Will Delaware let Elon Musk collect his $50 billion from Tesla after all?

Lawyers for Tesla will gather in a Delaware courtroom Friday to once more ask Chancellor Kathaleen McCormick to approve a record stock grant worth around $50 billion to chief executive Elon Musk now that shareholders, including Vanguard Group, have given the go-ahead over objections from Musk’s critics.

“Now that [Musk] has the votes to ratify the grant, it will be much harder for the chancellor to say these shareholders were wrong,” predicted Lawrence H. Hamermesh, a longtime Widener University Law School professor and a member of the Corporation Law Council that drafts updates of Delaware’s nationally influential business statutes.

McCormick in January had blocked the payout, citing the unprecedented size of the award, Musk’s influence over board members who recommended the payout, and the company’s failure to make those relationships clear.

In ballots counted at Tesla’s annual meeting June 13, some 72% of shareholders approved the payout. They also approved Musk’s proposal to take Tesla out of McCormick’s jurisdiction by moving its legal home to Texas.

But, as critics argued in court filings after the vote, Tesla still has to win the Delaware case and reverse McCormick’s denial before Musk can collect.

In their brief arguing that it’s time to give Musk his extra billions, lawyers for the company urged McCormick to approve the payout in light of the June vote. Musk, the world’s richest man, already owns Tesla stock worth $90 billion.

Whatever the court’s concerns about the 2018 plan, the June balloting, following McCormick’s 200-page decision, was a “fully informed shareholder vote” and approval would be “valid and effective under Delaware common law,” Tesla attorneys said.

Tesla lawyers concluded that Musk’s critics, including lawyers for Richard Tornetta, the Philadelphia-area shareholder who was named plaintiff in the challenge to the award, and Wilmington-based corporate-law expert Charles Elson, who has filed a separate brief opposing the Musk award, were wrong to consider the June vote “a gimmick” or a mere “public relations victory.”

Elson says McCormick properly called the award illegal, even if the CEO’s shareholder-supporters later approved, because the company was unable to point to comparably huge awards by other companies — ever.

But court decisions in Delaware and elsewhere have supported the idea that shareholders know “their own best interests,” Tesla lawyers argued to the court. The company called critics a “self-appointed” minority that shouldn’t have standing to stop Musk’s extra pay.

Vanguard Group, among the opponents of Musk’s grant when it was proposed in 2018, switched to supporting the payout in the June vote — a significant swing since Vanguard, on behalf of its investor-customers, is Tesla’s largest shareholder, after Musk himself.

Vanguard justified its reversal to support the record award to Musk in a newsletter it sent customers after meeting with Musk’s management team and members of his board. Vanguard wrote that the giant grant of 300 million options “is a significant outlier,” far in excess of what other companies have paid even the most successful executives.

Vanguard said its funds voted against the performance stock grant proposal in 2018 because it would have resulted in big payments to Musk even if Tesla’s stock “did not outpace other companies.”

However, since 2018, Tesla did, in fact, “significantly outperform” other stocks, beating 98% of the companies on the Russell 3000 stock index.

And given Tesla’s size — with $25 billion in revenues, it is half the size of General Motors and also smaller than Ford, but Tesla’s stock value is more than six times those two companies combined — “there are few companies that have created as much absolute market value appreciation as Tesla,” Vanguard noted.

Vanguard also gave weight to statements by Tesla directors that it is important to keep Musk as CEO and that the award would help “motivate” him to remain because it requires him to hold his new shares for five years. However, McCormick in her January ruling noted that Musk has said he would stay with the company even if he doesn’t get the award.

McCormick’s decision could be appealed to Delaware’s higher courts..

Vanguard joined the majority voting to approve Musk’s plan to move the company’s legal home to Texas, where Tesla is based. Musk has criticized Delaware’s business-friendly Chancery Court, not only for blocking his Tesla award, but for forcing him to buy Twitter (now X.com) after he tried to back out. Vanguard says it doesn’t see significant differences between Texas and Delaware corporate law, so it supported Tesla’s request.

Elson, the corporate-governance expert, worries that Delaware lawmakers are increasingly bowing to corporate pressure and have begun changing the state’s influential business laws in an effort to please corporate critics.

In a recent column for the London-based Financial Times, Elson cited a Delaware law signed by Gov. John Carney earlier this summer that, in Elson’s account, would allow corporate managers to cut “secret side deals with big shareholders,” bypassing the board and public disclosure.

Elson warned that this reverses Delaware’s trend of the past 40 years toward more disclosure and respect for “shareholder authority.” He predicts that investors “will turn elsewhere,” maybe to federal courts, to protect their stakes in companies with runaway managers.

Hamermesh, the law professor at Widener, says Elson’s complaint is overstated. It doesn’t mention the Tesla dispute or other recent attacks by disgruntled litigants on the state’s business courts.

Rather, according to Hamermesh, the law is designed to protect long-standing management-shareholder deals against challenges following a recent Chancery decision reversing one such deal, which had given investment banker Ken Moelis extra management powers at his own publicly traded company, Moelis & Co.

Because it threatened long-standing arrangements at other companies, that decision has caused more unrest in the small but high-stakes world of Delaware corporate law than Musk’s migration of Tesla and some of his other companies out of Delaware, Hamermesh said.

What corporations value most is “predictability” in the law and its enforcement, he said.

He cautioned against seeing other court and legislative decisions as shining any light on whether Musk will get his money.

“With Musk, the story’s not over,” Hamermesh said.

Buoyed by the shareholder votes, Musk is moving Tesla’s legal home out of Delaware, no matter whether or when he gets paid.

Hamermesh says that’s all right: “The votes are in. It’s the people’s right to make decisions. If he wants to take his marbles and go to Texas — go. We have standards to uphold.”