Elon Musk may lose his position as the world’s richest person after a US judge ordered him to return a corporate payout worth nearly $56 billion.
A court in Delaware ruled on Tuesday that the SpaceX and Neuralink boss could not keep the massive pay package he received from Tesla, the electric car company that he has run since 2008.
The ruling was a victory for Tesla shareholders who had accused Mr Musk of effectively dictating the terms of his own pay to board members who were not truly independent of him.
If implemented, the court's order would slash Mr Musk’s estimated $200bn-plus fortune and probably drop him below Amazon founder Jeff Bezos and French fashion baron Bernard Arnault in the rankings of Earth’s wealthiest humans.
"Put simply, neither the compensation committee nor the board acted in the best interests of the company when negotiating Musk’s compensation plan. In fact, there is barely any evidence of negotiations at all," wrote judge Kathaleen McCormick.
She described Mr Musk as a "superstar CEO" who used his influence over the company and close ties with multiple board members to create a "deeply flawed" approval process that arrived at an "unfair price".
In response, Mr Musk quipped: “Never incorporate your company in the state of Delaware."
Tesla shares slipped by as much as 4 per cent in after-hours trading on Tuesday evening.
Never incorporate your company in the state of Delaware
— Elon Musk (@elonmusk) January 30, 2024
Both the New York Stock Exchange and the Nasdaq exchange require the majority of a company’s board of directors to be independent of the company before its shares can be traded on the open market.
During the trial, Tesla’s lawyers argued that the mammoth pay package – approved in 2018 by the board and then by shareholders – was necessary to keep one of the world’s foremost engineers focused on the firm.
At the time, Tesla was mired in “production hell” and struggling to produce its Model 3 sedan in large numbers. Mr Musk’s deal awarded him an extra 1 per cent of the company’s shares for each commercial milestone that he reached.
This, Ms McCormick wrote, was "the largest potential compensation opportunity ever observed in public markets by multiple orders of magnitude".
Since then, the company has smashed past all 12 milestones and become one of the most valuable enterprises in the world, propelling Mr Musk from the mid-twenties of Forbes’ rich list all the way to the top.
At their peak, Tesla’s shares traded at nearly 14 times their value at the beginning of 2020, and even today – after a sustained period of economic gloom and a rough year for the company – they remain more than five times that level.
Antonia Gracias, who sat on Tesla’s board from 2007 to 2021, argued in court that it was “a great deal for shareholders” because it had led the company to new heights of success.
But in her ruling, McCormick argued that Mr Musk was already highly incentivised to run the company well because he owned 22 per cent of its shares.
“Swept up by the rhetoric of ‘all upside,’ or perhaps starry-eyed by Musk’s superstar appeal, the board never asked the $55.8 billion question: Was the plan even necessary for Tesla to retain Musk and achieve its goals?” she wrote.
She said that Mr Musk had "extensive ties" with the people who negotiated his pay and had rendered the entire company "highly dependent" on him, noting his 2021 change of title from "CEO" to "Technoking".
She also said that shareholders had not been fully informed when they voted for the deal because the company's statement about it had obscured key directors' connection to Mr Musk.
At one point, Ms McCormick said, Mr Musk bluntly described an early version of the deal as "me negotiating against myself".