Is a trial lawyer worth 100 Elon Musks?
Attorneys seek $5.6 billion for convincing a Delaware court that the CEO is overpaid.
In rejecting Elon Musk’s $55.8 billion pay package, the Delaware Chancery Court applied straightforward corporate law. But the decision should still worry companies incorporated in the state.
The court spends much of its 201-page opinion attacking the value of “superstar" CEOs and the importance of individuals to corporate achievement. While superstars are lauded in sports and entertainment, in Delaware the value of the best CEOs is in doubt.
The collectivist notion that no single person can make a huge difference suffuses the opinion, which asserts that Mr. Musk and other superstar CEOs are merely lucky people who “directors, investors and markets believe make a unique contribution to company value."
The court also assails directors, claiming their belief in a CEO’s value “could be wrongly held." Board members may be delusional. According to the court, the Tesla board was “starry eyed by Musk’s superstar appeal."
That’s not all. The court belittled Mr. Musk’s value. Tesla’s lawyers justified Mr. Musk’s pay because he enabled unimaginable growth relative to competitors. The court called this a “hard sell" because executives at rival companies perform the “same task" as Mr. Musk.
The opinion noted six times that Mr. Musk was paid more than CEOs of peer companies. When he entered into the pay deal six years ago, many industry analysts doubted the milestone goals the board set for him were achievable. They were. Tesla was then worth a bit more than General Motors. Today its value exceeds that of the Big Three, Honda and Toyota combined.
Most troubling, the court speculated that maybe Mr. Musk shouldn’t have been paid at all, because “where an executive has a sizeable pre-existing equity stake, there is a good argument that the executive’s interests are already aligned with those of the stockholders."
But Tesla had to compete for Mr. Musk’s attention with other companies he runs, such as X and SpaceX. The country’s leading business court doesn’t appear to understand the need to encourage Mr. Musk to focus on Tesla.
The lawyers who persuaded the court to nullify Mr. Musk’s salary are seeking fees of $5.6 billion. It is a strange world in which lawyers who sue companies propose to be paid like superstars, while executives who build them can’t.
The Delaware Chancery Court apparently views lawyers as entrepreneurs and CEOs as mere bureaucrats. Perhaps this is why Tesla’s board recommended shareholders vote to move the company to Texas, where respect for individualism is baked into the culture.
Tesla’s board has resubmitted Mr. Musk’s pay package to shareholders for a vote. Three of four independent shareholders already approved it, but the court ignored their votes. Delaware should clean up this mess by allowing Tesla to abide by the second shareholder vote. Restoring Delaware’s reputation as a hospitable place for capitalism and individualism will be far more of a challenge.
Mr. Macey is a professor at Yale Law School. He has done corporate-governance consulting work for Tesla. Mr. Henderson is a law professor at the University of Chicago and a visiting fellow at the Hoover Institution.
