Elon Musk Set for $1 Trillion Pay Package Under Texas Law

Elon Musk is poised for a remarkable pay package valued at $1 trillion from Tesla, enabled by the state’s recently enacted management-friendly corporate law in Texas. This significant development comes after Tesla reincorporated in Texas last year, following a Delaware court’s ruling that deemed Musk’s previous $56 billion compensation “unfathomable” and detrimental to shareholders.

Musk’s advocacy for businesses to abandon Delaware has taken effect, as the new Texas law provides a more favorable environment for corporate governance. The revamped pay structure for Musk, who is already the world’s richest person, is expected to have a higher chance of approval and lower risk of legal challenges compared to previous arrangements under Delaware law.

Under Texas regulations, shareholders face increased difficulty in contesting the independence of board members involved in developing Musk’s pay package. Unlike the 2018 pay structure, Musk will have the ability to vote his shares—approximately 13.5 percent—in favor of the new deal, according to a recent security filing. This voting power significantly enhances the likelihood of the pay package’s acceptance.

In 2022, shareholders voted to “ratify” Musk’s 2018 compensation package, an effort to counter the court’s ruling and reinstate his pay. Musk will control around 411 million shares at the upcoming shareholder meeting, nearly outweighing the 529 million shares that opposed the 2018 package. Ultimately, the ratification vote did not hold weight, as the Delaware judge’s previous decision was upheld and is currently under appeal.

The legal landscape has shifted since Tesla moved to Texas, as the state’s laws offer better protections against shareholder lawsuits. Ann Lipton, a professor at the University of Colorado Law School, stated, “They are completely insulated from a shareholder lawsuit in Texas.” Tesla assured investors during its transition from Delaware to Texas that the corporate laws in both states were “substantially equivalent,” and that shareholders would not have weaker litigation rights in Texas.

However, the situation changed in May 2023, when Texas lawmakers introduced legislation allowing companies to require shareholders to own at least 3 percent of a stock before they can initiate a lawsuit. Tesla swiftly implemented a bylaw reflecting this requirement. Musk is currently the only individual shareholder meeting this threshold, while institutional investors like Vanguard, BlackRock, and State Street maintain passive investment positions. Other investors could collaborate to achieve the necessary ownership percentage.

In contrast, Delaware imposes no such restrictions, leading to numerous lawsuits initiated by investors holding minimal stakes. These cases are often overseen and financed by specialized law firms, a fact that frustrates corporate boards. Notably, Richard Tornetta held just nine shares of Tesla when he filed a lawsuit regarding Musk’s 2018 compensation.

The New York State Comptroller has expressed concerns about Tesla’s new threshold, proposing to repeal the 3 percent requirement at the annual meeting where shareholders will also vote on Musk’s pay package. Lipton advised that shareholders dissatisfied with the proposed compensation have an alternative: “Sell,” she suggested.

As Tesla navigates its pay structure and corporate governance in Texas, the outcome of the upcoming vote will be closely monitored by investors and analysts alike. The implications of this decision could reverberate throughout corporate America, particularly in how companies structure executive compensation moving forward.