The (Now) $110B Musk Comp Saga Continues
Boardroom Governance Newsletter #60 | Jan 13, 2025
“In January 2024, the court issued a post-trial opinion finding that the award was subject to review under the entire fairness standard, the defendants bore the burden of proving entire fairness, they failed to meet their burden, and the plaintiff is entitled to rescission. The plaintiff’s attorneys then petitioned for fees and expenses, which is typical in a derivative suit when the plaintiff prevails.”
“The defendants responded by putting the rescinded compensation plan—the exact same plan that the post-trial opinion deemed a breach of the duty of loyalty—to a stockholder vote for the stated purpose of “ratifying” it. The defendants then moved to “revise” the post-trial opinion based on the stockholder vote, asking the court to flip its decision and enter judgment in their favor.”
Last month, Delaware Chancellor McCormick denied the motion to revise her post-trial opinion in Tornetta v. Musk and awarded $345 million in attorneys’ fees to the plaintiffs. In doing so, she reaffirmed her decision to rescind Elon Musk’s 2018 CEO compensation award—now valued at approximately $110 billion1—and awarded the controversial attorney’s fee petition. According to Professor Stephen Bainbridge, this translates to roughly $18,000 per hour for the plaintiffs’ attorneys.2
Earlier this year, I wrote about:
The original opinion (Feb 2024)
Tesla’s proposed move to Texas and ratification of Musk’s pay (Apr 2024), and
The successful stockholder vote on both issues (July 2024)
Reasons for Denial
Chancellor McCormick denied the motion to revise based on what she termed “four fatal flaws”:
“The defendants have no procedural ground for flipping the outcome of an adverse post-trial decision based on evidence they created after trial.”
“Common-law ratification is an affirmative defense that must be timely raised, which means that, at a minimum, it cannot be raised for the first time after the post-trial opinion.”
“What the defendants call “common law ratification” has no basis in the common law—a stockholder vote standing alone cannot ratify a conflicted-controller transaction.”
“Even if a stockholder vote could have a ratifying effect, it could not do so here due to multiple, material misstatements in the proxy statement. Each of these defects standing alone defeats the motion to revise.”
Fee Petition
The fee petition was granted in part. Notably, the plaintiff’s attorneys asked for $5.6 billion in freely tradeable Tesla shares. In her ruling, Chancellor McCormick characterized this as a “bold ask” and explained that Delaware courts typically award fees based on a percentage of the benefit achieved—scaled to the stage of the case and adjusted for other factors. However, as the Delaware Supreme Court cautioned in In re Dell Technologies Inc. Class v Stockholders Litigation, a fee award “can be so large that typical yardsticks… must yield to the greater policy concern of preventing windfalls to counsel.”
Chancellor McCormick found $5.6 billion to be a windfall “no matter the methodology,” and instead adopted the defendants’ approach: using the $2.3 billion grant-date fair value to calculate the benefit achieved, then applying a 15% rate. This resulted in a $345 million award. The defendants may elect to pay the award in cash or freely tradable shares.
Reactions to the Decision
This case has drawn significant attention in corporate governance circles, spanning multiple levels of discussion:
Conflicted-controller transactions.3 In her opinion, Chancellor McCormick reiterated that the Grant was a conflicted-controller transaction. These transactions typically present multiple risks to minority stockholders.4 Given these risks, Delaware courts apply the most exacting standard of review when reviewing conflicted-controller transactions: the entire-fairness standard. As I wrote in 2021 regarding another case against Elon Musk in Delaware (involving Tesla’s acquisition of SolarCity): the entire fairness review is not a prejudgment that fiduciary misconduct occurred. It is simply a recognition that because conflicted controller transactions have such strong potential for self-dealing, absent replication of an arm’s-length transaction process, an independent judge should thoroughly examine the transaction’s substantive fairness. By the way, in that specific case, Elon prevailed.
Professor Steven Solomon at Berkeley Law has summarized recent scholarship on controller/related issues, highlighting three key areas: the definition of a controller, the standard of review for controller transactions (MFW), and the scope of MFW. Each article offers a distinct perspective on these interrelated topics:
Laster, The Distinctive Fiduciary Duties That Stockholder Controllers Owe (2024)
Macey, Delaware Law Mid-Century: Far From Perfect but Probably Not Leaving for Las Vegas (2024)
Bainbridge, A Course Correction for Controlling Shareholders (2024)
Fisch and Solomon, Control and its Discontents (2024)
Lipton, The Three Faces of Control (2021)
Goshen, Hamdani & Lund, Fixing MFW: Fairness and Vision in Controller Self-Dealing (2024)
Feigenbaum, The Controlling Shareholder Enforcement Gap (2019)
Aristocrats Were Always Anarchists: The Tornetta Whisper Campaign and Delaware’s Future In The Age of American Oligarchy, by Joel Fleming, Partner of Equity Litigation Group. Interesting read, including list of articles critical of the Delaware opinions.
Musk Compensation Case Will Stand as Corporate Governance Pillar by Anat Alon-Beck.
Vox Shareholders and Still No Payday for Musk: Tornetta Round Two. Bite-Size Business Law Podcast by Fordham Corporate Law Center. Featuring Profs Sean Griffith and Richard Squire.
Tornetta v. Musk and the Future of Corporate Law. Organized: The Business Law Breakdown Podcast by Seth Oramburg featuring Profs Bainbridge and Alon-Beck.
Judge in Musk pay case is backed by law profs and plaintiffs' lawyers in letter to bar group. Dozens of law professors and plaintiffs’ lawyers signed a letter calling on the Delaware bar association to defend Chancellor McCormick from “deeply unfair attacks” made by Elon Musk.
Boardroom Governance Podcast 🎙️
Check out my latest episodes:
E160 Ben Joseloff: The Board's Guide to CFIUS and Evolving National Security Reviews. Ben is a partner at Cravath, former White House and U.S. Treasury Department official, and served as Lead Counsel for CFIUS. In this episode, we examine how CFIUS safeguards U.S. national security by reviewing foreign investments. We discuss significant CFIUS cases, emerging trends in transaction reviews, and the implications of upcoming regulations.
E159 David Berger: Ending the One-Size-Fits-All Model of Corporate Governance. In this episode, we explore the rapidly shifting landscape of corporate governance—from post-election policy changes to the evolving roles of AI, corporate purpose, and ESG. We examine Delaware’s ongoing legal challenges, assess the current state of the markets, and discuss how high-profile figures like Elon Musk are influencing government efficiency. We also unpack emerging governance models, particularly how PBCs fit into the new wave of AI leaders, and highlight key governance trends from 2024 along with what to watch for in 2025.
E158 Richard Blake: 2024 Silicon Valley 150 Corporate Governance Report. This episode covers a wide range of topics—including activism, board structures, and clawback policies of SV150 companies. We also examine the challenge to Delaware’s status as the favored corporate home and discuss how private ordering shapes governance. Rounding things out, we explore trends from 2024 and offer insights on what to watch for in 2025.
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Other Relevant Corporate Governance News and Content.
Boardroom Governance Podcast Summit. We’re still scoping venues for the 5th Anniversary of the Boardroom Governance Podcast—now at 160 episodes and counting! To mark this milestone, we’re hosting a special summit in the second half of 2025. Stay tuned for more information, and get ready to head to the San Francisco Bay Area later this year!
AI Start-Up Anthropic Is in Talks That Could Value It at $60 Billion. The AI race continues.
London Stock Exchange suffers biggest exodus since financial crisis. “A total of 88 companies have delisted or transferred their primary listing from London’s main market this year with only 18 taking their place, according to the London Stock Exchange Group.”
Appeals Court Strikes Down Nasdaq’s Board-Diversity Rules. The New Orleans-based Fifth U.S. Circuit Court of Appeals ruled that the SEC had erred in 2021 when it approved two Nasdaq listing rules focused on boardroom diversity. This is an interesting take by Prof Ann Lipton.
This is a very good interview of Jeff Bezos by Andrew Ross Sorkin from the 2024 Dealbook Summit.
Some highlights:
On raising seed round for Amazon: “I took to raise the first million dollars of seed capital for Amazon. So I sold 20% of Amazon at a $5m valuation. I sold 20% of the company for a $1m to 22 angel investors, roughly $50k each. And I had to take 60 meetings, so whatever, you know, roughly 40 of them said no. And a little 20, 22 or so said yes. And it was the hardest thing I've ever done.
On compensation (relevant for Tornetta v Musk case): “I asked the comp committee of the board not to give me any comp (…) my view was I was a founder. I had, I already owned a significant amount of the company and I just didn't feel good about taking more. I felt I had plenty of incentive.”
“Somebody needs to make a list where they rank people by how much wealth they’ve created for other people. And so instead of the Forbes list, it ranks you by your own wealth. So, you know, Amazon's market cap is ~$2.3 trillion. I own about 200 billion-ish of it. So if you take $2.3 billion and subtract out the piece I kept from myself, then I've created something like $2.1 trillion of wealth for other people. That should put me pretty high on some kind of list. And that's a better list. How much wealth have you created for other people?”
Nima Momeni Convicted of Second-Degree Murder in Death of Cash App Founder. He was convicted by a San Francisco jury in the fatal stabbing of Bob Lee, a tech executive.
Tim Ferris Podcast: Cyan Banister — From Homeless and Broke to Top Angel Investor (Uber, SpaceX, and 100+ More). Great episode, quite a unique story.
Cyan Banister opens up to Tim Ferris.
Celsius founder Alex Mashinsky pleads guilty to fraud charges. “As part of his plea deal with prosecutors, Mashinsky agreed not to appeal any sentence of 30 years or less - the maximum he faces for the two counts. Koeltl is set to sentence him on April 8, 2025.”
Michael Saylor’s presentation to Microsoft’s shareholders to adopt Bitcoin: rejected on Dec 10, 2024, with just 0.55% of votes in favor, according to a Form 8-K filing. Proxy advisors Glass Lewis and ISS both suggested a no vote, too. There is a similar proposal at Amazon.
A Visualization of Europe's Non-Bubbly Economy. The bubbles on the left are US publicly traded companies that are less than 50 years old with a market capitalization of $10B+. The bubbles on the right are the same but for the EU. Great visual from Andrew McAfee’s newsletter.
On a related geopolitical note:
Finally, I’m sending my heartfelt support to all those affected by the LA fires, along with gratitude for the brave first responders and the communities coming together to rebuild and heal.
Here are some ways to help:
Donate: Consider contributing to organizations providing relief efforts, such as the California Fire Foundation, the American Red Cross as well as the Los Angeles County Fire Department
Stay Informed: Follow reliable sources of information like California Department of Forestry and Fire Protection (CAL FIRE) and local news outlets like Los Angeles Times and KCAL News for updates and safety guidelines.
Onward and upward.
Sincerely,
Evan Epstein
The comp package gave him options to buy up to ~304 million shares at a preset price of $23.34, and the current price per share is about $385 (Tesla is now valued at $1.27T). That gives an intrinsic value of $110B: market value ~$117B (304m shares x $385 per share) minus cost of exercise ~$7B (304m shares x $23.34 per share).
“[T]he opinion acknowledges that the plaintiff's lawyers claim they worked 19,499.95 hours on the case. That works out to $17,692.31 per hour. Which strikes this observer as being at least as offensive as Musk's allegedly excessive compensation. After all, unlike litigators, at least Musk actually makes something socially useful.”
The Post Trial Opinion (January 2024) held: “This decision dares to “boldly go where no man has gone before,” or at least where no Delaware court has tread. The collection of features characterizing Musk’s relationship with Tesla and its directors gave him enormous influence over Tesla. In addition to his 21.9% equity stake, Musk was the paradigmatic “Superstar CEO” who held some of the most influential corporate positions (CEO, Chair, and founder), enjoyed thick ties with the directors tasked with negotiating on behalf of Tesla, and dominated the process that led to board approval of his compensation plan. At least as to this transaction, Musk controlled Tesla.”
“There is the “coercion” risk that a controller might retaliate if it does not get its way. There is the “bypass” risk, which envisions that the controller may bypass the board to unilaterally achieve its goals. More relevant to this case, there is the “tunneling” risk that the controller will use its ability to direct corporate actions to extract corporate value through related-party transactions.”