Elon Musk’s $46 bn pay: How Tesla shareholder nod could play out in the courts

Elon Musk, Chief Executive Officer of SpaceX and Tesla and owner of X, formerly known as Twitter. (File Photo: Reuters)
Elon Musk, Chief Executive Officer of SpaceX and Tesla and owner of X, formerly known as Twitter. (File Photo: Reuters)


The carmaker’s CEO says so far, shareholders were approving the package by a wide margin. But a vote to reapprove the agreement is unlikely to end legal challenges.

Tesla shareholders are set to decide Thursday whether to reinstate a pay package for Elon Musk that was thrown out by a judge. Musk said late Wednesday that so far, shareholders were approving the package by a wide margin.

But a victory for Musk is unlikely to put the issue to rest.

Shareholders signed off on the pay package of stock options, now valued at roughly $46 billion, in 2018. A Delaware judge, Chancellor Kathaleen McCormick, overturned it earlier this year, concluding the board was conflicted when negotiating it. Now Tesla wants shareholders to reapprove the same pay deal, saying their support would help the chief executive get pay that the electric-vehicle maker says he earned.

Legal experts say that even with shareholder approval, it is unclear how soon Musk could actually be paid. Here is how the situation could play out.

Will a fresh shareholder approval of the pay deal end the court fight?

Probably not.

The Delaware lawsuit started when Tesla shareholder Richard Tornetta, a heavy-metal drummer, sued the company in 2018. He alleged that Musk influenced the board as it negotiated his pay package and that the board misled shareholders who signed off on it.

The judge effectively agreed when she threw out the pay package. She deemed Musk a controlling shareholder of the company and concluded shareholders weren’t fully informed in their 2018 vote.

While pay packages for typical CEOs require approval from either an independent board or committee or independent shareholders, pay packages for controlling shareholder CEOs usually need signoff from both.

With a fresh shareholder approval, Tesla is hoping it can persuade the Delaware judge to change her ruling. Tesla could point to it as an informed shareholder vote, but it might not address the need for an independent committee’s approval, some lawyers say.

If the Delaware court doesn’t dismiss the case, the company could try arguing on appeal that Musk isn’t a controlling shareholder. If it wins that point on appeal, that—coupled with the new shareholder vote—could be enough to have the case dismissed, said Eric Talley, a law professor at Columbia University.

What might happen to the shareholder who sued Tesla?

Though Tornetta already earned a victory in court, he and his team are waiting for another crucial ruling. His lawyers in January sought some 29 million shares in Tesla, then valued at $5.6 billion, and a further $1 million to cover expenses. That award would result in a record payout for legal fees if approved.

The judge still has to decide how much to award them. A hearing is scheduled for July 8.

Tesla hopes that approval of the pay package by shareholders could limit the fees, which are tied to the benefit provided to Tesla shareholders.

So, would a ‘for’ vote help Musk get paid?

Not so fast, some lawyers say.

Tesla is pursuing two legal avenues at once with the vote. In addition to arguing a new vote addresses the judge’s concerns, Tesla is also betting the vote could ratify the pay package under a provision of Delaware law that allows companies to correct defective corporate actions. Known as Section 204, it is more typically used to address bureaucratic issues such as improper documentation.

If the pay package is ratified, Tornetta’s lawyers are likely to challenge both avenues, especially the unusual application of Section 204.

They could also suggest the new vote was coerced, pointing to recent tweets by Musk. One in particular suggested that unless he can amass roughly 25% voting control in the company, he might focus on projects outside of Tesla. He currently controls a much smaller portion of the vote.

“Mr. Musk seems to be making very thin threats about what he’ll do if they vote against it," Talley said.

What about the vote to move Tesla to Texas?

Tesla is also asking shareholders to approve the company moving its incorporation to Texas from Delaware. Musk on Wednesday evening said that measure is also poised to pass by a wide margin.

Assuming the move becomes official, a new case could be brought against the pay package in Texas. If that is decided before the Delaware appeal plays out, it could take precedence.

Still, McCormick, who is overseeing the case, seemed to reject this idea recently. She said that she interpreted recent communication by Tesla to mean they “do not plan to litigate any matter related to this action anywhere but Delaware."

—Emily Glazer contributed to this article.

This article might be updated periodically.

Write to Corrie Driebusch at corrie.driebusch@wsj.com

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