The Delaware court once again raised a red flag regarding Elon Musk's $56 billion compensation plan, with Judge Kathaleen McCormick's ruling once again rejecting this enormous compensation arrangement, even though shareholders had attempted to reconfirm its legality.
This decision not only continued the tone set by the initial ruling in January but also added new complexity to the ongoing legal entanglement between Tesla and Musk, as Tesla has clearly stated that it will appeal to a higher court—the Delaware Supreme Court.
In court documents disclosed on Monday, Judge McCormick rejected Tesla's request to modify the previous ruling. Tesla had argued that the recent shareholder vote reconfirming had addressed the concerns mentioned in the initial ruling.
However, Judge McCormick was unconvinced, noting that despite the vote approving it, the issues with the compensation plan itself still remained.
The judge insisted that Musk's compensation agreement was heavily influenced by his control over the board, making the terms of the agreement difficult to consider absolutely fair. She emphasized that Tesla failed to ensure that investors received adequate information before approving the compensation plan.
McCormick reiterated that although the board has the power to determine the amount of compensation, in this case, the board clearly compromised on Musk's terms, which the court found to be obviously excessive.
There is no denying that the board has the full authority to decide on reasonable compensation for Musk; however, the fact is that the board yielded to Musk's terms and failed to demonstrate the absolute fairness of those terms.
Additionally, this legal setback has brought Tesla tangible economic losses. Apart from the ruling on the compensation plan, the court also ordered Tesla to pay up to $345 million in fees to the plaintiff's lawyers, which will be paid in cash or stock.
Tesla expressed strong dissatisfaction with this ruling, arguing that if it is not overturned, it would mean that the judge and the plaintiff's lawyers have, to some extent, become operators of the company rather than its legitimate owners—shareholders.
In response to this ruling, Tesla decided to appeal to the Delaware Supreme Court, hoping to overturn this unfavorable decision for the company. The company had initially hoped that the shareholders' reconfirmation could clear the obstacles for the deal, but McCormick's ruling once again set legal barriers for it.
This ruling has also sparked widespread discussion on corporate governance and executive compensation in the tech industry. The outcome of the appeal not only concerns Tesla and Musk's interests but could also set an important precedent for future cases involving high executive salaries.
Meanwhile, Musk also achieved victory in another legal dispute. In a case involving the U.S. Securities and Exchange Commission, a district court judge recently made a ruling in favor of Musk.
The SEC previously attempted to sanction Musk for how he handled the acquisition of X, but the court rejected this request, noting that Musk had reimbursed the SEC for costs incurred due to his absence from the meeting.
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