Elon Musk was dealt a major financial blow on Tuesday (Jan. 30) when a Delaware state court judge voided his $56 billion executive compensation package from Tesla.
Delaware Chancery Court Judge Kathaleen McCormick ruled that the “process leading to the approval of Musk’s compensation plan was deeply flawed” and was unfair to shareholders. The 2018 package, the largest in history, awarded Musk’s 20.3 million stock options over 12 tranches and was valued at up to $55.8 billion at the time.
McCormick cited Musk’s strong influence over Tesla’s board of directors as a primary reason for overturning the plan—the first time in history for the typically business-friendly state of Delaware. She pointed out Musk’s decades-long personal and financial relationships with several board members including Ira Ehrenpreis, the compensation committee chair.
“Given the collection of people tasked with negotiating on Tesla’s behalf, it is unsurprising that there was no meaningful negotiation over any of the terms of the plan,” McCormick wrote in the ruling.
Here are where things stand a day after the ruling.
What Elon Musk can do next
“There’s no question he’s gonna appeal,” said Brain Dunn, a visiting lecturer at Cornell University’s School of Industrial and Labor Relations and an expert on executive compensation.
However, Dunn, who served as an expert witness during trial, said it would be difficult for Musk to get the ruling overturned on the basis of case law, specifically in regards to proving the board’s independence from Musk.
Another option for Musk is to negotiate a new compensation package. In order to avoid another lawsuit, Dunn says Tesla would need to add more independent members to its board, include clear benchmarks and justifications for every level of the compensation in the plan, and offer a significantly smaller package.
What it means for Musk’s net worth
The ruling has a significant impact on Musk’s net worth and will likely dethrone him as the world’s wealthiest person.
Musk currently has an estimated net worth of $205 billion, according to Bloomberg’s Billionaire Index. The compensation plan, which Bloomberg reported was valued at $51.1 billion as of Tuesday, comprised nearly a quarter of his wealth. Without it, his net worth shrinks to about $154 billion, sliding him down two spots behind Amazon’s Jeff Bezos and LVMH Chair and CEO Bernard Arnault.
What Musk is saying
Musk quickly took to his social media website X, formerly known as Twitter, to react to the judge’s decision.
He followed that post a couple hours later writing, “I recommend incorporating in Nevada or Texas if you prefer shareholders to decide matters.” He then posted a poll asking X users if the Tesla should switch its state of incorporation to Texas. About 87% of the nearly one million users vote yes.
Finally, Musk posted screenshots of a Wall Street Journal article with the headline, “Delaware is trying hard to drive away corporations.”
How the investors responded
The market’s initial reaction to the news was negative. Shares of Tesla slid about 3% to $184.60 in after-hours trading following the news Tuesday (Jan. 30). Tesla was able to recover its losses Wednesday, reaching $192 during intraday trading.