In a landmark ruling, Chancellor Kathaleen St. Jude McCormick of the Delaware court has decided that Elon Musk, the CEO of Tesla, is not entitled to the compensation package awarded by the company's board of directors. The package, potentially worth over $55 billion, has been the subject of a shareholder lawsuit accusing Musk and the directors of breaching their duties to the company.

The lawsuit alleged that the compensation package should be voided as it was the result of sham negotiations with directors who were not independent of Musk. The shareholder's lawyers also argued that the package was approved by shareholders who were given misleading and incomplete disclosures in a proxy statement. However, the defense attorneys contended that the pay plan was fairly negotiated by an independent compensation committee and was approved by a shareholder vote.

During the trial, Musk denied dictating the terms of the compensation package or attending any meetings where it was discussed. However, Chancellor McCormick determined that Musk, as a controlling shareholder with potential conflicts of interest, should be subject to a more rigorous standard. She found that the process leading to the approval of Musk's compensation plan was deeply flawed, citing his extensive ties with the persons involved in negotiating on Tesla's behalf.

McCormick specifically mentioned Musk's long business and personal relationships with compensation committee chairman Ira Ehrenpreis and committee member Antonio Gracias. She also noted that the working group responsible for the pay package included Todd Maron, Tesla's general counsel and Musk's former divorce attorney. The judge raised concerns about Maron's role as a primary go-between for Musk and the committee, questioning whose side he was on.

Consequently, Chancellor McCormick concluded that the only appropriate remedy was to rescind Musk's compensation package. She criticized the process as unfair and likened Musk's control over it to a self-driving car, recalibrating the speed and direction as he saw fit. The judge's decision to reverse the "absurdly outsized" pay package has been praised by Greg Varallo, the lead attorney for the shareholder plaintiff.

This ruling has sent shockwaves through the financial and legal communities. Wedbush Securities analyst Dan Ives described it as “unprecedented” and a "huge legal decision." The fact that the case was lost in Delaware court, known for its business-friendly environment, is surprising to many. The ruling highlights the potential consequences of corporate governance issues and raises questions about the independence of compensation committees.

Under the compensation package, Musk stood to receive billions of dollars if Tesla achieved specific market capitalization and operational milestones. The plan included growing Tesla's market capitalization by $50 billion and meeting aggressive revenue and profit growth targets. Musk would receive stock options equal to 1% of outstanding shares for each instance of meeting these milestones. To obtain the full benefit of the plan, Musk needed to lead Tesla to a market capitalization of $650 billion and achieve unprecedented revenues and earnings within a decade.

According to a post-trial brief filed by the plaintiff's attorneys, Tesla has already achieved all twelve market capitalization milestones and eleven operational milestones. This has resulted in nearly $28 billion in stock option gains for Musk. However, the stock options are subject to a five-year holding period.

Defense attorney Evan Chesler argued during the trial that the compensation package was a "high-risk, high-reward" deal that not only benefited Musk but also Tesla shareholders. He emphasized that the company wanted shareholders to be aware of the significant amount Musk could earn, hence including the $55 billion compensation figure in the proxy statement.

Musk's reaction to the ruling was expressed on X, the social media platform he owns, where he offered business advice: "Never incorporate your company in the state of Delaware." Musk's attorney and other Tesla defendants did not immediately respond to requests for comment.

This ruling has significant implications for executive compensation and corporate governance practices. It serves as a reminder that even in the corporate world, no one is above the law, and conflicts of interest must be carefully addressed to ensure fairness and transparency.