Elon Musk’s $50 Billion Tesla Pay Was Struck Down. What Happens Next?

A Delaware judge’s decision to void the pay package that helped make Elon Musk the world’s richest person leaves Tesla’s board with some difficult decisions to make.

Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery on Tuesday ordered Tesla to cancel stock options awarded to Mr. Musk, the electric car company’s chief executive, worth about $50 billion. Now the company’s directors must figure out a new compensation plan that can pass legal muster and satisfy Mr. Musk, who recently demanded that the board substantially increase his ownership of Tesla.

Tesla and Mr. Musk could appeal the court decision. Mr. Musk on Thursday said he would seek to incorporate the company in Texas, a state that he believes could be more hospitable to businesses.

As part of a compensation package Tesla finalized in 2018, Mr. Musk received options to buy 304 million shares that are now worth more than $50 billion. He has met the goals needed to receive those options, but Mr. Musk does not appear to have converted them into shares of Tesla. If he had, he would be barred from selling them for five years.

Chancellor McCormick said in her decision that Tesla must cancel the options, although she has not yet issued a formal order requiring the company to do so.

Even without the stock from that package, Tesla has made Mr. Musk unimaginably rich. He owns roughly 411 million Tesla shares that are worth around $78 billion. A securities filing last year said he had pledged 238 million shares for personal loans.

Mr. Musk, clearly angry, threatened to reincorporate Tesla in another state. On X, the social media platform that he owns, he said on Thursday that Tesla “will immediately move to hold a shareholder vote” to incorporate itself in Texas, where it has its corporate offices and a large factory.

Delaware is a popular place for companies to incorporate because of its streamlined legal system. Cases are heard by judges instead of juries, and there is only one layer of appeal — to the Delaware Supreme Court.

Mr. Musk has incorporated X, his social media company, in Nevada, whose laws make it much harder to sue directors. That company, previously called Twitter, had been incorporated in Delaware before Mr. Musk acquired it.

But his plan to move Tesla to Texas might meet resistance from shareholders if they see the change as an attempt to reduce their power.

Relocation “doesn’t give him a magic ticket,” said Gregory Varallo, a lawyer in Wilmington, Del., who argued the case against Mr. Musk’s pay package for shareholders.

If the stock options Tesla had awarded Mr. Musk in the 2018 package are voided, the company would have fewer shares outstanding. That, in theory, would increase the value of the stock owned by other people or businesses.

But any lift this gives the stock price could be offset by investor fears that Mr. Musk might leave the company or become less focused on its operations. Tesla’s share price fell by about 2 percent on Wednesday after Ms. McCormick’s ruling, which was released after the stock market had closed on Tuesday.

Over the long term, a company’s share price is driven by its profit and cash flow. Tesla’s stock has slumped by more than half from its high and is down over 20 percent this year largely because its profit margins have plunged and the company is expecting sales to grow much more slowly this year.

Chancellor McCormick said Mr. Musk played too great a role in devising the terms of his pay deal, and the board, which is legally obligated to serve the best interests of all shareholders, was not sufficiently independent of him. One director is his brother, Kimbal, and several others are longstanding friends and associates. She also said the pay package was excessive and paid him much more than was needed to motivate him to do a good job.

As a result, directors might have to make changes that will convince a judge that any new compensation package they award him was put together in an arms-length negotiation between them and Mr. Musk. Any revamped pay deal might also have to pay him a lot less.

The Tesla board needs to find a way to keep Mr. Musk focused on the business while also exerting more control over his “erratic” behavior, said Kristin Hull, founder of Nia Impact Capital, an investment firm in Oakland, Calif.

“We want him to play a really important role,” Dr. Hull said, but added, “There need to be some checks and balances and that’s what this decision is all about.” The fund owns a small number of shares.

Robyn Denholm, the chair of Tesla’s board, did not respond to a request for comment. Nor did the other seven members of the board.

Tesla and Mr. Musk can appeal to the Delaware Supreme Court, which some legal experts said would probably uphold the ruling.

But some legal experts said lawyers for the company and Mr. Musk could try to argue that Ms. McCormick’s ruling went too far and should be reversed. Mr. Musk’s lawyers, for instance, might argue that he was not the controlling shareholder that Chancellor McCormick suggested he was. He owned about 22 percent of Tesla when the package was devised, not giving him enough votes to control the company. The chancellor also said his “superstar” status gave him undue influence on the board.

“The supreme court could go either way” on that argument, said Michal Barzuza, a law professor at the University of Virginia, referring to the Delaware Supreme Court.

Tesla could also seek to take its appeal to the U.S. Supreme Court, but might have a tough time getting the high court to take the case because it does not raise any obvious constitutional or federal issues.

Lawyers who represented Mr. Musk in the case did not respond to requests for comment.

The decision would change Tesla’s approach to designing, manufacturing and selling cars only if it prompts Mr. Musk to leave the company or play a less active role. Mr. Musk has shown signs of being restive. Before the decision, Mr. Musk had demanded that the Tesla board increase his stake in the company to 25 percent, from 13 percent.

If he didn’t get what he was asking for, he said, he would work on robotics and artificial intelligence products elsewhere. Mr. Musk has already established an independent artificial intelligence company called xAI. He also runs SpaceX and is the founder of Neuralink, which is developing implants allowing people to control computers with their brains.

It’s hard to see how the Tesla board could meet his demand for a much bigger stake in the car company in light of the Delaware decision.

Few, if any, chief executives are so closely identified with their products, or seen as such an essential part of their companies’ success, as Mr. Musk. In her decision, Ms. McCormick suggested his status as a “superstar” chief executive had a downside. It “creates a ‘distortion field’ that interferes with board oversight,” she said.