There will be food on the Musk table this Christmas!
The Delaware Supreme Court decision restoring Elon Musk’s 2018 Tesla compensation deal was more nuanced than it at first appears (for example, the plaintiff won a whole dollar and his lawyers will get quite a bit more than that, although a lot less than they had been hoping for), but the bottom line from the Delaware Supreme Court was clear enough. Elon Musk will finally receive the benefit of the (highly contingent) pay package he was awarded by Tesla’s board in January 2018. Good. According to the Wall Street Journal, its value has now risen to $139 billion. Better still.
As I explained in a Capital Letter in February last year:
In January 2018, Elon Musk agreed a new compensation package with Tesla’s board that, if Tesla did astonishingly well, could have amounted, over time, to $55.8 billion. The package was approved by the company’s stockholders two months later. Tesla did astonishingly well. Too bad: In January 2024 the package was struck down by a [very senior] Delaware judge.
By rescinding the package, the judge, Kathaleen McCormick, had come up with a ruling that would have meant that Musk would have been working for Tesla for nothing since 2018.
Courts generally keep clear of second-guessing boards, but Delaware law, explained McCormick, “recognizes unique risks inherent in a corporation’s transactions with its controlling stockholder.” Although Musk held far less than 51 percent of Tesla, she argued not unreasonably (I discussed this at some length in that Capital Letter) that he should be treated as “controlling” the company. Once she had done that, the door was open for her to scrutinize the deal and the process by which it had been approved to determine whether the package was “entirely” fair, a very high standard.
McCormick overrode the board and shareholder approvals and decided that it was not, and rescinded it, brushing aside objections that this would leave Musk uncompensated for his work since 2018 on the grounds that his “preexisting equity stake [had] provided him tens of billions of dollars for his efforts.”
As I commented at the time, the fact that “that stake reflected both his own investment in the company and stock he had received in return for past services didn’t worry her.”
I thought that Musk would face an uphill struggle on appeal, but that McCormick’s decision to reduce a $55.8bn package to zero seemed “extraordinarily harsh.”
Was there really no scope to scale it back rather than to wipe it out altogether? If there had been, that might (at a guess) be the most promising route to take in an appeal.
In the end, the WSJ reported:
Because it is the unmaking of an agreement, rescission is an extreme remedy and should only be granted by a court of equity when it is ‘clearly warranted,’” the court wrote in the unsigned opinion.
I have to think that the difference between $55.8 billion and $0 must have underscored to the higher court just how “extreme” a measure of recission could be.
At the time of the original decision, which predated Musk’s involvement with Trump, he was already something of an evildoer to the radicalized “centrists” who make up so much of our establishment. His key crime? Buying Twitter.
And so the Bloomberg story describing his defeat was prefaced with a headline in which no effort had been made to appear even-handed:
Elon Musk Meets His Match in Shakespeare-Quoting Delaware Judge
Then came the first sub-headline:
‘Judge Katie’ sprinkles Star Trek and Julia Child into rulings.
And the second read like this:
Her mentor says she ‘feels compelled’ to address injustice.
Hmmm.
As I wrote at the time:
McCormick’s (carefully argued) judgment betrayed no overt signs of conventional political bias, but traces of a leftist sensibility can be detected. Thus, she began with a question: “Was the richest person in the world overpaid?” Perhaps that was just a good hook for the “story” that McCormick, a stylish, clear, and sometimes amusing writer, was telling, but (to me) it came with a hint that she was none too enamored with the idea of “the richest person in the world,” a title, in fact, that Musk had yet to earn — yes, earn — at the time the pay package was awarded…
Her reference to the $55.8 billion as an “unfathomable sum” is unmistakably disapproving and would be in keeping with her underlying view that Musk’s existing stake (and the money he could make from it) should be enough. Incidentally, it was no secret that Musk could make all those billions if all went exceptionally well…Unlike the head of Delaware’s Court of Chancery, most Tesla shareholders, it seems, could “fathom” a (very) big number. And they could live with it.
Not only could they live with it, they voted for it a second time (to their credit, but somewhat to my surprise: this was for past services), although legally this made no difference. Since then, they have approved a package for the next few years that, if all targets are hit, could be worth $1 trillion. Fathom that!
In a way, I argued, McCormick’s clash with Musk was a battle between two sections of this country’s elite:
Musk may be infuriating, reckless, eccentric, ornery, and (insert additional adjectives here: There are plenty to choose from), but he contains multitudes. He is also the most extreme contemporary incarnation of the individualism, creativity, and freewheeling spirit that has made the American entrepreneuriat what it is. And then there is McCormick, a member in good standing of a ruling class not generally known for any of the latter three qualities. Moreover, as a senior member of the judiciary she is ex officio a protector of the broader interests of the legal profession, custodians of a system in which an excessive premium is put on process and procedure, a premium that all too often has been a source of hugely profitable rent-seeking — at enormous cost to everyone else.
On this occasion, Delaware’s Supreme Court appears to have risen above that.