Tesla board wants shareholders to approve Elon Musk’s giant pay package. Critics say it’s so big, it’s illegal.

Tesla Inc. “Technoking” Elon Musk (his official title) and his board have sent shareholders more than a dozen appeals since early April, urging them to approve a record-breaking stock package worth over $50 billion to Musk. They are asking shareholders to vote by Tesla’s scheduled annual meeting June 13.

But corporate governance critics who urged Delaware Chancellor Kathaleen McCormick to block an earlier version of the stock package — under guidelines approved by shareholders in 2018 — say the new vote won’t make that very large award legal, even if Musk wins the new shareholder vote.

The vote is designed to replace an earlier version of the pay package, blocked in January by McCormick, who found that Musk unfairly “dominated” the process of setting his own pay and neglected rules for setting executive compensation at publicly traded companies.

Musk already owns Tesla stock worth over $70 billion and has said he’ll keep running Tesla, even if he doesn’t get the extra shares. The new shares would give Musk direct ownership of 22% of Tesla, up from the current 13%, according to shareholders’ advisory firm Glass Lewis Inc.

Besides the share grant vote, Musk also wants shareholders to approve moving the company’s legal home to Texas so future disputes can be tried far from what Musk calls the “uncertainty” of Delaware, which calls itself “America’s corporate capital” for the large number of companies that are chartered there and use the state’s business-friendly Court of Chancery to resolve disputes.

Ratification of the revised proposal would reward Musk for Tesla’s “unprecedented growth” and “restore Tesla’s shareholder democracy,” Tesla board chair Robyn M. Denholm, an Australian accountant who has become a multimillionaire from Tesla stock grants, said in a 1,500-page April 29 proxy statement to company shareholders.

Despite complaints by corporate managers like Musk when decisions go against them, corporate-law scholars say Delaware has been the favored legal home of U.S. corporations because of predictable, speedy dispute resolution by its appointed Chancery Court judges. Texas is setting up its own business courts, where plaintiffs who sue companies will be able to pick which of Texas’ 254 counties to go to trial, and demand trials by jury, which corporations often prefer to avoid.

Despite those limitations, Musk hopes courts in Texas, where Tesla is now based, will be less critical of his actions than Delaware, where McCormick previously forced Musk to honor his $44 billion agreement to buy Twitter when he tried to renege.

But the lawyers who challenged the earlier pay package on behalf of a small Tesla investor, Richard Tornetta, a former heavy-metal drummer from Norristown, have filed additional motions arguing that shareholders’ approval should “not ‘restore’ to Mr. Musk” his stock or options grants — even if the vote goes Musk’s way — until further litigation over how Tesla is governed gets resolved under Delaware corporate law.

“He’s going around telling everyone that if this vote goes through, he gets the money. But that’s not how it works,” said Charles Elson, Wilmington-based vice chairman of the American Bar Association law section’s corporate governance committee and a longtime consultant to large corporations.

Under Delaware corporate law, it’s not enough for a CEO share grant to be popular with other shareholders. In her ruling, McCormick called Musk’s package unfair, citing his dominance over other directors, as well as the failure to detail those relationships in the earlier vote.

Another “vote won’t cleanse that,” Elson said. To be sure, a company has the right to give billions away, even if it can’t justify it as a business decision, but such a vote has to be unanimous.

Elson submitted a friend of the court brief critical of the company’s pay plan, because it addressed questions of fairness that go beyond Tesla. In a subsequent filing, Elson says Tesla retaliated by threatening to fire the Holland & Knight law firm, where Elson had been a consultant since 1995, from a case in which a Holland & Knight partner in Philadelphia was defending Tesla against an employees’ racial discrimination case. Under pressure, Elson resigned the consulting job.

“Tesla’s board seems to be selling the re-vote to stockholders as a way of overturning the court’s order,” said Joel Fleming, who represents Elson.

Tesla’s lawyers argued last month that Elson and the shareholders’ lawyers who filed motions to keep the Delaware litigation going are just trying “to influence the outcome of stockholder votes at Tesla’s June 13 annual meeting, rather than to address actual issues.”

Rudolf Koch, a Wilmington corporate lawyer at the firm Richards, Layton & Finger who is representing Tesla in the Chancery court, declined to comment.

In his filings and social media posts, Musk says he’s fighting for “shareholder democracy.” His critics say they’re the ones fighting for the true interests of Tesla shareholders and against a massive giveaway.

In the previous vote on Musk’s share grants in 2018, more than 70% of voting shareholders approved the proposal, which would award him a fortune in shares if the company’s sales and profits rose far and fast — which they did.

Musk is popular with investors for convincing many Americans to drive electric cars. Though Tesla stock has lost more than half its value since its peak in 2021, the company remains far more valuable than larger rivals Toyota, Honda, Ford, or GM, because its rapid growth suggests big profits ahead.

Around 40% of shares are owned by institutional investors, led by Malvern-based Vanguard Group, BlackRock Inc., and State Street, the big index-fund investment firms. The rest is owned by individuals and other direct investors, some of it by Tesla employees and directors.

Vanguard and some other large holders voted against the Musk pay package when it was proposed in 2018.

On Thursday, Institutional Shareholder Services, which advises institutional investors on governance questions, urged shareholders to vote against Musk’s pay package, calling it “outsized.” ISS also noted uncertainties in relying on Texas’ unproven business courts, but said it wouldn’t oppose the move, since it’s unlikely to change shareholders’ rights.

On May 25, Glass Lewis another adviser to institutional investors, also urged shareholders to reject Musk’s pay package, citing its large size, negative impact on existing share values, and Musk’s extensive involvement with companies other than Tesla. Glass Lewis had also urged investors to vote against the original pay package when it went before shareholders in 2018. Tesla discounted Glass Lewis’ statement as based on “speculation” and ignored Tesla’s success under Musk.

Vanguard and most other big investors have not yet said whether they will support Musk’s pay package this time.

On May 20, the labor union-affiliated SOC Investment Group filed a statement with the SEC urging other shareholders to oppose the pay package and to withhold votes from two Musk supporters who are up for reelection to the board: Kimbal Musk, Elon’s brother, and James Murdoch, a former executive of his family’s Fox media empire.

On May 21, New York City Comptroller Brad Lander, on behalf of city workers’, public-school employees’, police, and fire pension plans, also urged a “no” vote on Musk’s pay, stating that “there is ample evidence that the board is overly beholden to CEO Musk” and noting that the board members who support the plan have themselves made multimillions from it, making it tough for them to represent other investors fairly.

Musk has many fans who have taken to his X.com social media network to urge shareholders approve his pay package. But one of Tesla’s largest individual investors, Singapore real estate billionaire Leo Koguan, announced on Musk’s social media network earlier this month that he is voting against the pay package and against moving its legal base out of Delaware.

Once a public admirer of Musk, Koguan has lately challenged whether the Technoking can effectively run multiple companies. On May 16, in reply to the Tesla board’s energetic “Vote Yes” effort, Koguan urged investors to vote against it, adding that “Papa” Musk has been treating shareholders “like insects.”