A Delaware judge has ruled Elon Musk has to forfeit $56bn of Tesla share awards from a long-term pay package, causing a storm at the electric-car maker and threatening to distract its boss from troubles at the company and across his business ventures.
“Never incorporate your company in the state of Delaware,” Musk commented on X, the social media platform he owns.
Here is what the ruling means, if upheld, for the billionaire and his empire.
Why was the pay deal so generous?
In early 2018, when Tesla laid out the pay incentive scheme for Musk, many saw it as fanciful. The deal was intended to lock him into the business at a time when the board was worried he might turn his attention to SpaceX or other ventures full time instead.
The scheme set out 16 separate financial targets spread across profits, revenues and market capitalisation, and awarded Musk stock worth about 10 per cent of the company. If he were to hit 12 of the 16, he would be able to vest shares worth upwards of $50bn — the largest pay package ever granted.
The most ambitious targets were for revenues of $175bn, adjusted earnings of $14bn and a market capitalisation of $650bn.
At the time, Tesla’s market value was $59bn and as part of the deal, Musk — who receives no salary or any other pay from the carmaker — would get nothing if the valuation did not reach the $100bn mark.
Back then it was not a given prospect: Tesla was in the midst of “production hell”, building cars in a tent in its car park, while making some models without seats or computer modules because of supply chain fumbles.
With previous production milestones missed, just $12bn in sales and the company scraping barely $400mn in profits, targets of overtaking General Motors in revenues and Microsoft in valuation seemed unattainable.
“No one took it seriously,” said a former Tesla insider.
Yet the company increased output, sales soared, and shares rose past those in Toyota, topping $1tn in overall market value. Last year its Model Y, launched in 2020, became the best-selling car worldwide.
“He did it, and no one else in the world could have done it, and if the price tag is $56bn, that’s the price tag,” said one former Tesla executive. “He’s Ronaldo, he’s Messi. He can ask for what he wants.”
Who are the shareholder(s) behind the suit?
The lead plaintiff is an individual, Richard J. Tornetta, who attested in a 2018 affidavit filed in Pennsylvania that he was a “continuous holder” of Tesla shares during the time of the Musk stock grant.
Delaware court filings show Tornetta in 2019 had sued Pandora and Sirius XM over their merger whose terms he believed short-changed Pandora shareholders.
Tornetta’s Tesla complaint is filed on behalf of all shareholders and is a so-called ‘derivative’ action, a lawsuit brought by a shareholder or group of shareholders.
The initial complaint asked for damages to be awarded though the ruling imposed a penalty of “rescission”, Musk handing back the shares to Tesla.
The Delaware court agreed with the plaintiff that Musk “controlled” Tesla even with just a 20 per cent stake in 2018. As such, the board had to show it struck the pay package through a “fair” process and at a “fair” price, a steep burden it could not ultimately satisfy.
What does the ruling mean for Tesla’s governance?
The ruling “creates a tornado situation for Tesla’s board”, said Dan Ives, an analyst at Wedbush, who believes the board will either appeal against the decision or draw up a new package.
Independence has long been a problem at the company, while past efforts to expand oversight by Tesla’s board have yielded scant fruit.
Tesla directors include Musk’s brother Kimbal, longtime associate James Murdoch, and JB Straubel, one of Tesla’s co-founders. Robyn Denholm, who has been chair since late 2018, has been a director for a decade.
After Musk tweeted he had “funding secured” to take Tesla private in 2018 — prompting the US Securities Exchange Commission to charge him with securities fraud — the board tried to curtail his use of the platform.
These efforts have failed: Recent messages from Musk, who bought Twitter for $44bn in 2022 and rebranded it as X last year, include opinions on US immigration, handwriting and chickens.
Musk receives little or no resistance from those intended to rein him in, former Tesla executives say.
“Is there anyone on the [Tesla] board who is showing the slightest bit of pushback on anything?”
Philippe Houchois, auto analyst at Jefferies, said the latest saga might spark governance changes. “It is too risky for the board to carry on as it is,” he said. “I think it won’t be rubber stamping [Elon’s wishes] any more.”
Yet if the board’s job is to make shareholders wealthier, defenders of the scheme argue those who purchased shares in 2018 or earlier have been well rewarded.
Tesla’s market capitalisation rose 20-fold to about $1.2tn last year. Even with a recent slide to roughly $600bn, investors are sitting on a 10-fold return, a better performance than if they had invested in Amazon, Meta or Netflix over the same period.
A former Tesla director said: “The board and the investors have made so much money that they almost look the other way.”
What is the potential fallout for Tesla as a business?
After a decade of dominance, the carmaker is facing stiff competition in EVs: China’s BYD overtook the business late last year to become the world’s largest maker of battery-only vehicles. Tesla is developing a low-cost model due to begin production in late 2025 and is increasing deliveries of its Cybertruck, while contending with slowing growth.
“Tesla was an anomaly in the car industry,” said one former executive at the company and a car industry veteran. “But today it’s behaving more like a car company. It’s falling behind because the market is saying now there are other options.”
As EV demand slows, Tesla slashed prices to boost sales, angering current owners as their cars depreciated.
Some question Musk’s recent decisions, which have coincided with some of its strongest executives departing.
In a recent note, Houchois at Jefferies criticised Musk’s “cavalier attitude towards governance and fiduciary duties”, a record of “misallocating his own capital” and “questionable strategic and product priorities at Tesla that have undermined growth, returns and management cohesion”.
Will there be consequences for Musk’s other ventures?
The Delaware ruling threatens to curtail Musk’s plan to finance his growing business empire by borrowing against his Tesla stock.
Musk said on X this month that he wanted to increase his stake in Tesla to 25 per cent — from his current 13 per cent, according to regulatory filings — in order to develop its AI products. The 2018 plan granted him another 304mn of share options, which, if exercised, would have boosted his stake to about 20 per cent.
When the carmaker reported its quarterly results last week, he said he wanted to turn Tesla into an “AI juggernaut” but, he added, “if I have so little influence at that stage I could be voted out by a random shareholder advisory firm”.
Even before the Twitter acquisition, Musk backed a series of ventures. They include SpaceX, his rocket business, Neuralink, which is developing brain implants, xAI, an artificial intelligence venture designed to compete with OpenAI, and the Boring Company, which is digging transportation tunnels under Las Vegas and Los Angeles.
The billionaire entrepreneur has long claimed to be cash poor, with the majority of his wealth tied up in Tesla and SpaceX equity. Analysts have estimated he has pledged tens of billions of dollars’ worth of stock as collateral for loans.
In 2022, to help fund his Twitter acquisition, Musk sold more than $20bn worth of his Tesla stock, and pledged even more for a $12.5bn margin loan though the latter was never executed.
Tesla’s most recent annual proxy filing last year showed that as of March 31, Musk had pledged about a third of his shareholding — or roughly $49bn — including stock received from the 2018 award at issue in Delaware. If the 2018 award is forfeited, more than half of his stock in the carmaker would be tied up as collateral.
That level of borrowing has been a concern to corporate governance advisers. “The significant number of pledged shares raises concerns regarding the audit committee’s ability to effectively oversee risk at the company,” warned Institutional Shareholder Services ahead of last year’s annual shareholder meeting.
The easiest way for Musk to shore up his finances without selling more stock in the carmaker would be to sell shares in SpaceX. The privately held rocket company was reportedly valued at $180bn in a share sale in December and is seen as hot prospect for an initial public offering.
Additional reporting by Euan Healy in London and Tabby Kinder in San Francisco