Tesla won the war for Elon Musk’s $1 trillion pay package. Now it’s prepared to win future legal battles.
Shareholders voted to approve the record-breaking compensation plan by a 75% margin on Thursday, paving the way for Musk to become the world’s first trillionaire should he meet a series of ambitious product and financial goals.
It came after the Tesla CEO’s previous $56 billion pay package, which was approved by Tesla shareholders in 2018 and again in 2024, was struck down by a Delaware judge last year following an investor lawsuit.
Since then, Tesla has made a series of moves to ensure Musk’s $1 trillion payday doesn’t suffer the same fate.
The EV giant has relocated its legal home from Delaware to Texas after gaining shareholder approval for the move at its 2024 annual meeting.
In May, the Lone Star State passed SB 29 and SB 1057, two bills that make it much harder for small shareholders to bring legal challenges against companies.
Under SB 29, litigants must now prove in a lawsuit that a company’s directors are not acting in good faith and that they have engaged in fraud or violated the law.
The bill also introduced a new rule that shareholders have to own at least 3% of the company’s shares to bring legal action, also known as a derivative lawsuit. The threshold is not automatically applied to companies, but Tesla incorporated it into its bylaws in May.
Only Musk himself and a handful of large, institutional investors, including BlackRock and Vanguard Group, own more than 3% of Tesla — and although shareholders can club together, $42 billion worth of shares is a high bar to meet.
By contrast, the lawsuit that led to the Delaware Court of Chancery’s ruling on Musk’s previous pay package was bought by Richard Tornetta, a former heavy-metal drummer who owned just nine Tesla shares at the time.
The judge in the Tornetta case ruled that Musk was too close to some of Tesla’s board members for them to act independently, and that Tesla’s board did not do enough to justify how it arrived at the package’s $56 billion figure.
Lawsuits face ‘a very hard road’
Legal professors told Business Insider that it would be far more difficult for shareholders to bring legal challenges against Musk’s new pay package in Texas.
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“I think that it would be a very hard road to challenge this in court,” said William Magnuson, a professor of law at Texas A&M University, citing the changes to Texas law that have granted heightened legal protection for company directors.
“All of these really have greatly limited the ability of shareholders to challenge misbehavior by boards of directors,” he said.
James Spindler, a corporate and securities law professor at the University of Texas, agreed.
He said that while Tesla shareholders could still challenge the level of disclosure surrounding the pay package under Texas law, as Tornetta did in Delaware, the 3% standing threshold made the prospect of a similar lawsuit unlikely.
“For a public company, that’s probably going to be the end of the matter. When you’re talking about a multibillion-dollar company, there just aren’t going to be that many people that own 3% of the shares,” Spinder added.
After a Delaware court struck down his last pay package, Musk urged other companies to leave the state, and several have followed Tesla and SpaceX’s lead.
The Diamond state has since tweaked its corporate law provisions to make it harder for small shareholders to bring derivative lawsuits.
Delaware’s move came as states like Texas and Nevada attempt to woo big companies with their own director-friendly regulations, and Magnuson said that companies are increasingly seeking to move to states with “friendlier” corporate law statutes that place more limits on shareholder’s rights.
“I think that we’re at the beginning of a real sea change in the way that corporate law works,” he added.
