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Delaware Supreme Court hears Musk's pay package appeal

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Chancellor McCormick ruled Musk controlled pay

negotiations,

plan deemed unfair

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Tesla disputes $345 million legal fee, seeks reduced

compensation

By Tom Hals

DOVER, Delaware, Oct 15 (Reuters) - Elon Musk's lawyers

will urge the Delaware Supreme Court on Wednesday to restore his

$56 billion pay package from Tesla, as one of the

biggest corporate legal battles enters its final stage nearly

two years after a lower court judge rescinded the Tesla CEO's

record compensation.

The outcome could have substantial consequences for the

state of Delaware, its widely used corporate law, and its Court

of Chancery, a once-favored venue for business disputes that has

recently been accused of hostility towards powerful

entrepreneurs.

The January 2024 Court of Chancery ruling striking down Musk's

pay has become a rallying cry for Delaware critics. Chancellor

Kathaleen McCormick ruled that the Tesla board lacked

independence from Musk when it approved the pay package in 2018

and that shareholders lacked key information when they voted

overwhelmingly in favor of it. As a result, she applied a

demanding legal standard and found the pay unfair to investors.

The defendants, current and former Tesla directors, denied

wrongdoing and said McCormick misinterpreted the facts and the

law. Musk is not expected to attend.

COMPANIES SWITCH LEGAL HOMES

After the Musk pay ruling, large companies, including Tesla,

Dropbox, and the venture capital firm Andreessen Horowitz,

switched their legal homes to Texas or Nevada, where courts are

friendlier toward directors. Delaware lawmakers responded to the

corporate departures, a trend known as "Dexit," by overhauling

its corporate law.

If Musk loses the appeal, he will still reap tens of billions of

dollars in stock from the electric vehicle company, which agreed

in August to a replacement deal if his 2018 plan is not

restored.

The company said the replacement award was meant to retain

and focus Musk, who said earlier this year he was forming a new

U.S. political party, on transitioning Tesla to robotics and

automated driving. Tesla is now incorporated in Texas, where it

is far more difficult for a shareholder to challenge board

decisions.

Tesla's board last month proposed a compensation plan,

highlighting confidence in Musk's

The five justices on Delaware's high court will consider the

appeal of the pay ruling as well as the $345 million legal fee

that McCormick ordered Tesla to pay to the attorneys for Richard

Tornetta, who held just nine Tesla shares when he sued to block

the pay deal. The court typically takes months to rule.

Tesla estimated in 2018 the stock options plan would be

worth $56 billion if the company met operational and financial

goals, which it did. Because the stock continued to appreciate,

the options are currently worth closer to $120 billion, by far

the largest executive compensation ever. Musk is the world's

richest person with a fortune of around $480 billion, according

to Forbes.

The defendants have argued that McCormick erred in finding

social and business ties to Musk compromised their independence

and said Tesla shareholders were informed of the economic terms

of the pay deal before they approved the plan. The directors

said she should have reviewed the pay package under the

"business judgment" standard, which protects directors from

second-guessing by courts.

The directors have long argued the pay package performed as

hoped - it focused the attention of Musk, a serial entrepreneur,

and he transformed Tesla from a startup into one of the world's

most valuable companies.

Several months after McCormick's ruling, Tesla received

shareholder approval a second time for the plan, which McCormick

rejected as legally invalid. Tesla is also appealing that

decision.