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Musk argues lower court made legal errors in rescinding

pay

package

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Lower court judge deemed pay package unfair to Tesla

shareholders

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Musk's appeal claims wrong legal standard was applied

By Tom Hals

WILMINGTON, Delaware, March 11 (Reuters) -

Elon Musk kicked off his appeal to try to restore his $56

billion payday from Tesla on Tuesday, claiming a lower court

judge made multiple legal errors in rescinding the record

compensation.

The 2018 pay package resulted in spectacular growth for the

electric vehicle maker and yet it was determined by the lower

Court of Chancery to be unfair to shareholders, who voted twice

to approve the plan, Musk argued.

"That counterintuitive result defies settled principles of

Delaware law, sound corporate governance, and common sense,"

said the opening appeal brief by Musk and the current and former

Tesla directors who are defendants in the case.

In January 2024, Chancellor Kathaleen McCormick rescinded the

pay package of stock options, calling it "unfathomable." She

said it was unfair to Tesla shareholders because the directors

who approved it were beholden to Musk and Tesla withheld key

information from investors before they voted to approve it.

In June, Tesla got shareholder approval for the pay package for

a second time, but the judge rejected that as grounds for

reversing her ruling.

The pay package had awarded Musk options to buy around 303

million Tesla shares at around $23 each if the company hit

performance and valuation goals. Tesla stock closed Tuesday at

$230.58.

Tesla has said creating a new pay package of similar value could

result in a charge of $25 billion, making the appeal an

important avenue for restoring Musk's compensation and keeping

his attention on Tesla.

Musk has said that he wants a greater stake in Tesla or he might

develop products outside of the company. The appeal comes as he

is dedicating time to President Donald Trump's government

efficiency effort, known as DOGE, which has sparked

demonstrations outside Tesla dealerships. The stock has fallen

sharply in recent weeks.

In the appeal brief, Musk and the other defendants said

McCormick wrongly applied a very difficult legal standard known

as entire fairness to assess the pay package.

She arrived at that standard by finding Musk, who owned

21.9% of the stock at the time the board approved the pay

package, controlled the pay negotiations, according to the

brief. In addition, she wrongly determined that ordinary

business relationships among directors made them conflicted and

she erroneously faulted Tesla's disclosures ahead of the 2018

shareholder vote, according to the brief.

Applying the entire fairness standard amounted to granting a

"license to sue" to Tesla shareholders, the brief said. The

lawsuit was brought by Richard Tornetta, a Tesla investor who

owned nine shares when he filed the case in 2018. The lawsuit

benefits Tesla, not Tornetta, in what is known as a derivative

suit.

Musk blasted the pay decision and has encouraged other companies

to follow Tesla and SpaceX and reincorporate out of Delaware. A

handful have left the state or said they might, including Meta

Platforms ( META ), TripAdvisor ( TRIP ) and Trump's media

company.

Fears that a trickle of companies will turn into a stampede,

which has been dubbed "DExit," prompted the state's legislature

to consider amending its corporate law to better protect

controlling shareholders from lawsuits.

(

Reporting by Tom Hals in Wilmington, Delaware; Editing by

Stephen Coates)