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By Tom Hals
WILMINGTON, Delaware (Reuters) - Elon Musk kicked off his appeal to try to restore his $56 billion payday from Tesla on Tuesday, claiming a lower court judge made multiple legal errors in rescinding the record compensation.
The 2018 pay package resulted in spectacular growth for the electric vehicle maker and yet it was determined by the lower Court of Chancery to be unfair to shareholders, who voted twice to approve the plan, Musk argued.
"That counterintuitive result defies settled principles of Delaware law, sound corporate governance, and common sense," said the opening appeal brief by Musk and the current and former Tesla directors who are defendants in the case.
In January 2024, Chancellor Kathaleen McCormick rescinded the pay package of stock options, calling it "unfathomable." She said it was unfair to Tesla shareholders because the directors who approved it were beholden to Musk and Tesla withheld key information from investors before they voted to approve it.
In June, Tesla got shareholder approval for the pay package for a second time, but the judge rejected that as grounds for reversing her ruling.
The pay package had awarded Musk options to buy around 303 million Tesla shares at around $23 each if the company hit performance and valuation goals. Tesla stock closed Tuesday at $230.58.
Tesla has said creating a new pay package of similar value could result in a charge of $25 billion, making the appeal an important avenue for restoring Musk's compensation and keeping his attention on Tesla.
Musk has said that he wants a greater stake in Tesla or he might develop products outside of the company. The appeal comes as he is dedicating time to President Donald Trump's government efficiency effort, known as DOGE, which has sparked demonstrations outside Tesla dealerships. The stock has fallen sharply in recent weeks.
In the appeal brief, Musk and the other defendants said McCormick wrongly applied a very difficult legal standard known as entire fairness to assess the pay package.
She arrived at that standard by finding Musk, who owned 21.9% of the stock at the time the board approved the pay package, controlled the pay negotiations, according to the brief. In addition, she wrongly determined that ordinary business relationships among directors made them conflicted and she erroneously faulted Tesla's disclosures ahead of the 2018 shareholder vote, according to the brief.
Applying the entire fairness standard amounted to granting a "license to sue" to Tesla shareholders, the brief said. The lawsuit was brought by Richard Tornetta, a Tesla investor who owned nine shares when he filed the case in 2018. The lawsuit benefits Tesla, not Tornetta, in what is known as a derivative suit.
Musk blasted the pay decision and has encouraged other companies to follow Tesla and SpaceX and reincorporate out of Delaware. A handful have left the state or said they might, including Meta Platforms, TripAdvisor and Trump's media company.
Fears that a trickle of companies will turn into a stampede, which has been dubbed "DExit," prompted the state's legislature to consider amending its corporate law to better protect controlling shareholders from lawsuits.
(Reporting by Tom Hals in Wilmington, Delaware; Editing by Stephen Coates)
