A judge in Delaware has now ruled that Elon Musk’s $56 billion pay packet in 2018 from electric car producer Tesla was unlawful, annulling the decision to grant it. This is a huge ruling and will have significant implications for corporate governance.
The judge, Kathaleen McCormick, has found that the directors wrongly granted the pay packet, which was at the time the largest ever in US history. This salary was a large factor in contributing to Musk’s overall wealth, seeing his net worth rocket to a high of $220 billion in late 2023.
To clarify, Musk does not actually receive a base salary, and is instead compensated via stock options most of the time (as is relatively common practice with top executives). Musk’s salary in 2018 was not simply through being handed stocks, however – instead, the pay packet included a term stating that his stock options would be dependent on Tesla reaching certain share prices and levels of profitability. Musk reached these targets relatively quickly.
A minority shareholder (owning just 9 Tesla shares), Richard Tornetta, launched legal proceedings soon after. The main argument being put forward was that shareholders were not given enough details on how easily achievable the targets would be for Musk.
Musk’s lawyers argued that the pay packet was justified – largely because of the fact he was actively involved in a number of different businesses (SpaceX, Neuralink, etc), and so the higher pay based on performance targets effectively incentivised him to put more attention into Tesla.
On the other hand, Tornetta’s team suggested that Tesla’s directors were simply ‘starry eyed’ over Musk’s ‘superstar appeal’, and so granted a far higher pay packet than reasonable. An additional point made was that the compensation committee at Tesla included a number of individuals who had close personal relationships with Musk, thereby leading to accusations of bias. Committee chair Ira Ehrenpreis was singled out for this issue in particular. As a result, the directors ‘were beholden to Musk or had compromising conflicts’, invalidating their salary decision.
Judge McCormick was in favour of Tornetta’s claim, and so ruled against the pay packet. Musk’s response has been furious – on X (previously Twitter), he now writes: ‘never incorporate your company in the state of Delaware’. Tesla, like many large US companies (Amazon is another example) is based there primarily due to the relatively low corporation tax system in place. In the aftermath of this ruling, Musk has threatened to relocate Tesla to Texas (where many of its physical operations are based).
Of course, this decision is based on the law as applies in Delaware (and to some extent the US as a whole). In the context of England and Wales, an entirely different regime applies (though sharing many similar themes).
The main statute here is the Companies Act 2006. Directors are not automatically entitled to a salary at all via their position. Instead, this is largely dictated by the company’s constitution (often via model articles), which set out how the company should run day-to-day. There will usually also be an employment contract in place with the directors, meaning directors are contractually entitled to a salary too.
The setting of directors’ salaries in England and Wales does not always involve shareholders (no need to vote on a ‘resolution’ of any type), especially if it is seen as rather routine. However, unusually high salaries or extra-long employment contracts require shareholder approval via a resolution (a vote).
Furthermore, once the decision has been made, minority shareholders (like Tornetta) in the UK have a number of remedies they can pursue if they feel the company has not been acting in their best interests. This might include a claim that the granting of such a high salary to a CEO has unfairly prejudiced the members (shareholders) [s994], or a derivative claim [s260] stating that the company has suffered as a result of a breach of duty (there are many duties for directors under CA 2006 – the bias issue here could violate the independent judgment duty under s173, for example) by the directors deciding on a salary.
Aspiring lawyers looking to analyse this case as part of their application cycles coming up (for example, as part of applications to training contracts or vacation schemes as solicitors, or pupillages as barristers) have a number of points to discuss.
These talking points could form useful grounds for discussion both on the application form and further on during the interview stage. For example, in a commercial awareness-focused interview as part of an assessment centre – many top firms have been known to set aside a whole interview just for this topic, with Magic Circle firm Allen & Overy being just one example.
Many of your clients are likely to be corporate in nature if your legal practice takes you into the City (though even local high-street solicitors will need to understand these points in order to advise local businesses to some extent). There are many key points from this story which you will likely have clients asking you:
This story contains a large number of talking points for aspiring lawyers to discuss, and touches upon topics which are likely to come up in practice very regularly for those based in the City. It provides a chance to anchor the interest in corporate law which you are trying to demonstrate with a tangible example that provides excellent opportunity for further discussion.
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