Kathaleen McCormick wasn’t asking for that much. In two days, the chief judge of the court of the State of Delaware acquired worldwide fame by opposing the most publicized entrepreneur, Elon Musk. Tuesday January 30, she canceled Tesla’s decision to grant a whopping bonus of 56 billion dollars (nearly 52 billion euros) to its boss. Shareholder and stock market law is precisely the specialty of Delaware, this small state near Washington where the vast majority of large American companies are registered.
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Suffice it to say that Kathaleen McCormick knows her stuff and her arguments are solid. So much so that legal experts believe an appeal to the State Supreme Court is unlikely.
However, on paper, everything seems clear. In 2018, Tesla’s board of directors reached an agreement with Elon Musk, who agreed not to receive a salary in exchange for the promise of an exceptional bonus if the company also achieved disproportionate performance. To achieve this, the company had to increase its sales and market capitalization almost tenfold. The objective was achieved, and even exceeded in 2021 when the stock market valuation exceeded $1,000 billion.
Money found on the stock market
But the judge first disputes the amount. Even Steve Jobs would not have dared to dream of such a sum. This is 250 times higher than the average bonus for American managers, already considered exorbitant. Especially since he was already a shareholder of more than 20% of the company at the time, he had a very strong incentive to succeed in his bet. But above all, the court highlights the governance flaws of Tesla, whose board, made up of close friends, and even his brother, is entirely in the pay of the boss, who currently only holds 13% of the shares. This wouldn’t be a problem if the company was private, but it was on the stock market that it found the money to expand. Ordinary shareholders were poorly informed and, even though they also made a lot of money, they do not intend to be diluted in this transaction.
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This does not suit Elon Musk, who is multiplying costly projects which have led him to pledge part of his shares in exchange for loans. In addition, Tesla’s golden age may be fading away with the rise of competition, particularly from China. The Delaware judge may have signaled the end of recess.
