By Tom Hals and Jonathan Stempel
WILMINGTON, Delaware (Reuters) -A Delaware judge ruled on Monday that Tesla (NASDAQ:TSLA) CEO Elon Musk still is not entitled to receive a $56 billion compensation package despite shareholders of the electric vehicle company voting in June to reinstate it.
The ruling by the judge, Chancellor Kathaleen McCormick (NYSE:MKC) of the Court of Chancery, follows her January decision that called the pay package excessive and rescinded it, surprising investors, and cast uncertainty over Musk’s future at the world’s most valuable carmaker.
In a post on X after the decision, Musk said that “shareholders should control company votes, not judges.”
Tesla in a statement on X said, “The ruling is wrong, and we’re going to appeal,” adding that the judge had overruled a supermajority of shareholders.
Musk and Tesla can appeal to the Delaware Supreme Court as soon as McCormick enters a final order, which could come as soon as this week. The appeal could take a year to play out.
Tesla has said in court filings that the judge should recognize a subsequent June vote by its shareholders in favor of the pay package for Musk, the company’s driving force who is responsible for many of its advances, and reinstate his compensation.
McCormick said Tesla’s board was not entitled to hit “reset” to restore Musk’s pay package.
“Were the court to condone the practice of allowing defeated parties to create new facts for the purpose of revising judgments, lawsuits would become interminable,” she said in her 101-page opinion.
She said a ratification vote like the one used by Tesla had to be conducted before the trial and a company cannot ratify a transaction involving a conflicted controller. She had determined Musk controlled the pay negotiations.
She also said Tesla made multiple material misstatements in its proxy statement regarding the vote, and could not claim the vote was a “cure-all” to justify restoring Musk’s pay.
Tesla shares fell 1.4% in after hours trade, after the ruling.
Gary Black, managing partner of The Future Fund, which owns Tesla stock, said on X that he believed the Delaware Supreme Court was more pragmatic than McCormick. “I doubt this ruling will be resolved anytime soon, and it will likely be overturned by a more moderate court along the way,” he wrote.
The pay package had awarded Musk stock options if the company hit performance and valuation goals.
While the award originally was valued at up to $56 billion, Tesla’s shares have surged 42% since Nov. 5, when Republican candidate Donald Trump, supported by Musk, won the U.S. presidential election. Following that rally, the pay package is worth about $101 billion.
The ruling comes as Musk has been tasked by Trump with creating a more efficient government by slashing spending. The role as co-lead of the new Department of Government Efficiency would be informal rather than a government position, allowing Musk to keep his job at Tesla as well as leading other companies including rocket maker SpaceX.
Musk threw himself behind Trump’s election campaign and has become a close adviser in the process.
PAY DAY FOR PLAINTIFF’S LAWYERS
McCormick also ordered Tesla to pay the attorneys who brought the case $345 million, well short of the $6 billion they initially requested, but still one of the largest fee awards ever in securities litigation. She said the fee could be paid in cash or Tesla stock.
“We are pleased with Chancellor McCormick’s ruling, which declined Tesla’s invitation to inject continued uncertainty into Court proceedings,” said a statement from Bernstein Litowitz Berger & Grossmann, one of the three law firms for the plaintiff.
The law firm also said it looked forward to defending the court’s opinion if Musk and Tesla appealed.
After the January ruling, Tesla shareholders flooded the court with thousands of letters arguing that rescinding Musk’s pay increased the possibility he would leave Tesla or develop some products like artificial intelligence at ventures other than Tesla.
Mom-and-pop investors and Musk’s influential fans helped Tesla and Musk win the June shareholder vote and many were speaking up on social media against Monday’s decision.
“Beyond the pedantic details of legal procedure, the bigger issue here is that the voice of shareholders is being overruled,” Omar Qazi said in a post on X from the handle @WholeMarsBlog after Monday’s ruling.
“If they can’t consider the vote in this case, hopefully they’ll consider it on appeal,” said Qazi who has more than 551,000 followers.
McCormick in January found that Musk improperly controlled the 2018 board process to negotiate the pay package. The board had said that Musk deserved the package because he hit all the ambitious targets on market value, revenue and profitability.
After the January ruling, Musk criticized the judge on his social media platform X and encouraged other companies to follow the lead of Tesla and reincorporate in Texas from Delaware, although it is unclear if any companies did so.
The judge in her January ruling called the pay package the “biggest compensation plan ever – an unfathomable sum.” It was 33 times larger than the next biggest executive compensation package, which was Musk’s 2012 pay plan.
Musk’s 2018 pay package gave him stock grants worth around 1% of Tesla’s equity each time the company achieved one of 12 tranches of escalating operational and financial goals.
Musk did not receive any guaranteed salary. Tornetta argued that shareholders were not told how easily the goals would be achieved when they voted on the package.