In January of 2018 Telsa awarded CEO Elon Musk a 10-year pay package that includes a minimum wage (which he gives to charity) and 12 levels of stock options tied to market value, potentially worth $56 billion if Tesla hits a market cap of $650 billion. (The options vest on each $50 billion in growth.) Tesla’s board felt that it needed “to incentivize Musk to remain a fully engaged CEO,” given his many extracurricular activities.
After a surprising third-quarter profit, Tesla's market cap stands at roughly $54 billion. Now a coming trial in Delaware’s Chancery Court will decide if the compensation is awarded.
The case began when a shareholder, Richard Tornetta, sued over the award, claiming that the board breached its fiduciary duty. Chancery Vice Chancellor Joseph Slights held a hearing in May. Expectations were low. Delaware normally applies the business judgment rule to pay cases, giving boards latitude, since they should know more about their business than outsiders.
Tornetta relied on a case in which Delaware had concluded that Musk had great sway over the board. Slights, who heard the SolarCity case, characterized Musk in the pay case as a “conflicted, controlling shareholder, and as such...ought to provoke heightened judicial suspicion.” Slights wasn’t personally attacking Musk: A “controlling” shareholder technically stands on both sides of a transaction, which is, by definition, a conflict, even if stockholders share his gains.
Whatever the outcome of this proceeding it should have a lsting effect on Founder/CEOs and their stock compensation.