Delaware Court Rules Unfair to shareholders, Raises concerns about the independence of the board.
A Delaware court has ruled against the $56 billion pay package awarded by Tesla in 2018. Judge Kathleen McCormick of the Court of Chancery called the compensation an “unfathomable” sum, criticized it as unfair to shareholders, and questioned the board’s independence while demanding justification for the award.
Judge McCormick took the concerns and highlighted that the board “failed to show that the Tesla board, as presently constituted, could function independently” due to Musk`s influence and dominance. Tesla promised Elon Musk a 12% stake based on the company’s financial performance. However, critics argued that a lack of transparency gave Musk undue influence over the board and led to excessive rewards, even when the company met its goals.
Musk sold some Tesla stock to help fund his acquisition of Twitter, now known as X after the pay package was approved. Presently, he owns approximately 13% of the shares and stated that he wants 25 percent, making it a leading company in artificial intelligence and robotics. The decision is significant for Tesla and Musk. The company must now renegotiate a new package for its CEO, and the fund raised several questions about the leadership of Musk in the future and his relations with the board.
It could also set a precedent for future executive compensation cases, influencing companies to design and justify larger payouts.
The parties have to agree on the details of the order, including attorney fees before it becomes final and potentially subject to appeal.
A tweet made by Musk stated, “Never incorporate your company in the state of Delaware.” It created a poll for its followers asking whether Tesla should amend the state of incorporation to Texas at the location of its physical headquarters.
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