*

Chancellor McCormick ruled Musk controlled pay

negotiations,

plan deemed unfair

*

Tesla disputes $345 million legal fee, seeks reduced

compensation

By Tom Hals

DOVER, Delaware, Oct 15 (Reuters) - Elon Musk's $56

billion pay package from Tesla should have been

restored by a vote of the company's shareholders last year, a

Tesla attorney argued to the Delaware Supreme Court on

Wednesday.

One of the biggest corporate legal battles entered its final

stage after a lower court judge rescinded the Tesla CEO's record

compensation in January 2024. The company is also appealing a

ruling by the lower court that rejected as legally invalid a

vote by shareholders to restore the pay package.

"This was the most informed stockholder vote in Delaware

history," Jeffrey Wall, an attorney for Tesla, told the

justices. "Reaffirming that would resolve this case."

The case's 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 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.

Musk did not attend the arguments, which were held in a

special court to accommodate the 65 people in attendance, mostly

lawyers.

The defendants, current and former Tesla directors, denied

wrongdoing and said McCormick misinterpreted the facts and the

law.

COMPANIES SWITCH LEGAL HOMES

Tesla argued in Dover, Delaware, that the five justices on

Delaware's high court had three avenues to reverse the lower

court ruling. They could find that Musk, who owned 21.9% of

Tesla stock in 2018, did not control the board pay negotiations

and that shareholders were fully informed when they voted to

approve it that year. They could determine that rescinding the

pay was an improper remedy because it did not undo the work that

Musk had done or the gains that shareholders had received. Or

they could determine last year's vote demonstrated that

shareholders wanted to accept the pay deal, despite the legal

flaws.

"Shareholders in 2024 knew exactly what they were voting

for," Wall said.

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. Tesla has said the replacement plan will cost $25

billion or more in accounting charges.

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 PROPOSES NEW PAY PLAN

Tesla's board last month proposed a $1 trillion compensation

plan, highlighting confidence in Musk's ability to steer the

company in a new direction, even as Tesla loses ground to

Chinese rivals in key markets amid softening EV demand.

The justices are considering 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.