Why Elon Musk's battle with Delaware and shareholders is about more than a $56 billion pay deal

The decision to void Elon Musk’s pay package may have far-reaching consequences.Toby Melville – Pool/Getty Images

Elon Musk just had his $55.8 billion Tesla pay package voided in a Delaware court ruling.
The decision, which Tesla can still appeal, goes beyond just damaging Musk’s personal gain.
Musk’s ambitions for Tesla and SpaceX were on the line, as was his confidence in the Diamond State.

Elon Musk might be done with Delaware.

The Diamond State, which supposedly gained its moniker from Thomas Jefferson, has proven to be a very hospitable, low-tax home for thousands of corporations including Tesla.

But Musk will have found that famed hospitality to be missing this week after a Delaware judge voided his $55.8 billion compensation package that was granted by the Tesla board in 2018.

The lawsuit, led by Richard Tornetta — an investor who held just nine Tesla shares — has now nullified the payout that helped Musk become the world’s richest person.

“The process leading to the approval of Musk’s compensation plan was deeply flawed,” Judge Kathaleen McCormick said in a 201-page opinion, which stated that Tesla’s nine-person board at the time of the grant’s approval was lacking any truly independent directors.

Musk’s Tesla pay was structured without a salary to involve 12 stock option awards that would only be given once performance goals for each of them were met. Musk has met the goals for the awards but can only sell them after a certain period.

Though Musk can appeal the decision, there are signs that this battle is about more than just the massive pay package that has propelled him to a $205 billion fortune.

Musk’s ambitions are on the line

Musk’s plans for SpaceX are somewhat tied to his ability to raise enormous personal wealth through Tesla.Chandan Khanna/Getty Images

As much as the Delaware court’s decision is a hit to Musk’s personal gain, it also risks being a hit to his ambitions with Tesla and SpaceX.

In Tesla’s case, a failed appeal would mean Musk loses options on roughly 303 million Tesla shares, leaving him with just a 13% stake in the EV maker.

Is that enough? Apparently not.

Musk argued earlier this month that he needs 25% ownership of the company to give him the voting control needed to see through decision-making on key areas of innovation such as AI and robotics.

“Unless that is the case, I would prefer to build products outside of Tesla. You don’t seem to understand that Tesla is not one startup, but a dozen. Simply look at the delta between what Tesla does and GM,” he wrote on X.

I am uncomfortable growing Tesla to be a leader in AI & robotics without having ~25% voting control. Enough to be influential, but not so much that I can’t be overturned.

Unless that is the case, I would prefer to build products outside of Tesla. You don’t seem to understand…

— Elon Musk (@elonmusk) January 15, 2024

In other words, failure to gain more control poses a possibility that Musk’s focus could end up away from Tesla as he pursues AI and robotics ventures elsewhere.

It’s a prospect that may give Tesla backers some pause. The carmaker is currently worth $600 billion, up from roughly $50 billion in 2018, when Musk received his pay plan. By comparison, Toyota, the second most valuable carmaker, is worth less than half of Tesla’s value today.

Musk also claimed during the trial around his pay in November 2022 that his pay package would help finance his ambitions to create a multiplanetary species with SpaceX. “It’s a way to get humanity to Mars,” he said.

As Judge McCormick noted in her opinion on Tuesday, “colonizing Mars is an expensive endeavor.” So it’s reasonable to take Musk at face value when he says his Tesla pay, as McCormick put it, is a “means of bankrolling that mission.”

Technical challenges of inhabiting Mars aside, the whole project might be a nonstarter if a big chunk of its financing plan just went missing.

In addition to impacting his space colony ambitions, the judgement could also harm his ability to fund X. DealBook reported that Musk had taken out “stock margin loans” to finance some of his business ventures, meaning it could be more difficult for him to raise cash if X is in need of more.

Delaware Inc dethroned?

Closer to home, Musk’s legal battle could trigger a rethink of where Corporate America goes to do business. First, it’s worth reflecting on why this drama has been playing out in America’s second-smallest state.

Delaware is where an extraordinary amount of corporations in America go to be domiciled.. In fact, with more than one million companies incorporated there, the state is home to as many — if not more — businesses as it is people.

There are several reasons Delaware has become such a huge corporate attraction.

Favorable tax laws are one incentive. Something known as the “Delaware Loophole” allows companies to register in the state, but avoid paying corporate income tax if they don’t operate there. A sales tax is also absent.

Companies are also offered a degree of privacy that is hard to get elsewhere, thanks to rules that allow them to conceal who their owners are. In theory then, this should be a place that allows the likes of Musk to do as they like with little to rein them in.

But as the court decision showed, that’s not exactly the case: Someone as powerful as Musk can face serious pushback. His response since then has been telling.

“Never incorporate your company in the state of Delaware,” he wrote in an X post, before following up with another post recommending Nevada or Texas instead.

I recommend incorporating in Nevada or Texas if you prefer shareholders to decide matters

— Elon Musk (@elonmusk) January 31, 2024

Later, he started a poll asking X users if Tesla should incorporate in Texas, where the company has its physical headquarters. Almost 12 hours into the poll, roughly 88% of 743,200 voters said “yes.”

How complex this might be — or if it’s something Tesla’s biggest shareholders would want, is unclear. But Texas could take the opportunity to claim it can be friendlier to corporation owners. In 2023, the Texas governor signed a law to create new business courts due to open this year.

If the court offers a regime that’s friendlier towards corporate interests, expect Musk to embrace it.