Elon Musk won his Tesla pay battle. Now he has to win his legal war

A new legal battle is underway to determine whether Elon Musk actually gets his money after Tesla convinced shareholders to back the CEO’s $56 billion pay plan.

Tesla filed court documents last week before the same Delaware Chancery Court judge who previously voided Musk’s compensation, arguing the June 13 shareholder vote offered a “principled resolution” to end the dispute in Musk’s favor.

An attorney for the shareholder who successfully sued to block the pay package argued in a separate court filing Friday that Tesla’s shareholder resolution should have no legal effect on the judge’s original decision, and that Tesla is not empowered to use an extra-judicial vote to overrule the Delaware court.

This attorney, Greg Varallo, said Tesla must appeal the judge’s decision to the Delaware Supreme Court if it wants to reverse it.

For Tesla (TSLA), there is a lot riding on the uncertain path that Musk’s disputed pay plan must now take through the US court system.

If the courts give Tesla what it wants, it can keep Musk’s plan in place along with a $2.5 billion accounting charge it took back in 2018 when shareholders first agreed to the all-stock-option, performance-based deal.

If not, the electric-vehicle maker could instead be forced to hold a third vote on Musk’s pay, plus book a charge of at least $25 billion that could threaten future earnings.

“Everything here is unprecedented,” said Kevin Murphy, an executive compensation expert and finance professor for University of Southern California’s Marshall School of Business who testified for Tesla in a trial over the plan.

The unprecedented nature of Tesla’s dispute means its resolution may be equally uncharted.

The new legal battle swings the spotlight back to Delaware judge Kathaleen McCormick, who ruled in January that Tesla’s board didn’t act “in the best interests” of Tesla shareholders in approving the $56 billion Musk pay pact.

McCormick must now rule on whether the new shareholder vote does in fact restore Musk’s pay, according to Ann Lipton, a corporate law professor at Tulane School of Law.

McCormick could choose to rule on the dispute by considering written and oral arguments from both sides, Lipton said,

Alternatively, the judge could ask the parties to submit more information, as well as engage in additional discovery to bring to light other facts and evidence. The judge could also hold hearings akin to a new trial, Lipton added.

Tesla has asked the judge to set an expedited schedule during which the parties will submit court documents containing additional rationale for their positions. Tesla said each party should be allowed to make those arguments before McCormick enters a final judgement in the matter.

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On Friday Tesla’s lawyers described the recent shareholder vote backing Musk’s pay as “one of the most well-informed stockholder votes in recent memory,” and noted that two of the world’s most sophisticated investors, BlackRock (BLK) and Vanguard, said yes to the proposal.

Tesla has said 72% of votes cast by shareholders, excluding Musk and his brother Kimbal, were in favor of the compensation package.

A hearing before McCormick is set for July 8, during which she is also scheduled to take up additional unresolved matters in the case.

One is a request from the shareholders’ lawyer for $6 billion in legal fees, which Tesla disputes.

And in the event McCormick validates Musk’s compensation, she could weigh in on whether the shareholder vote turns back the clock to reactivate the agreement as of 2018. Tesla has reported that retroactively accounting for the compensation plan would save the company at least $25 billion.

“She could say [to Tesla], ‘You did the right thing. You took it back to shareholders…I might not like it, but it’s not my role to get involved in the contracting between consenting adults,'” Murphy said.

But “I doubt she’ll do that, which means we’ll go through an appeal,” Murphy added.

Lipton said this judge is unlikely to have final say.

“Whichever side loses, that side will appeal to the Delaware Supreme Court,” Lipton added.

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