A Last Word on Mr. Musk and His War on Delaware

It is finally over. After years of wrangling and far-flung attacks on the Delaware judiciary by Elon Musk, the final legal resolution of his Tesla compensation controversy has been handed down by the Delaware Supreme Court. The result is not pretty. The compensation baby was rhetorically split. Hopefully, I can explain the Court’s seemingly contradictory resolution of the matter and how it will affect executive compensation and director duties more generally.

In 2018, the Tesla board granted the largest executive pay package ever to Musk, reportedly to incentivize him to deliver significant significant future shareholder value. As a result, he was ultimately paid multi-billions for his efforts. A shareholder sued arguing that the compensation granted was improper.

After several years of posturing by both sides and a lengthy trial, the Chancellor of the Delaware Court of Chancery ruled that the package in its inception was highly flawed and ordered its recession. Even two shareholder votes in favor of the package by a 70-to-30 vote would not justify the compensation award. Musk proceeded to attack the judge in particularly vicious terms and urged other companies incorporated in Delaware to exit the state.

As a result, Musk moved Tesla’s state of incorporation from Delaware to Texas. His board, now basically immune from legal action in Texas, then simply awarded him the same package that was denied by the Chancellor, making the Delaware judgment effectively irrelevant. Rarely, if ever, does one evade a legitimate legal action, particularly before an appeal can be heard, by moving to a more hospitable jurisdiction. This basically made a mockery of the legal process and is highly damaging to our country’s traditional rule of law.

Despite this end run around the judgment, the case went on. Shortly before Christmas 2025, the Delaware Supreme Court, in a unanimous opinion, finally ended the story. Although their decision would have no impact on Musk’s pay now awarded in Texas, the Court left intact the Chancellor’s findings of serious process violations by Tesla’s nonindependent directors and the fiduciary duty failures that flawed the package. The “cleansing” actions of the shareholder votes were not recognized by the Court.

The kicker, though, is how the Court ultimately resolved the dispute. Rather than upholding the Chancellor’s recision order, the Court simply awarded the plaintiff one dollar, despite the seriousness of the violations of Delaware law. This was very odd. The plaintiff’s lawyers were granted over $54,000,000 in fees, suggesting the action had significant merit. However, the Court pointed to some procedural errors in the recision order, noting that Musk had worked hard without compensation for the period of time involved.

The Chancellor’s lightning bolt directed at Musk and his board was deflected to innocuous ground. Though the justices did give a nod to the Chancellor for her resistance to the meritless public attacks on her integrity by Musk, the Court nonetheless declined to uphold her recission order.

This was a very strange and confusing result. If a judge finds serious infractions of the law, applying a token remedy diminishes the seriousness of the duty violations and renders fiduciary duty almost meaningless. Sometimes, splitting the difference is not a good idea.

Of course, this decision must also be read in the context of the times in which it was rendered. As a consequence of the controversy surrounding the case, Delaware was supposedly threatened with a corporate exit by certain members of the controlling shareholder community angered by this and other decisions. Delaware’s response was a devastating legislative override of numerous Supreme Court decisions that was designed to appease that group.

It didn’t work, as Texas and Nevada, offering greater managerial protections, swooped in and began to seriously erode the Delaware franchise. A race to the bottom had begun, with investors, and even directors, the real losers.

Delaware law traditionally protected the actions of independent directors from managerial overreach. This legislation seriously compromised that long-established tenet. To assume that the Delaware justices were unaware of these public actions would be nonsensical. In no way are my comments an attack on our courts, which I respect tremendously. It is simply an acknowledgment of human reality. One must read this opinion, then, with this in mind.

That said, what lessons can directors take from this decision? First, the findings of infractions by the board were left intact and future boards who attempt to follow the Tesla route have been sufficiently warned. Second, in a different time and with a different court, significant damages could, in fact, be awarded. GameStop has adopted a similar plan. It will be interesting to see if it will be challenged.

Finally, as I have long argued in these pages, the disparate treatment of such controversies occasioned by the watering down of fiduciary duty by Texas, Nevada and now even the Delaware legislature will have a negative impact on capital formation. Ultimately, the federal government will step in and create a unified federal regulatory regime, as was done in 1933 with the creation of the SEC. This was a role Delaware oddly enough played successfully for many years. This, sadly, I believe, for various reasons, would ultimately be a nonoptimal but necessary result.

The regretful lesson here is that the conclusion of the Musk action leads to the realization that resolving legal issues by intimidation and resorting to the political process sometimes works. This is to the detriment of the notion of an independent judiciary in our nation and the traditional respect for that institution and the rule of law in general. This is bad for investors as well as the ultimate success of our public capital markets.