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A Delaware judge on Friday expressed skepticism that a Tesla shareholder vote would give her grounds to reinstate the record $56 billion pay package for Elon Musk that she invalidated earlier this year.
During a daylong hearing before Kathaleen McCormick in Delaware Chancery Court, lawyers for Tesla and its board admitted they could not cite any precedent that would allow shareholders to override the court decision that the board had breached its legal duty by approving the package.
But they insisted that a Shareholder vote in June Reapproving Musk’s original 2018 package should give him grounds to reverse course and create a new law.
“This [vote] “Shareholder democracy was working,” said David Ross, a lawyer for Tesla’s directors.
The hearing comes as McCormick considers a request from Tesla to return to Musk the roughly 300 million-share package it canceled in January when it found Tesla’s board had been too close to Musk to fairly assess compensation. A shareholder vote to approve the package in 2018 was tainted, he ruled, because investors were unaware of the board’s conflicts.
Billionaire CEO Musk was infuriated by the decision and Tesla put the 2018 package to a shareholder vote in June. It was approved and Tesla went back to court to ask McCormick to reconsider his decision.
McCormick on Friday described the June “ratification” vote as a “risky legal strategy.”
“If this board wants to meet to pay a lot of money [to Musk]“That’s within a new fiduciary decision,” McCormick said, wondering whether it wouldn’t be cleaner for Tesla to simply design a new payment scheme.
“Let us respect the purpose. If the shareholders want, they can vote for or against. [on a new pay package]But we can’t have a continuous recursive loop,” McCormick said.
Tesla’s lawyers insisted they were not seeking to completely vacate the January ruling. Instead, they said McCormick could simply return the stock award to Musk, respecting the latest shareholder vote without altering his findings that the 2018 board had breached its duties.
Ross noted that shareholders were fully informed, having received a copy of the 200-page ruling detailing flaws in the 2018 payment process in their proxy materials prior to the vote.
McCormick repeatedly interjected during Tesla’s lawyers’ arguments, trying to elicit information about the legal doctrines and cases they were relying on to push for revocation. At one point, he noted that the proxy statement sent to shareholders offered legally more aggressive theories than those Tesla has now put before the court. “It’s very creative,” he said at one point.
Greg Varallo, the attorney for the Tesla shareholder who brought the case, told the court that Tesla’s only remaining recourse over the January ruling was a judicial appeal to the Delaware Supreme Court.
Despite McCormick’s findings about conflicts between Musk and Tesla board members, the company and many shareholders believe he has earned his massive paycheck.
The 2018 pay package included a number of operational and valuation milestones, which Tesla met as its market capitalization soared to $1 trillion in 2021 from less than $100 billion in 2018. Several shareholders large and small said Musk deserved to be rewarded for that outcome. Musk himself has threatened to turn his attention elsewhere if he doesn’t receive a large enough stake in Tesla.
McCormick summarized Tesla’s arguments to Varallo: “The [Tesla] Shareholders want what they want. They want to pay Mr. Musk. [an award] “The court has found that it is unfair and violates fiduciary duty. It would be good for Delaware to see this happen,” he said, referring to the idea that shareholders should have a say in major corporate governance actions.
“I thought it was about equal justice under the law. I argue that’s good for Delaware,” Varallo said, acknowledging his client’s ability to litigate against one of the world’s richest men despite owning fewer than 200 shares of Tesla.
Musk has publicly complained about Delaware law since the decision was made. In June, shareholders also agreed to allow Tesla to move its headquarters to Texas, as Musk had requested, and he moved the legal domiciles of two other companies he controls (SpaceX and Neuralink) from Delaware to other states.
McCormick said he would take the arguments into consideration and rule later. considering How much should be awarded to the plaintiff’s lawyers in the case, who have sought billions of dollars in Tesla stock as fees for winning the case?