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Elon Musk's $50 billion Tesla salary was slashed. what happens next?

Elon Musk's $50 billion Tesla salary was slashed. what happens next?

A Delaware judge's decision to void the pay package that helped make Elon Musk the world's richest man has left Tesla's board of directors with some difficult decisions to make.

Chancellor of the Delaware Court of Chancery Kathleen St. J. McCormick on Tuesday ordered Tesla to cancel about $50 billion worth of stock options granted to Mr. Musk, the electric car company's chief executive. Now company directors must figure out a new compensation plan that can pass legal muster and satisfy Mr. Musk, who recently demanded that the board significantly increase Tesla ownership.

Tesla and Mr Musk may appeal the court's decision. Mr. Musk has also indicated that he may try to incorporate the company in another state that he believes may be more favorable to businesses, such as Texas.

As part of the compensation package finalized by Tesla in 2018, Mr Musk received options to buy 304 million shares, now worth more than $50 billion. Although he has met the goals required to receive those options, Mr. Musk has not converted them into Tesla shares. If he had done so, he would have been barred from selling them for five years.

Chancellor McCormick said in his decision that Tesla must cancel the options, although he has not yet issued any formal order to the company to do so.

Even without that package of stock, Tesla has made Mr Musk unimaginably rich. He owns about 411 million Tesla shares worth about $78 billion. A securities filing last year said he had pledged 238 million shares for a personal loan.

A clearly angry Mr Musk threatened to rejoin Tesla in another state. On X, the social media platform he owns, he asked his followers to vote on whether Tesla should incorporate itself in Texas, where it has corporate offices and a large factory.

“If you prefer shareholders to decide on matters, I recommend incorporating in Nevada or Texas,” he said.

Delaware is a popular place to incorporate companies due to its well-organized legal system. Cases are heard by judges rather than juries, and there is only one layer of appeal – to the Delaware Supreme Court.

Mr Musk incorporated his ex in Nevada, whose laws make it very difficult to prosecute directors. But getting there will require a vote of shareholders, some of whom may not want the company to go to a state where they have less power.

The transfer “doesn’t give him any magic ticket,” said Gregory Varallo, a lawyer in Wilmington, Del., who argued the case against Mr. Musk’s pay package for shareholders.

If the stock options Tesla gave Mr Musk in the 2018 package are cancelled, the company will have fewer shares outstanding. In theory, this would increase the value of stocks owned by other people or businesses.

But any boost to the share price it brings may be balanced by investors' fears that Mr Musk might leave the company or focus less on its operations. Tesla's share price fell about 2 percent on Wednesday following Ms. McCormick's decision, which was released after the stock market closed on Tuesday.

In the long term, a company's share price is driven by its profits and cash flows. Tesla has fallen by more than half from its peak and is down more than 20 percent this year, largely because its profit margins have shrunk and the company expects sales to be much slower this year. Will increase.

Chancellor McCormick said Mr Musk played too big a role in crafting the terms of his pay deal and that the board, which is legally bound to serve the best interests of all shareholders, was not sufficiently independent from him. One director is his brother, Kimbal, and several other longtime friends and associates. She also said that the salary package was excessive and she was paid more than necessary to motivate her to do good work.

As a result, directors may have to make changes that would convince a judge that whatever new compensation package he offered them was put in place after a lengthy negotiation between them and Mr. Musk. Any revised salary deal may require him to pay much less.

Kristin Hull, founder of Nia Impact Capital, an investment firm in Oakland, California, said the Tesla board needed to find a way to keep Mr. Musk focused on the business as well as have more control over his “erratic” behavior.

“We want him to play a really important role,” Dr. Hull said, but he added, “There needs to be some checks and balances and that's what this decision is about.” The fund owns a very small number of shares.

Tesla Chairman of the Board Robin Denholm did not respond to a request for comment. Neither did the other seven board members.

Tesla and Mr Musk may appeal to the Delaware Supreme Court, which some legal experts have said would uphold the decision.

But some legal experts said lawyers for the company and Mr Musk may try to argue that Ms McCormick's decision went too far and should be overturned. For example, Mr Musk's lawyers could argue that he was not the controlling shareholder as Chancellor McCormick had suggested. He owned about 22 percent of Tesla when the package was prepared, giving him not enough votes to control the company. The chancellor also said that his “superstar” status gave him undue influence on the board.

“The Supreme Court could go either way” on that argument, said Michael Barzuza, a law professor at the University of Virginia, referring to the Delaware Supreme Court.

Tesla may also want to take its appeal to the US Supreme Court, but it may have difficulty taking the case to a higher court because it raises no clear constitutional or federal issues.

Lawyers representing Mr Musk in the case did not respond to requests for comment.

The decision will change Tesla's approach to designing, manufacturing and selling cars only if it leads Mr Musk to leave the company or take a less active role. Mr Musk has shown signs of being restless. Before the decision, Mr Musk had demanded that the Tesla board increase his stake in the company from 13 per cent to 25 per cent.

If they didn't get what they were asking for, he said, they would work on robotics and artificial intelligence products elsewhere. Mr Musk has already founded an independent artificial intelligence company called xAI. He also runs SpaceX and is the founder of Neuralink, which is developing implants that allow people to control computers with their brains.

It's hard to see how the Tesla board will be able to meet their demand for a much larger stake in the car company in light of the Delaware decision.

Few, if any, chief executives are so closely identified with their products, or seen as an essential part of their companies' success, as Mr. Musk. In her judgment, Ms McCormick suggested that “superstar” was a downside of her position as chief executive. “This creates a 'distortion field' that interferes with board inspection,” he said.

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