The litigation, known as Tornetta v. Musk, was filed as a derivative action in 2018. Shareholder Tornetta argued that Musk and Tesla’s board breached their fiduciary duties by granting an unfairly generous package to a controlling shareholder. After an 11-day trial, Chancellor McCormick concluded that Musk exercised extensive influence over the board and that key information was omitted from proxy materials before the shareholder vote.
In Friday’s opinion, the Supreme Court left those factual findings intact but determined that the remedy should have afforded Tesla an opportunity to propose an alternative compensation figure. By opting for rescission without that step, the Chancery Court “went further than necessary,” the justices wrote.
The order brings an apparent end to more than five years of legal wrangling over the record-setting award. Attorneys for Tornetta stated by e-mail that they remain satisfied with the lower-court verdict establishing the board’s fiduciary breaches, even though the remedy has been narrowed. Tesla did not immediately issue a public response.
Broader Corporate Governance Implications
The case has drawn widespread attention because Delaware is the incorporation venue for a majority of U.S. public companies. McCormick’s earlier decision triggered swift reaction from Musk, who criticized the ruling on his social platform X, moved Tesla’s state of incorporation to Texas, and encouraged other entrepreneurs to reconsider Delaware.
Tesla’s board sought to pre-empt potential fallout by holding a fresh shareholder vote in 2024 to “ratify” the 2018 plan. In November, investors also approved a separate ten-year compensation framework that could ultimately be worth about $1 trillion if aggressive performance thresholds are achieved. That newer plan would raise Musk’s voting interest from roughly 13 percent to about 25 percent. Because the Supreme Court has now reinstated the original 2018 package, the contingency mechanism adopted to replace it is rendered moot.
Imagem: Internet
The legal conflict intersected with legislative activity as well. A law firm representing Tesla in the appeal drafted a bill to revise Delaware’s corporate statutes earlier this year. The measure, adopted by the state legislature in March, would have altered standards for validating corporate acts; however, it applies only prospectively and therefore did not influence the Supreme Court’s analysis.
Details of the Restored Award
The reinstated arrangement grants Musk options equal to about 1 percent of Tesla’s common stock per tranche, exercisable when specific benchmarks are met. Requirements include sustained market-capitalization tiers ranging from $100 billion to $650 billion and escalating revenue and EBITDA targets. All 12 milestones were reached by the end of 2022, leading to the full vesting that the Chancery Court sought to unwind.
The Supreme Court’s decision does not alter McCormick’s determination that Musk’s outsized role in negotiations created conflicts of interest. It does, however, signal that courts may favor narrower remedies, such as monetary adjustments, rather than outright cancellation, when boards are found to have breached procedural duties. The judges emphasized that any future challenge to executive pay should give companies a chance to demonstrate what level of compensation would be fair to shareholders under the circumstances.
For Tesla, the ruling eliminates significant uncertainty around Musk’s historical earnings but leaves open questions about its current governance practices and the scale of incentives attached to future performance. The company continues to face scrutiny over board independence, disclosure standards, and Musk’s multi-company commitments, which include leadership roles at SpaceX, Neuralink and X.
No further appeals are expected because Delaware’s highest court is the ultimate authority on matters of state corporate law. Absent new litigation, the judgment reinstating the options and awarding nominal damages concludes the longstanding dispute.
Crédito da imagem: CNBC
