Musk Compensation Case Will Stand as Corporate Governance Pillar

Chancellor Kathaleen McCormick’s denial of Elon Musk’s $56 billion compensation package at Tesla Inc. is a landmark in corporate governance. The case highlights the tension between visionary leadership and the need for governance rigor.

While Musk’s contributions to Tesla are undeniable, governance principles require transparency, fairness, and procedural integrity—elements this case lacked.

Ratification Timing Flaw

A central issue was the timing of Tesla’s shareholder vote, held after the trial as a workaround to judicial scrutiny.

Timing is important. Less than an hour after the court issued its post-trial opinion, Musk criticized Delaware on social media. Seven hours later, he announced plans for Tesla to immediately “hold a shareholder vote to transfer its state of incorporation to Texas.”

Tesla’s board quickly acted on Musk’s proposal, forming a special committee on Feb. 10 to evaluate the move. By March 5, the committee’s mandate was expanded to include determining whether Musk’s compensation package should be ratified alongside the redomestication vote.

Proper governance demands ex ante ratification, not ex post maneuvers that undermine judicial integrity. This timing misstep weakened Tesla’s position, underscoring the need for proactive governance processes.

Misleading Proxy Materials

The proxy vote ratifying Musk’s package was marred by inadequate disclosures. The narrative suggested a rigorous and independent process, but evidence presented in court showed that Musk’s influence as a controlling CEO had a significant impact on the negotiations. This raised concerns that the process wasn’t as impartial as portrayed, further undermining the proxy vote’s validity.

McCormick noted that the proxy materials didn’t sufficiently explain the role of the board and its compensation committee in evaluating the package. The proxy materials’ misleading nature deprived shareholders of the ability to fully understand the stakes of their vote, according to McCormick.

In corporate governance, a proxy vote isn’t merely procedural; it’s a critical mechanism through which shareholders exercise their rights and hold boards accountable. By failing to provide clear and accurate disclosures, Tesla compromised the integrity of the voting process, calling into question the legitimacy of the ratification itself.

This aspect of McCormick’s ruling underscores a broader lesson for corporate boards: Proxy statements must be more transparent, balanced, and truthful.

The Judiciary Speaks

McCormick’s ruling reinforces the judiciary’s role in protecting fiduciary duties and shareholder rights. By rejecting Tesla’s post-trial tactics, the court sent a clear message: Corporate governance must adhere to principles of procedural integrity and transparency, regardless of the CEO’s prominence.

The issue is that the defendants—Musk and the board—attempted to overturn a post-trial decision using evidence created after the trial, a tactic that undermines judicial integrity. Not to mention that common-law ratification, as an affirmative defense, can’t be invoked for the first time post-trial.

The defendants’ interpretation of common law is equally problematic. Their claim that stockholders can retroactively approve corporate acts to reverse court rulings or extinguish adjudicated claims has no legal basis, especially in cases involving conflicted-controller transactions where strict safeguards apply.

The Supreme Court’s Role

The Delaware Supreme Court is unlikely to invalidate McCormick’s ruling. Overturning her decision would send a troubling signal that controlling CEOs can bypass judicial oversight, undermining Delaware’s foundational principles of corporate governance. Upholding the ruling would reaffirm the judiciary’s critical role in safeguarding fiduciary duties and protecting shareholder interests, even when the case involves a figure as prominent as Musk.

That said, I suspect the Supreme Court may act as more than just an arbiter in this instance—it could position itself as a mediator in response to the significant public and corporate attention this case has garnered. While affirming McCormick’s decision, the court might take this opportunity to outline a clearer framework for approving executive compensation in the future.

This would address concerns from business leaders about potential constraints on incentivizing top executives while maintaining the rigorous governance standards that Delaware is known for. My guess is that the Supreme Court will seek to balance these competing interests by setting clearer guidelines for boards managing compensation for influential controlling CEOs.

Those guidelines could include steps to ensure independent oversight, formalized ratification processes, and transparent disclosures that align compensation with long-term shareholder value. Such an approach would preserve the integrity of the courts’ oversight while providing practical solutions for boards navigating these high-stakes decisions.

This case represents a defining moment for corporate governance, and I believe the Supreme Court will use it not only to reaffirm the importance of judicial accountability but also to chart a way forward for companies to align leadership incentives with governance best practices. If so, McCormick’s ruling will serve as both a safeguard and a roadmap for corporate boards moving forward.

Musk’s Next Move

Musk still has options. Tesla’s planned redomestication to Texas could allow the board to develop a new compensation package under Texas law, which might offer more flexibility. If transparently negotiated and approved, such a package could satisfy governance requirements while aligning with shareholder interests.

This approach would give Tesla’s board an opportunity to demonstrate its ability to balance fiduciary duties with the need to retain a visionary leader like Musk. However, there will be considerable expensive tax consequences.

Governance as a Guide

This has been an unfortunate saga that could have been prevented with the right counsel, proper guidance, and, frankly, some humility and respect for the court. If I were advising Musk, I would strongly recommend avoiding such direct confrontations with the judiciary and taking an approach more focused on deal-making.

I understand why many business leaders and commentators are upset, as the shareholders did vote to approve Musk’s compensation. On one hand, the shareholders clearly acknowledged Musk’s significant contributions to the company and chose to reward him. To many of his supporters and shareholders, his compensation may seem well-earned and justified. On the other hand, McCormick is rightly focused on what appears to be a direct challenge to Delaware law and judicial authority.

This case is a cautionary tale for boards navigating high-stakes executive compensation. Procedural missteps, inadequate disclosures, and after-the-fact ratifications undermine trust and judicial respect. As Delaware remains the gold standard in corporate governance, the ruling illustrates the importance of aligning leadership incentives with governance best practices.

The case is Tornetta v. Musk, Del. Ch., C.A. No. 2018-0408-KSJM, decided 12/2/24.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Anat Alon-Beck is associate professor of law at Case Western Reserve University School of Law.

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