The full-throated push to grant Tesla CEO Elon Musk a pay package now valued at $100 billion was shut down by a judge this week.
In a 101-page opinion, Delaware Court Chancellor Kathaleen McCormick declined to reverse a previous decision to scrap Musks’ pay. Essentially, she wrote, the arguments presented by the defense representing Tesla and some of its board members were “creative,” but missed the mark. McCormick had previously rescinded Musk’s pay in a prior ruling, and, after losing at trial, Tesla held a new stockholder say-on-pay vote in June 2024 in a bid to pay Musk what the Tesla board said it rightly owed him. Tesla chairperson Robyn Denholm told shareholders the board stood behind the compensation package, and rallied investors to reapprove Musk’s pay as a way to undo the court’s decision, which shareholders overwhelmingly did in a vote that garnered 72% support in June 2024.
Tesla told investors that the vote, which it called a “common law ratification,” could snuff out claims the board breached its fiduciary duty in awarding the pay plan. “When properly implemented, common law ratification ‘reaches back’ to validate the challenged act as of its initial enactment,” Tesla wrote to shareholders.
The court soundly rejected that approach.
“There are at least four fatal flaws,” McCormick wrote in her decision. “The large and talented group of defense firms got creative with the ratification argument, but their unprecedented theories go against multiple strains of settled law.” (McCormick wrote in her decision that Tesla “lawyered up” the day it filed its April proxy statement asking shareholders to ratify Musk’s pay by adding five additional law firms to the list of attorneys representing the defendants in the pay lawsuit.)
In a post on X, Tesla wrote that the court was wrong and that it planned to appeal the decision.
“This ruling, if not overturned, means that judges and plaintiffs’ lawyers run Delaware companies rather than their rightful owners – the shareholders.”
So what exactly led McCormick to her decision? Here are the “four fatal flaws,” she outlined:
Fatal flaw #1: Tesla didn’t have the procedural grounds to flip the court’s decision
First, Tesla debuted the argument that a stockholder ratification vote was a “powerful elixir” that could cure wrongdoing in its April proxy statement, wrote McCormick. But Tesla had no grounds to flip the outcome of a court decision based on evidence it created after the trial took place, the opinion states. Tesla’s lawyers later backed off that stance during oral argument in court, dropping the more aggressive language and instead seeking to “modify the remedy” without challenging the court’s findings. Still, McCormick wrote, lawyers requested “judgment entered for defendants on all counts,” which would have been tantamount to overturning the court’s decision in Tesla’s favor.
“So, the ‘only relief’ sought by Defendants by the time of oral argument was to ‘modify the remedy’ of rescission and flip the entire outcome of the case in Defendants’ favor,” the judge wrote, emphasizing her point with a facetious: “That’s all.”
Fatal flaw #2: Timing. Common-law ratification can’t be raised after an opinion post trial
Second, Tesla raised that common-law ratification defense after the opinion to rescind his pay package came post-trial—a full six years after the case was filed, one and a half years after trial, and five months after the court’s opinion, McCormick wrote. No court has ever allowed stockholder ratification after facts have been settled, with a sole exception during the past 70 years, McCormick wrote.
“Wherever the outer boundary of non-prejudicial delay lies, Defendants crossed it,” she wrote. “The court declines to exercise its discretion to permit Defendants to raise the defense of stockholder ratification at this late stage.”
Fatal flaw #3: Tesla’s approach didn’t stick to the established legal framework
The third and potentially most significant flaw McCormick outlined had to do with the legal framework Tesla relied on. She wrote that the stockholder vote by itself wasn’t enough to ratify a “conflicted-controller transaction,” which was how Musk’s grant was described in McCormick’s previous opinion rescinding his pay. “Conflicted-controller transactions present multiple risks to minority stockholders,” she wrote. And particularly in this case, there is what is called “tunneling risk,” in which someone in control of a company can try to get ahead through related-party transactions.
Because of the significant risk, the court applies a stricter standard of review that requires specific steps be taken like an independent special committee review and an informed shareholder vote, among other requirements. Tesla’s approach didn’t stick to the established framework required.
“Defendants’ failure to adhere to the framework for securing stockholder ratification in a conflicted-controller context offers an independent basis for rejecting the Ratification Argument,” she concluded.
Fatal flaw #4: Multiple material misstatements
Finally, the April proxy statement that asked shareholders to ratify Musk’s pay after the court rescinded it was “materially misleading,” McCormick wrote. She noted, “there are many ways in which the Proxy Statement mangles the truth” but one prominent failure was that much of what Tesla told its stockholders in that proxy statement was either inaccurate or just plain misleading.
Each of the four fatal flaws with the ratification argument were enough to trounce the motion to revise the decision, McCormick wrote.
“Taken together, they pack a powerful punch.”
Tesla did not immediately respond to a request for comment.