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Elon Musk could potentially no longer hold the title of the wealthiest person in the world as a US court has ruled for him to repay a company payout of approximately $56 billion.
On Tuesday, a Delaware court decided that the CEO of SpaceX and Neuralink, who has been in charge of Tesla since 2008, cannot retain the substantial compensation package he received from the electric car company.
The decision was a success for Tesla investors who had alleged that Mr. Musk had exerted control over the conditions of his own compensation to board members who lacked true independence from him.
If put into effect, the decision of the court would greatly reduce Mr. Musk’s estimated fortune of over $200 billion and potentially lower his rank among the world’s richest individuals, placing him below Amazon’s Jeff Bezos and French fashion mogul Bernard Arnault.
According to Judge Kathaleen McCormick, both the compensation committee and the board did not prioritize the company’s well-being when discussing Musk’s compensation plan. In fact, there is little indication that any negotiations took place.
She referred to Mr. Musk as an exceptional CEO who utilized his power within the company and strong connections with several board members to establish an imperfect approval procedure that resulted in an unjust price.
Mr. Musk responded by saying, “Do not incorporate your company in the state of Delaware.”
The value of Tesla stocks declined by up to 4% during after-hours trading on Tuesday night.
The New York Stock Exchange and Nasdaq both mandate that a company’s board of directors must consist mostly of individuals who are not affiliated with the company before its shares can be publicly traded.
In the court proceedings, attorneys for Tesla contended that the large compensation package, which was first approved by the board in 2018 and later by shareholders, was crucial in maintaining the concentration of one of the top engineers in the world on the company.
During that period, Tesla was facing significant challenges in manufacturing its Model 3 sedan at a high volume, which was referred to as “production hell”. In order to incentivize Mr. Musk, his agreement included an additional 1% of the company’s shares for every commercial goal he achieved.
According to Ms McCormick, this was the biggest chance for compensation ever seen in public markets, surpassing all others by a significant amount.
Afterward, the enterprise has exceeded all 12 goals and achieved a high value, elevating Mr. Musk from the middle ranks of Forbes’ wealthy individuals to the very top.
During their highest point, Tesla’s stocks were trading at almost 14 times their value from the start of 2020. Currently, even after a challenging year for the company and the economy, they are still more than five times that amount.
Antonia Gracias, a former member of Tesla’s board from 2007 to 2021, claimed in court that it was a beneficial decision for shareholders as it resulted in the company’s significant growth and success.
However, according to McCormick’s decision, Mr. Musk already had a strong motivation to effectively manage the company due to his ownership of 22% of its shares.
“Enthralled by the persuasive language of ‘all benefit,’ or possibly captivated by Musk’s celebrity charm, the board failed to inquire about the crucial $55.8 billion inquiry: Was the proposed plan truly essential for Tesla to keep Musk and reach its objectives?” she stated.
According to her, Mr. Musk has strong connections with those who negotiated his salary and has made the entire company rely heavily on him. This is evident in his recent change of title from “CEO” to “Technoking” in 2021.
The speaker also mentioned that shareholders were not fully aware when they voted on the deal because the company’s statement did not clearly disclose the involvement of key directors with Mr. Musk.
During the conversation, Ms. McCormick recalled that Mr. Musk straightforwardly referred to an initial iteration of the agreement as “me negotiating against myself.”
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