A Delaware Supreme Court justice on Wednesday pressed a Tesla Inc. stockholder class attorney on how founder Elon Musk — facing a Court of Chancery strike-down of his $56 billion, multiyear compensation plan — can be "put back to the status quo ante after six years of achieving what he was asked to achieve."
Justice Karen L. Valihura put the question to Gregory V. Varallo of Bernstein Litowitz Berger & Grossmann LLP during arguments for reversal of Chancellor Kathaleen St. J. McCormick's finding in January 2024 that disclosure failures, murky terms, conflicted director architects and the pressure from Musk's influence warranted rescinding the pay package.
The chancellor followed up the decision with a still-pending $345 million attorney fee award, which was also at the center of the appeal arguments Wednesday by Tesla, its directors and objectors. The fee reflected 15% of a $15 billion reversed accounting charge resulting from Chancellor McCormick's ruling.
According to the suit and ruling under appeal, the electric car and renewable energy company's board approved a deal in which Musk allegedly "dictated the timing" of the approval process in 2018. He also purportedly changed "substantive terms immediately prior to six out of the 10 board or compensation committee meetings during which the plan was discussed," the complaint said.
Tesla stockholders nevertheless approved rechartering the company in Texas after Chancellor McCormick's decision, removing the business from Delaware General Corporation Law mandates. The company's market capitalization was reported at $1.35 trillion Wednesday, six years after approval of a 10-year plan pegged in part on a far-lower, $650 billion target level in the package.
"Do you have a case where the court has equitably rescinded an executive's compensation after years of work?" Justice Valihura asked. The justice added later that the stockholders sought only recission of the pay plan, noting, "You abandoned your other remedies. If we were to determine recission isn't appropriate here, aren't you left with nominal damages?"
Varallo argued that there was "nothing extraordinary" about Chancellor McCormick's decision.
"What makes the case truly extraordinary is that it addresses the largest pay package in human history," granted "to the richest man on Earth, and also one of the most powerful men on our planet," he said.
Christopher G. Michel of Quinn Emanuel Urquhart & Sullivan LLP, counsel to Tesla's individual directors, told the justices that Musk was not a controlling stockholder, and that the stockholders themselves approved the 2018 plan in a fully informed vote, with the economic substance of the pay package disclosed in a proxy.
Justice Gary F. Traynor told Michel that the case pretrial stipulation made clear that the suit sought recission of the stock award, "and there was no pushback that I saw from the defendants."
"Recission is only legally available when it restores all parties to their position before the transaction," Michel said. "This doesn't restore any of the parties. Mr Musk cannot reclaim the years of work he did; the nights he spent sleeping on the floor of the factory."
Varallo later argued that the Tesla's board did a "terrible job" of monitoring Musk's conduct, and said that the suit was able to demonstrate his control, with Chancellor McCormick finding that Musk "repeatedly and unilaterally manipulated the timing of the process."
The defense, Varallo argued, conceded after the trial that any material disclosure failure would trigger a more plaintiff-friendly entire fairness standard of review for the claims, rather than business judgment deference.
"They argue you missed the caveat to that: assuming he was a controlling stockholder," Chief Justice Collins J. Justice Seitz Jr. said.
Varallo said "Musk had significant ownership in the company, and according to the [Chancery] court, the maximum influence a manager can wield over a company," with a majority of directors beholden to him.
Jeffrey B. Wall of Sullivan & Cromwell LLP, counsel to Tesla, told the court that an overwhelming 72% majority of the company's stockholders agreed to leave the pay plan in place, "whatever its flaws, and move on."
Delaware's Supreme Court has recognized the legitimacy of posttrial ratification, Wall said, adding that the Tesla shareholder vote was "likely the most informed vote in Delaware history."
"The Chancery Court seems to view the ratification vote as an attack or an attempt to flip the court's decision. It wasn't," Wall said. "They were answering a different question: Given where we are now, what do we wish to do? Keep the plan in place and avoid a massive accounting charge or go back to the table and negotiate with Mr. Musk?"
Corporation and law firm response to the Tesla case and other recent Court of Chancery decisions spawned business-friendly amendments to the state's corporation law in both 2023 and 2024.
One of several friend-of-the-court briefs filed in the case, submitted by the Texas Association of Business, argued that "one thing coming out of this litigation is certain: However you slice it, the [second Tesla shareholder vote] suggests shareholders did not believe that Delaware's formal legal standards were providing them many benefits at all."
Another friend-of-the-court brief filed by former attorneys and law professors cautioned that, "if permitted to stand, the rulings below —which foretell an impractical, litigation-driven approach to numerous transactions, especially executive compensation — draw into question Delaware's long-standing position as the leading jurisdiction in the United States on corporate law."
The stockholders are represented by Gregory V. Varallo, Jeroen van Kwawegen and Thomas G. James of Bernstein Litowitz Berger & Grossmann LLP, Peter B. Andrews, Craig J. Springer, David M. Sborz, Andrew J. Peach and Jackson E Warren of Andrews & Springer LLC, and Jeremy S. Friedman, Spencer M. Oster and David F.E. Tejtel of Friedman Oster & Tejtel PLLC.
The individual directors are represented by David E. Ross, Garret B. Moritz and Thomas B. Mandracchia of Ross Aronstam & Moritz LLP, Michael A. Barlow, Alex Spiro, Christopher D. Kercher and Christopher G. Michel of Quinn Emanuel Urquhart & Sullivan LLP, and Daniel Slifkin and Vanessa A. Lavely of Cravath Swaine & Moore LLP.
Tesla is represented by Rudolf Koch and John D. Hendershot of Richards Layton & Finger PA, William M. Lafferty and Susan W. Waesco of Morris Nichols Arsht & Tunnell LLP, John L. Reed and Ronald N. Brown of DLA Piper, and Catherine A. Gaul of Ashby & Geddes PA.
The objector defendants are represented by Anthony A. Rickey of Margrave Law LLC, David S. Eagle and Sally E. Veghte of Klehr Harrison Harvey Branzburg LLP, Donald B. Verrilli, Elaine J. Goldberg and Achyut J. Phadke of Munger Tolles & Olson LLP, Joseph A. Grundfest of Stanford Law School, and Thomas R. Grady of GradyLaw.
The case is In re Tesla Inc. Derivative Litigation, case numbers 534, 2024; 10, 2025; 11, 2025; and 12, 2025, in the Supreme Court of the State of Delaware. The case under appeal is 2018-0408, in the Court of Chancery of the State of Delaware.
Oct 15
Deal Summary
