A Delaware court has ruled in favor of a shareholder who filed a lawsuit against Tesla CEO Elon Musk and other company leaders, accusing them of failing to meet their obligations to the electric vehicle and solar panel maker. The lawsuit alleged that this resulted in a waste of corporate assets and the unjust enrichment of Musk.
The plaintiff’s lawyers argued that Musk determined the value of the compensation package through deceptive negotiations with directors who were not independent of him. Defense attorneys, on the other hand, pointed out that the compensation plan was negotiated fairly by a commission of independent directors, contained high performance payments, and was approved in a shareholder vote that was not even necessary.
Delaware Judge Kathaleen McCormick agreed with the plaintiff, Richard Tornetta, and ruled that Musk controlled Tesla’s board of directors when he was granted a package of stock options in 2018. This stock option package allowed Musk to become the richest man in the world, as it was conditional on Tesla achieving 12 goals, including a market capitalization of at least $50 billion and certain income goals.
During the trial, Tornetta alleged that the compensation agreed upon between Musk and the company was exorbitant and only came true because the businessman controlled the board of directors. McCormick pointed out in her ruling that Musk maintained deep personal relationships with the people who had to decide the amount of compensation, and that the negotiation granted everything that Musk demanded, even though the judge considered that the businessman would not have abandoned Tesla if he had not obtained the gigantic package of stock options.
As a result, McCormick ruled that the agreement between the company and Musk is void. Musk currently controls 13% of Tesla’s shares and is the company’s largest individual shareholder. However, he has expressed a desire to own 25% of Tesla in order to lead the company, and has suggested that the board of directors should offer him more stock options to reach that number.
The ruling in the Delaware court has caused Tesla shares to fall 3% after the markets closed. Musk reacted to the ruling on social media, and the case has sparked debate about corporate governance and executive compensation.
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