Full impulse to give Tesla CEO Elon Musk’s $100 billion pay package was blocked by a judge this week.
In one of 101 pages the opinionChancellor of the Delaware Court Kathleen McCormick He refused to reverse an earlier decision to cut Musks’ salary. In essence, he wrote, the arguments presented by the defense representing Tesla and some of its board members were “creative” but missed the mark. McCormick had previously suspended Musk’s salary in a previous ruling, and after losing the trial, Tesla voted in favor of shareholders in June 2024 to pay Musk what the Tesla board said he was properly owed. Tesla Chairman Robyn Denholm told shareholders the board was behind the compensation package, and rallied investors to re-approve Musk’s salary as a way to overturn the court’s decision, which shareholders overwhelmingly did in a June 2024 vote that won 72% support.
Tesla told investors that the vote, which it called a “common law confirmation,” could dismiss claims that the board breached its fiduciary duty in issuing the pay plan. “When properly implemented, common law ratification ‘reaches back’ to validate the challenged act’s initial enactment,” Tesla. he wrote to the shareholders
The court completely rejected this approach.
“There are at least four fatal errors,” McCormick wrote in his decision. “A large and talented group of defense firms got creative with the ratification argument, but the unprecedented theories run counter to several forces of established law.” (McCormick wrote in his decision that Tesla “lawyered up” on the day it filed its April proxy statement, asking shareholders to ratify Musk’s pay by adding five additional law firms to the list of attorneys representing defendants in the pay dispute.)
in one the message good XTesla wrote that the judge was wrong and plans to appeal the decision.
“This ruling, if not overturned, means that judges and plaintiffs’ attorneys are running Delaware companies rather than their legal owners, the shareholders.”
So what exactly led McCormick to his decision? Here are the “four fatal mistakes”, he explained:
Fatal Flaw #1: Tesla did not have procedural grounds to overturn the court’s decision
First, Tesla argued that the shareholder ratification vote was a “powerful elixir” in its April proxy statement, McCormick wrote. But Tesla had no reason to overturn the result of a judicial decision based on evidence produced after the trial, the opinion said. Tesla’s lawyers later reversed that position in oral court arguments, abandoning more aggressive language and instead seeking to “modify the remedy” without challenging the judge’s findings. However, McCormick wrote, the lawyers asked for “a summary judgment on all counts for the defendants,” which would have overturned the judge’s decision in Tesla’s favor.
“Therefore, the ‘only relief’ defendants requested to present at oral argument was to amend the ‘plea’ of dismissal and reverse the entire outcome of the case in favor of the defendants,” the judge wrote, making his point bluntly. : “That’s all.”
Fatal Mistake #2: Timing. Common law ratification cannot be raised after post-opinion trial
Second, Tesla raised the defense of common law ratification after the decision to revoke his pay package came after the trial — six years after the case was filed, a year and a half after the trial, and five months after the court’s opinion, McCormick wrote. No court has ever upheld shareholder ratification after the facts have been settled, with a single one the exception over the past 70 years, McCormick wrote.
“Where there is an outer boundary of non-harmful delay, the defendants crossed it,” he wrote. “The court declines to exercise its discretion to allow the shareholder ratification defense to be raised at this late stage.”
Fatal mistake #3: Tesla’s approach did not adhere to the established legal framework
The third most significant error McCormick pointed out had to do with the legal framework Tesla was relying on. He wrote that a shareholder vote by itself was not enough to ratify a “disputing controller transaction,” which is how Musk’s financial support was described in McCormick’s previous opinion to void his salary. “Disputing controller transactions present multiple risks for minority shareholders,” he wrote. And especially in this case, there is the so-called “tunnel risk”, where someone who controls a company can try to get ahead through related transactions.
Because of the high risk, the court applies a stricter standard of review that requires specific steps, including review by an independent special committee and an informed shareholder vote. Tesla’s vision did not adhere to the established framework.
“Defendants’ failure to meet the framework for securing shareholder ratification in the conflicting controller context provides an independent basis for rejecting the Ratification Argument,” he concluded.
Fatal Mistake #4: Mistaking multiple materials
Finally, an April proxy statement asking shareholders to ratify Musk’s salary, after the court overturned it, was “materially misleading,” McCormick wrote. He noted, “There are many ways in which the Proxy Statement confuses the truth,” but one glaring failure was that much of what Tesla told shareholders in that proxy statement was incorrect or misleading.
Each of the four serious flaws in the affirmance argument was sufficient to defeat the motion to reconsider the decision, McCormick wrote.
“Taken together, they pack a powerful punch.”
Tesla did not immediately respond to a request for comment.
