HOW RICH is too rich? According to judge Kathaleen McCormick, Chancellor of the Delaware Chancery Court, in her ruling on Musk v Tornetta in January this year, the 2018 remuneration package given to Elon Musk for growing Tesla into a 1.2 trillion-dollar company was way too generous. At the same time she appeared to mock his aim to colonise Mars.
She ruled, ‘In the final analysis, Musk launched a self-driving (remuneration) process, recalibrating the speed and direction along the way as he saw fit. The process arrived at an unfair price. And through this litigation, the plaintiff requests a recall . . . The incredible size of the biggest compensation plan ever — an unfathomable sum — seems to have been calibrated to help Musk achieve what he believed would make ‘a good future for humanity.’
McCormack ordered a rescission of Musk’s options package. He was thereby deprived of all compensation for his work of the previous five years. Two weeks ago, despite an overwhelming and larger second vote by shareholders in June in favour of Musk’s remuneration, judge McCormick, a politicised Democrat, stuck to her ruling that Musk should get nothing.
The background to this courtroom drama is as follows. In 2018 the board of Tesla and some 73 per cent of Tesla’s shareholders (excluding Elon Musk and his brother, Kimbal, who recused themselves) voted to give Musk a highly incentivised options package. Musk would receive no pay. Instead in 12 tranches he would be incentivised with share options if he achieved outlandish benchmarks on car delivery, EBITDA (earnings before interest, taxes, depreciation, and amortisation) and, most important, stock-price performance.
To get paid he would have to turn a company valued at 50 billion US dollars into a company worth more than 650 billion. According to the defendants, the deal was ‘six percent for 600 billion dollars of growth in stockholder value.’
There was clear precedent. It was a remuneration model based on Musk’s first share grant, in 2012, which vested after five years when he grew Tesla’s market capitalisation from 3.2 to 53 billion. The performance targets for the 2018 package were so ambitious it is difficult to imagine that any executive, except an inveterate risk-taker such as Musk, would have accepted them.
But, through extreme adversity, he triumphed. Musk’s denied options today would be worth about 100 billion US dollars. An incredible sum, it is true, but is it right for a judge to strike down a pay package simply because she thinks the amount is too much?
An English barrister of my acquaintance prima facie agreed with McCormick – perhaps a reflection on how left-wing have judiciaries in Britain, Europe and elsewhere become. But as Musk has argued, ‘shareholders should control company votes, not judges.’ He has also vowed to take Musk v Tornetta to the Delaware Court of Appeal.
The case against Musk was originally brought by Richard Tornetta, a drummer for the heavy-metal rock band Dawn of Correction. Tornetta’s other activities include industrial design, making auto-audio gadgets and working as a shareholder activist.
That he was represented by three law firms, two of them based in New York, suggests Tornetta, who supposedly owns just nine Tesla shares, was possibly a stalking horse for the Democrat Party. The trial took place in President Joe Biden’s home state of Delaware, which he represented as a Senator for 36 years.
The third law firm, Andrews & Springer LLC, is based in Wilmington Delaware, population 70,000, where McCormick’s Chancery court resides. One assumes that everyone knows everyone in Delaware legal circles.
While McCormick believed Musk should be paid nothing, not even a salary, for five years of work, she awarded Tornetta’s lawyers 345 million US dollars (it should be noted this was less than the 5.6 billion – an hourly rate of 290,000 dollars – claimed by those lawyers).
It should also be remembered that, because of Musk’s refusal to allow unions into Tesla, Biden did not invite Musk – albeit a lifelong Democrat who voted for Biden in 2019 – to his EV summit in August 2021.
This has not been Musk’s only run-in with the Democrat establishment in recent years. In May 2020 Tesla defied the order of a minor public-health official to shut his Fremont California factory during the Covid-19 pandemic. Musk challenged the authorities to arrest him.
Similarly, his brushes with California’s Democrat governor, Gavin Newsom, are legendary. After Newsom recently passed a law placing state rights above parental rights, Musk moved the headquarters of all his businesses, X included, to Texas.
In 2018 the SEC (Securities and Exchange Commission) forced Musk to resign as chairman of Tesla. Later in 2021 and 2022 the SEC sought to bar him as an officer or director of a public company.
Disputes between Musk and the SEC are ongoing. Musk has publicly referred to the SEC’s San Francisco office as ‘bastards . . . shameless puppets of Wall Street shortseller sharks who did nothing to protect actual shareholders’.
As for McCormick, she justified her Musk v Tornetta ruling on nitpicking legal grounds. She argued that Musk was a controlling shareholder and that he imposed a remuneration package in his favour. The negotiations, McCormick alleged, were not done at ‘arm’s length’, because the board members were Musk’s friends; negotiations were not confrontational enough. Further she concluded that ‘performance conditions need to be meaningful and real’.
The flaws in McCormick’s reasoning are manifold. With 21 per cent of the shares in 2018, Musk did not have a controlling interest. When it came to votes on his remuneration, Musk and his brother recused themselves. The board and its remuneration committee comprised wealthy independent individuals such as James Murdoch, scion of the Murdoch media empire, and Hiromichi Mizuno, Chief Investment Officer of the Japanese Government Pension Fund. These were not lightweight, biddable figures.
Lastly, how could Musk’s building of a sustainably profitable auto company, the first since Chrysler 100 years ago, not be ‘meaningful and real’?
As the legendary Swiss-American auto executive Bob Lutz – who during his career worked for Ford, Chrysler and General Motors – observed in 2018, Tesla had no tech advantage, no software advantage, no battery advantage. No advantages whatsoever.
They will never make money on the Model 3 because the cost is way too high. Musk himself viewed the probability of Tesla completing his ‘Master Plan Part Deux’, which aimed to build an ‘affordable’ Model 3, as ‘extremely unlikely’. Professional investors agreed. At the time, some 25 per cent of Tesla stock was shorted, a record figure. Shortsellers included Bill Gates, who has never been forgiven by Musk.
To achieve his Model 3 targets, Musk spent several years practically living in his Fremont auto plant, often sleeping on a mattress under his desk in the middle of the shop floor.
Not surprisingly, he has posted on X advising companies to avoid incorporating in Delaware: ‘Change your state of incorporation out of Delaware before they lock the doors.’
At the annual general meeting this year Tesla shareholders approved a move of corporate registration from Delaware to Texas. It is the risk that Delaware will lose its pre-eminent position in corporate registration in the US that leads some observers to suggest vested legal interests in Wilmington will make sure Musk wins the appeal in Delaware’s supreme court. It is assumed failure in Delaware would lead Musk to appeal to the Supreme Court in Washington.
In the tiny state of Delaware, just four times the size of London, with a population of just over a million, this is no minor matter. Delaware needs the money.
According to Michel Casey, author of American Kleptocracy: How the US created the World’s Greatest Money laundering Scheme in History, Delaware replaced New Jersey in the early 19th century as the go-to destination for corporations nationwide looking for protections and secrecy unavailable elsewhere (others had referred to New Jersey as the ‘traitor state’ sucking up corporate taxes and fees other states lost out on).
The transfer of these activities to Delaware took place after Woodrow Wilson, who before becoming US President was governor of New Jersey in the two years to 1913, decided to clean up corporate corruption. The American Law Review from the era reported that Delaware was gangrened with envy at the spectacle of the truck-patchers, sand-duners, clam-diggers and mosquito-wafters of New Jersey getting all the money in the country into her coffers.
After Senator Wilson’s reforms, Delaware cleaned up; Delaware has since had the dubious honour of being the ‘traitor state’. A natural home, one might think, for the ‘Biden crime family’, as President-elect Trump used to refer to the Bidens during the presidential campaign. This monicker was an allusion to kickbacks to an unnamed ‘big man’ referred to 17 times in Hunter Biden’s infamous laptop files.
The contents of these files were suppressed by the FBI in collusion with American social-media companies before the 2020 presidential election, won by Biden. Indeed, it was the release of the so-called Twitter Files by Musk that provided the first hard evidence of the Democrats’ ‘deep state’ conspiracy against Trump.
Is the Musk v Tornetta case an example of Democrat lawfare against Trump supporters or an example of an extremely radicalised judge in what the Daily Beast has described as America’s fourth-most-corrupt state? Or both? You decide.
Whatever the answer, in a country that believes in risk-taking and free-market endeavour, allowing courts to overturn the will of shareholders, properly informed, is absurd. It is the slippery path to an authoritarian socialist state.
