen McCormick of the Court of Chancery said in her ruling, citing procedural violations.

The legal battle pits the globe’s richest person against America’s most prominent court for corporate law, testing the rules of executive pay at one of the country’s most high-profile companies.

In a post Tuesday on X, which Musk owns, he criticized the ruling. “Shareholders should control business votes, not judges,” Musk said.

Tesla echoed Musk’s view, vowing to appeal. “A Delaware judge just overruled a supermajority of shareholders who own Tesla and who voted twice to pay [Elon Musk] what he’s worth,” the business said in a post on X.

Here’s what to recognize about why the judge struck down Musk’s compensation package, and what could happen next:

Why did the judge rule on Musk’s compensation for a second period?

The ruling this week reaffirms a January selection made by McCormick, in which the judge rejected the 2018 compensation package that Tesla voted to provide to Musk. The January ruling declared that the negotiations surrounding the package had been inappropriate, due to a lack of independence among board members and problematic influence by Musk over those negotiations.

McCormick revisited the selection in response to a petition from Musk attorneys after a second shareholder vote in June showed more than 70% supported the compensation package.

Shareholders again ruled in favor of the package even after the flaws of the initial negotiation had been fully disclosed, Musk’s attorneys argued, further claiming that the second shareholder vote made up for the initial problems with the compensation package that McCormick noted.

The ruling this week did not revisit the issues settled in McCormick’s first ruling against Musk, Ann Lipton, a professor at Tulane University who studies corporate law, told ABC information.

“The defendants thought maybe they could fix the problems by having the shareholders vote again on the package with the court’s first view available to them,” Lipton said. “McCormick concluded, ‘No, they couldn’t.'”

Why did the judge rule against Musk?

In her initial ruling, McCormick took issue with the power Tesla afforded Musk, saying his sizable stake in the business and close ties with board members had undermined the procedure behind the compensation package.

“The collection of features characterizing Musk’s connection with Tesla and its directors gave him enormous influence over Tesla,” McCormick wrote in her view.

“Musk was the paradigmatic ‘Superstar CEO,’ who held some of the most influential corporate positions (CEO, Chair, and founder), enjoyed thick ties with the directors tasked with negotiating on behalf of Tesla, and dominated the procedure that led to board approval of his compensation schedule,” McCormick’s view continued. “At least as to this deal, Musk controlled Tesla.”

In her latest ruling, McCormick decided that a second shareholder vote on the compensation package – even if made with packed knowledge of the initial problems surrounding the negotiation of the agreement – could not undo those problems.

In other words, stockholders cannot ratify an agreement if the procedure behind it was improper, McCormick said.

“A equity owner vote standing alone cannot ratify a conflicted-controller deal,” McCormick wrote in her view. The term “conflicted-controller deal” refers to the dispute of profit McCormick initially found in the role Musk played in negotiations.

The ruling this week centered “very much on an issue of procedure,” Lipton said, with McCormick determining that a recent shareholder vote could not alter the findings that had dictated the court’s initial ruling.

“The gist is: Too little, too late,” Lipton added.

Frustration among Musk and shareholders is understandable, Lipton said, since the ruling appears to refute the will of thousands of Tesla shareholders. But the rules regulating corporate procedure exist in part to protect those same shareholders, she added.

“On a gut level, it’s factual: Shareholders really do recognize who Musk is, what the package is, and that they desire to provide it to him,” Lipton said. “On the other hand, we have procedures for determining for sure that that’s what the shareholders desire. It’s complicated.”

What will happen next?

Tesla has vowed to appeal the ruling, which would send the selection to the Delaware Supreme Court. The higher court would revisit both the January ruling of an improper procedure for setting the pay package, as well as the selection this week regarding a setback to fix those problems with a second shareholder vote, Lipton said.

If Musk wins, he would receive the pay package. If not, Tesla could commence over with a recent, albeit similar compensation package, Lipton said.

Since proceedings in this case began, Musk relocated his business to Austin, Texas, meaning potential litigation of a recent pay package would make its way through the courts in that state.

“It’s challenging to recognize what another state would do,” Lipton said, but she added that a Texas court would likely prove less amiable to a test to Musk’s compensation.

“I’d like Musk’s chances,” Lipton added.