Tesla’s shareholders signed off on the record compensation deal because they were “starry-eyed” about their “superstar” CEO, a Delaware judge has ruled

A Delaware judge has voided Elon Musk’s $56 billion Tesla pay package, arguing that the company’s board of directors had failed to prove that the billionaire CEO deserved such a high compensation. Musk responded by publicly floating a move to Texas.

The 2018 pay deal was the highest in US corporate history, and made Musk the richest man in the world, with an estimated fortune of up to $220 billion as of last year. Under its terms, Musk was given stock options that would pay out if Tesla hit certain performance targets.

However, Tesla investor Richard Tornetta, who owned just nine shares in the electric automaker at the time, sued Musk and the company, arguing that the billionaire had misled shareholders by telling them that these targets would be more difficult to reach than they were.

The case was finally brought to trial in November, and Chancery Court Chancellor Kathaleen McCormick ruled in Tornetta’s favor on Tuesday. In her 200-page judgment, McCormick argued that Musk had “enormous influence over Tesla” and was therefore able to convince shareholders that such a pay deal was necessary. Even though Musk had excused himself from board meetings on the pay deal, McCormick claimed that five of the six directors who voted on it were “beholden to Musk or had compromising conflicts.”

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“Swept up by the rhetoric of ‘all upside’, or perhaps starry eyed by Musk’s superstar appeal, the board never asked the $55.8 billion question: Was the plan even necessary for Tesla to retain Musk and achieve its goals?” McCormick wrote.

The judge instructed Musk and Tornetta to confer and decide how Musk would go about handing back any of the pay package he has already received.

Not all US states allow corporate courts to override shareholder decisions. “Never incorporate your company in the state of Delaware,” Musk posted on X, which he owns, after the decision was announced. “I recommend incorporating in Nevada or Texas if you prefer shareholders to decide matters,” he added.

Musk then posted a poll asking his 170 million followers “should Tesla change its state of incorporation to Texas, home of its physical headquarters?” By Wednesday evening, 87% of respondents had answered “Yes.”

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Tesla has been on the receiving end of similar challenges before. In 2020, a Detroit-based pension fund sued several members of the company’s board, claiming that they awarded themselves excessive compensation between 2017 and 2020. The case was settled out of court last summer, with the directors agreeing to hand back $735 million and forego compensation for two years.