Delaware judge again blocks Tesla’s plan to give Elon Musk over $50 billion

Elon Musk may have helped reelect Donald Trump and won influence in the new administration. But an appointed Delaware judge has dealt his best-known company, Tesla, another rebuke in its attempt to grant Musk more than $50 billion in additional company stock.

In her second 100-page-plus opinion on the case this year, Chancellor Kathaleen McCormick, the head of Delaware’s business-friendly Chancery Court, ruled that a June 13 vote in which 72% of Tesla shareholders approved the record payout doesn’t change what she found in her January opinion: that Tesla’s directors have failed to show Musk’s extra payout was fair to those same shareholders.

McCormick listed “fatal flaws” in Tesla’s request she reconsider her original decision: The shareholder vote didn’t change and wasn’t designed to fix the problems with the grant; Tesla’s Musk-controlled board didn’t resolve the conflicts of interest McCormick flagged in her original decision; and the “multiple, material misstatements” in Tesla’s campaign to win shareholder support, falsely claiming the vote by itself could get Musk his money, made the vote invalid.

McCormick also noted that Tesla’s “large and talented group of defense firms got creative” in pleading “unprecedented theories” that were not supported by law; while the board could have, but failed to, use guidance in her January opinion to change its composition so it was less dependent on Musk, and negotiate a new bonus in “a range of healthy amounts.”

She also approved a $345 million payment in stock or cash — Tesla’s choice — to Wilmington lawyer Gregory Varallo and other attorneys for Richard J. Tornetta, the suburban Philadelphia Tesla shareholder who sued to stop the payout. Those lawyers had applied for $5.6 billion, or about 10% of what they would save shareholders by preventing Musk from getting the bonus. McCormick called the smaller award “an appropriate sum” to reward their “total victory.”

The judge found that it wasn’t enough that Musk won a majority of shareholders to his side by meeting tough financial and production goals and boosting Tesla’s share value to far above that of any other auto manufacturer. Indeed, Vanguard Group, the Malvern-based investment giant that is Tesla’s largest outside investor with around 9% of the stock, voted against the original bonus plan in 2018, but endorsed the 2024 payout, noting that Musk had met its targets.

Musk responded with a terse message on X, the social media company he was forced to purchase by a previous McCormick decision after he tried to back out: “Shareholders should control company votes, not judges,” Musk wrote.

“The court’s decision is wrong, and we’re going to appeal,” Tesla said in a separate statement, also posted to X. The company accused McCormick of having “overruled a supermajority of shareholders who own Tesla” and who had voted “to pay @elonmusk what he’s worth.”

“She’s right,” countered Charles Elson, a Wilmington-based corporate governance expert who filed a brief in the case, supporting shareholders who challenged the payout. “The Delaware Chancery Court’s whole mission is to protect investors, so people can commit capital. And they did.”

“This ruling isn’t a surprise,” he added. “It’s not antibusiness, unless you define business as taking advantage of your shareholders.”

A simple majority of shareholders is enough to pass a reasonable pay plan explained by mainstream business considerations, Elson noted.

But McCormick ruled in January that Tesla had failed to make a convincing case for the unprecedentedly larger payments to Musk, who, she noted, had said he would stay at Tesla, where he is the largest owner, whether or not he got the additional shares.

If a company fails to justify such an expensive use of company assets, even a minority of shareholders can successfully object to such a large payment, Elson said. “You can’t have one set of rules for most people, but another for superstars. No one is above the law.”

Tesla shares have risen since the January decision. The stock traded Tuesday at around $350 a share, below its 2021 high of around $385, but double its January price.

Despite President-elect Trump’s threat to end federal subsidies for electric vehicles, Tesla shares surged after a positive third-quarter sales and earnings report, and Musk’s promise to turn the company into a manufacturer of $20,000 personal Optimus robots.

Elson said companies like Tesla provoke an “emotional” response among many investors “based on the personality of the leader. He can do what he wishes, or what his banks allow him to do, with X.com,” which Musk owns privately. “But when you trade in public markets [as Tesla does], you have to accept your legal responsibilities.”

McCormick is the same judge who had previously ordered Musk to go ahead with his $44 billion purchase of Twitter after he tried to back out.

After previous Delaware decisions went against him, Musk and many of his supporters complained about the use of judicial decisions to limit CEO power and overrule pro-CEO shareholder majorities, and moved to reincorporate his companies’ legal bases outside Delaware.