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Musk’s record $56bn pay deal rejected for second time

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Tesla CEO Elon Musk’s record-breaking $56 billion pay deal has been rejected for the second time by a judge in Delaware. This decision follows months of legal disputes and comes despite approval of the pay package by both Tesla shareholders and its board of directors in the summer.

Judge Kathaleen McCormick upheld her initial decision from January, which ruled that Tesla’s board was overly influenced by Musk in approving such a large compensation deal. In response to the ruling, Musk took to X (formerly Twitter) to express his discontent, stating: “Shareholders should control company votes, not judges.” Tesla also announced plans to appeal, calling the ruling “wrong” and arguing that it would mean judges and lawyers, not shareholders, would control Delaware-based companies.

The pay package, which was proposed in 2018, was meant to be the largest-ever compensation package for a CEO of a publicly traded company. Judge McCormick noted that Tesla had failed to prove the fairness of the deal, even though it was supported by a shareholder vote of 75% in June. She ruled that the size of the package, which Musk would have received contingent on Tesla’s growth and profitability, was not justified under the circumstances, given the significant influence he had over the board’s decision.

Musk, who is also the CEO of X (formerly Twitter) and SpaceX, remains the world’s richest person, with an estimated net worth of around $350 billion, according to the Bloomberg Billionaires Index. His influence and public statements on a wide range of issues have solidified his standing, and many believe that his wealth will continue to grow, particularly with the potential for further involvement in politics. Following Donald Trump’s victory in the 2024 U.S. presidential election, Musk was tapped to lead a newly established Department of Government Efficiency, tasked with streamlining government bureaucracy and reducing unnecessary regulations.

Despite the significant backing Musk received from Tesla’s shareholders, Judge McCormick did not accept that the pay package was reasonable, even with the argument that the package was approved by those who held stakes in the company. In her opinion, she emphasized that a stockholder vote could not justify a compensation deal if it was not in the best interests of all investors. The court ruling also saw Tesla’s shareholder, who brought the case against the company, awarded $345 million in legal fees, but not the $5.6 billion in Tesla stock that they had requested.

Some experts believe that a ruling in Musk’s favor could have undermined conflict-of-interest laws in Delaware, where Tesla is incorporated. Charles Elson, a corporate governance expert at the University of Delaware, called the decision well-reasoned, stating that the process for approving Musk’s pay package was overly influenced by him and lacked independent oversight. “You had a board that wasn’t independent, a process that was dominated by the chief executive, and a package that was way out of any sort of reasonable bounds,” Elson remarked, referring to the package as a “quite a combo.”

The rejection of Musk’s pay package could have significant implications for corporate governance. Experts argue that it demonstrates the importance of protecting the interests of all shareholders, not just the powerful CEO or major stakeholders. Tesla, which had moved its legal base to Texas earlier this year, may attempt to reconstitute a similar pay package in the state, where different legal rules could potentially allow for greater flexibility in approving large compensation deals.

In the broader context, Musk’s rejection highlights ongoing debates surrounding executive compensation, corporate influence, and the role of boards in overseeing and approving major financial decisions. With further legal action expected, the Tesla case could set important precedents for how high compensation deals are structured and regulated in the future.

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