Elon Musk Wins Tesla Pay Battle but Faces Legal War for $56 Billion Compensation

Infotrading.io - Elon Musk, CEO of Tesla Inc. (TSLA), has emerged victorious in a crucial shareholder vote regarding his controversial $56 billion pay plan. However, the battle is far from over as the legal war to secure his compensation heads back to the Delaware Chancery Court.

The Shareholder Vote and Its Implications

Last week, Tesla filed court documents asserting that the June 13 shareholder vote, which endorsed Musk’s pay package, should resolve the dispute in Musk’s favor. The company argued that this vote represents a “principled resolution” and should override previous court decisions.

Greg Varallo, the attorney representing the shareholder who successfully challenged the pay package, disagrees. Varallo contends that Tesla cannot use an extra-judicial vote to overturn the Delaware court’s ruling. He insists that Tesla must appeal to the Delaware Supreme Court to reverse the decision.

Legal Path Ahead

The outcome of this legal battle is critical for Tesla. If the courts rule in Tesla’s favor, the company can maintain Musk’s compensation plan along with the $2.5 billion accounting charge recorded in 2018. Conversely, if the courts rule against Tesla, the company could be forced to hold another vote on Musk’s pay and book a charge of at least $25 billion, potentially impacting future earnings.

“Everything here is unprecedented,” remarked Kevin Murphy, an executive compensation expert and finance professor at the University of Southern California’s Marshall School of Business, who testified for Tesla during the trial. The resolution of this dispute remains uncharted territory.

Role of the Delaware Chancery Court

The spotlight now returns to Delaware judge Kathaleen McCormick, who previously ruled in January that Tesla’s board did not act "in the best interests" of shareholders when approving Musk's pay plan. McCormick must now determine if the new shareholder vote reinstates Musk’s compensation.

Ann Lipton, a corporate law professor at Tulane School of Law, explained that McCormick could resolve the dispute through written and oral arguments from both sides or by requesting additional information and discovery. Alternatively, she could hold hearings akin to a new trial.

Tesla has requested an expedited schedule for submitting additional court documents and arguments before McCormick enters a final judgment. Tesla's lawyers highlighted that 72% of shareholder votes, excluding Musk and his brother Kimbal, favored the compensation package, with notable support from major investors BlackRock (BLK) and Vanguard.

Upcoming Hearing and Further Legal Challenges

A hearing is scheduled for July 8, during which McCormick will address unresolved issues, including a request from the shareholders’ lawyer for $6 billion in legal fees, which Tesla disputes. If McCormick validates Musk's compensation, she may also decide whether the shareholder vote reactivates the agreement retroactively to 2018, potentially saving Tesla at least $25 billion.

Kevin Murphy suggested that McCormick might acknowledge the shareholder vote but still anticipate an appeal. “I doubt she'll do that, which means we'll go through an appeal,” Murphy stated.

Ann Lipton echoed this sentiment, predicting that the case is unlikely to end with McCormick’s ruling. "Whichever side loses, that side will appeal to the Delaware Supreme Court," Lipton added.

While Elon Musk has secured a significant victory with the shareholder vote endorsing his $56 billion pay plan, the legal battle is set to continue. The outcome of this case will have substantial implications for Tesla's financials and corporate governance. As the situation unfolds, investors and legal experts alike will be watching closely to see how this unprecedented dispute is resolved.