Delaware Supreme Court Considers Tesla Lawsuit Over Elon Musk’s Pay

The Delaware Supreme Court recently heard arguments in a longstanding lawsuit over Tesla CEO Elon Musk’s 2018 compensation package, one of the largest ever awarded to a corporate executive.

Camila Domonoske writes in NPR Business that Tornetta v. Musk centers on whether the package, structured entirely through stock awards tied to ambitious performance targets, was excessive, and whether Musk’s influence over the board undermined shareholder interests.

The dispute has drawn attention to the way in which corporate governance, executive pay, and shareholder approval can clash in publicly traded companies.

The controversy began when shareholder Richard Tornetta filed suit against Musk, Tesla, and the board in Delaware’s Court of Chancery. He alleged that board members violated their fiduciary duties by allowing Musk undue influence over his own pay, and that shareholders were inadequately informed about board relationships and the size of the award.

Tesla defended the package, emphasizing that it was tied to performance, approved by shareholders, and aligned with Musk’s interests with the company’s rapid growth, which reportedly increased the company’s value by roughly 1,400%.

The Chancery Court ruled in favor of Tornetta, finding the package excessive and directing Tesla to develop a new compensation plan. Tesla’s attempt to hold a second shareholder vote on the same package was rejected, leading to the current appeal.

The Delaware Supreme Court must now determine whether Musk’s pay reflected an appropriate business decision or an excessive award influenced by board familiarity and insufficient disclosure.

Key considerations include the proportionality of the package relative to other CEOs, shareholder awareness and approval, and whether the 2024 shareholder vote remedies earlier procedural concerns.

Both sides present arguments emphasizing shareholder interests, either through limiting potential overcompensation or respecting informed votes.

Legal teams should be aware that this case has broad implications for corporate governance and executive compensation. Its outcome could affect how courts evaluate shareholder approval, board independence, and fiduciary duties. It may also influence the trend among corporations to consider relocating out of Delaware in response to legal scrutiny.