Brief of Current and Retired Practitioners and Professors as Amici Curiae in Support of Reversal in In re Tesla, Inc. Derivative Litigation

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Delaware Chancery Court Twice Rejects Musk’s $56 Billion Tesla Pay Package

Chancellor Kathaleen McCormick of the Delaware Court of Chancery has twice invalidated Elon Musk’s unprecedented $56 billion compensation package from Tesla, citing serious procedural flaws and breaches of fiduciary duty. Her rulings underscore the heightened scrutiny Delaware courts apply to conflicted transactions involving controlling shareholders, particularly when procedural safeguards are lacking.

First Ruling – January 2024

In a sweeping decision, Chancellor McCormick found that the pay package was the product of a flawed process infected by conflicts of interest. She held that Musk, as a controlling shareholder, played an improper role in shaping the terms of his own compensation, negotiating directly with board members who lacked true independence. The court concluded that these actions constituted a breach of fiduciary duty and ordered the package rescinded.

Shareholder Vote and Second Ruling – December 2024

After the initial ruling, Tesla attempted to cure the defects by submitting the compensation plan to a shareholder vote. However, Chancellor McCormick rejected the ratification effort, ruling that the vote was procedurally defective and tainted by materially misleading disclosures in the proxy statement. She emphasized that even where shareholder ratification might otherwise validate a compensation arrangement, it cannot do so when the process is compromised and shareholders are not fully informed.

These rulings indicated that Delaware courts intended to closely examine transactions involving fiduciary self-dealing and would not hesitate to intervene when procedural safeguards—such as board independence and full disclosure—are lacking. The decisions also illustrate that shareholder ratification is not a panacea; it must be properly informed and procedurally sound to have legal effect.