How the deal that made Musk the world’s richest person could unravel

WILMINGTON, DE - JULY 12: Tesla Founder Elon Musk leaves a courthouse after testifying in a court case on July 12, 2021 in Wilmington, Delaware. Musk testified in court over Tesla's $2.6 billion acquisition of SolarCity, a rooftop solar panel installer. (Photo by Michael A. McCoy/Getty Images) (Michael A. McCoy via Getty Images)

Elon Musk’s $56 billion pay package from Tesla - termed “an unfathomable sum” by the Delaware judge who tossed it out on Tuesday - was the cornerstone of Musk’s meteoric rise from eccentric CEO to world’s richest person, fueling audacious bets to explore the cosmos, digitize the human brain and acquire Twitter’s “de facto town square.”

Now, he may have to give it all back.

Subscribe to The Post Most newsletter for the most important and interesting stories from The Washington Post.

Legal experts say Musk likely will be forced to return at least some of the stock options he secured as part of his 2018 pay package, an award that was - and remains - unparalleled in scope. “The plan is the largest potential compensation opportunity ever observed in public markets by multiple orders of magnitude,” Chancellor Kathaleen McCormick wrote in her opinion, “over 33 times larger than the plan’s closest comparison, which was Musk’s prior compensation plan.”

No matter how much Musk had to give up to pursue his many other ambitions, he could always trust that additional shares from the lucrative Tesla package were right around the corner. Now, legal experts said, McCormick’s ruling almost certainly will require Tesla to devise a plan to hand back Musk’s stock options.

Wall Street is still grappling with the gravity of the decision.

This could be “a historical moment in the Tesla story,” said Daniel Ives, managing director with Wedbush Securities. But “the board,” he added, “is not going to lay down and let the Delaware court decide the future of Tesla.”

Late Wednesday, Musk announced on X that “Tesla will move immediately to hold a shareholder vote to transfer” the company’s incorporation from Delaware to Texas, home of its physical headquarters, after a poll of X users came out “unequivocally in favor of Texas!”

The Delaware ruling comes at a difficult time for Musk. His Tesla stake is now around 13 percent, well below the nearly 22 percent he controlled when the compensation plan was struck. It has dwindled as he sold stock to cover tax bills and other financial obligations since his $44 billion purchase of Twitter in 2022. Meanwhile, Tesla - which rose like a rocket to become the world’s most valuable automaker in 2020 - is encountering new challenges, including stagnating revenue from steep price cuts and the prospect of softening demand for its electric vehicles.

Musk faces more than financial losses. The nation’s premier business court ruled that members of Tesla’s board were “beholden” to him in a flawed compensation process that he heavily influenced. That ruling strikes at his power, his reputation and his carefully cultivated image as a rakish but brilliant entrepreneur and tactical genius.

Here’s what we know.

- - -

What is this $56 billion pay package?

In 2018, Musk helped arrange a compensation package in lieu of salary that put him on track to become the world’s wealthiest person. The package was composed of stock options at a time when Musk owned nearly 22 percent of the company’s shares, so long as he hit performance-based goals.

With a maximum value of nearly $56 billion, the plan is the “largest potential compensation opportunity ever observed in public markets” by a significant margin, McCormick said in her decision.

“This ownership stake gave him every incentive to push Tesla to levels of transformative growth,” she wrote, noting that “Musk stood to gain over $10 billion for every $50 billion” the company recorded “in market capitalization increase.”

- - -

Why did the judge rule it unfair?

McCormick said Musk used his “enormous influence over Tesla” to shape the package, leveraging his personal relationships with the board members who approved it, including longtime friends and his former divorce lawyer.

The ruling describes Musk as a “paradigmatic Superstar CEO” who “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.” The result was a process that was “deeply flawed,” McCormick said in her ruling.

Moreover, the performance milestones set out in the agreement were supposed to compensate Musk for hitting “stretch performance goals.” But in reality the targets were conservative, the ruling said, rewarding Musk for growth that was in line with Tesla’s expectations.

“It is not clear how Tesla management reconciled their views that the milestones were both ‘risky’ and a ‘stretch’ yet simultaneously more than 70% likely to occur,” the ruling states.

- - -

What happens now?

The choices facing Musk and Tesla’s board are complex and come with plenty of baggage, according to Anat Alon-Beck, associate professor of law at Case Western Reserve University.

They can appeal the decision, but they’re unlikely to succeed given the evidence, she said. So they may have to create a new special committee with an appropriate degree of independence from Musk and draw up a new compensation package that would supersede the one voided by the ruling.

Musk asked his followers on X (formerly Twitter) whether he should move Tesla out of Delaware; the poll results overwhelmingly show that he should. But Alon-Beck said he would face an uphill battle to relocate. Shareholders tend to prefer that public companies incorporate in Delaware because the state’s policies are so friendly to businesses and their shareholders, including lenient taxes, a higher degree of privacy and a court dedicated solely to corporate cases.

“It’s like the Hotel California,” Alon-Beck said of Delaware. “You can check in, but you can never leave.”

Still, Tesla shareholders are notoriously loyal to Musk; any ask he makes is likely to be taken seriously.

Any appeal, meanwhile, would land in the Delaware Supreme Court, which could affirm or reverse McCormick’s decision. While an outright judgment in favor of Musk is unlikely, said Ann Lipton, associate law professor at Tulane University, the court could send the case back to McCormick to revisit the reasoning behind some of her findings.

“There have been trials where you just kick a whole thing back down but try it again,” she said.

- - -

What does it mean for Musk’s wealth?

The Tesla pay package helped propel Musk’s net worth to about $200 billion, making him the world’s richest person. If he is forced to return the stock grants, his wealth would take a significant blow, probably knocking him out of the top spot.

But the hit to his net worth wouldn’t necessarily be straightforward. Because so much of his wealth is tied to Tesla’s valuation, the potential shock to the company’s stock price could cause his net worth to tumble further than the $56 billion value of the options.

He would hardly be destitute: Musk still holds significant wealth in the form of his other Tesla shares, and his ownership in several other companies, including SpaceX and the Boring Co. Musk made his fortune early on with PayPal, which he co-founded. He pocketed $165 million from its sale to eBay.

Musk invested in Tesla in 2004, a year after its founding, and became its chief executive in 2007. His space exploration company, SpaceX, has a valuation of about $180 billion, according to CNBC, and Musk owns about 42 percent of the company.

- - -

What does it mean for Tesla?

Tesla’s board is now left in the uncomfortable position of having to oversee the company, which is led by Musk, even though some board members have been ruled too cozy with the CEO. Legal experts said the board could be asked to approve a new pay package for Musk that would not land them in the same legal situation.

It will be a tricky line to walk, legal experts said. Still, Musk is popular among many investors, and some experts believe he’s likely to get paid somehow.

“I feel like he’ll find a way to get most, if not all, of this,” said Gene Munster, managing partner at Deepwater Asset Management. “There’s going to probably be some sort of workaround to get there.”

But the decision could throw Musk’s plan to win greater control of Tesla into jeopardy.

As it considers future compensation packages for him, the board “will probably be chastened by this decision,” said Andrew Jennings, associate professor at Emory University School of Law.

- - -

What does it mean for Musk’s larger empire?

Musk is notorious for his lack of liquid wealth - most of his money is tied up in stock or equity in private companies. The shares are valuable not just for their monetary potential, but because he leverages them to take out personal loans and make other investments.

There have been times when Musk has put down more than half his Tesla shares as collateral for loans. Musk was able to buy Twitter because he used Tesla shares to back his $44 billion offer, which was also supported by a $13 billion loan.

But losing the Tesla options could put a squeeze on all of Musk’s bets - tanking the company’s share price and jeopardizing his ability to cover his financial commitments. X is now estimated to be worth around a quarter of what Musk paid for it - and he owes roughly $1 billion in interest annually.

“He’s just working with a much thinner margin and a much smaller net,” said Eric Talley, a professor of law and co-director of the Millstein Center at Columbia University.

Related Content

Students reported her for a lesson on race. Then she taught it again.

'Microsoft is back.' How AI put the five-decade-old tech giant on top again.

Taylor and Travis — and everything you’re dying to know!