Delaware Supreme Court reverses Chancery Court’s Tesla decision

The Delaware Supreme Court has reversed a controversial Chancery Court decision that rejected Elon Musk's Tesla shareholder-approved compensation package – a lower-court decision that prompted Tesla’s exit in favor of Texas incorporation.

In its Dec. 19 reversal, the Supreme Court wrote that the Chancery Court erred by rescinding Musk’s compensation package, because the company could not be restored to what it was before the 2018 compensation offering. The $56 million deal had prompted a stockholder with nine shares to file suit against Musk and Tesla, even though Musk had met all the financial milestones for Tesla necessary to collect the compensation package.

Stockholders voted two times to approve the compensation package, yet the Chancery Court sided with the plaintiff who held nine shares, ruling it was an unfair pay plan.

The Supreme Court reinstated Musk’s 2018 compensation plan.

In its decision, the Supreme Court said the Chancery Court erred in faulting Musk and Tesla for not proposing an alternative compensation package.

“The Court of Chancery erred in assigning to the defendants the burden to identify a viable alternative because it always remained the plaintiff’s burden to satisfy the prerequisites for any form of relief awarded,” the opinion states.

But the biggest change comes in the attorney’s fees, which was a chunk of the $345 million decision Chancery Court Chancellor Kathaleen McCormick awarded the plaintiff.

“The Defendants suggest that if the Plaintiff were awarded nominal damages, then his counsel would be entitled to a fee award based upon quantum meruit. We agree,” the opinion states.

The Supreme Court awarded $1 in nominal damages to the plaintiffs because they failed to establish entitlement to any other form of relief.

Quantum meruit is a legal term for paying fees based on a reasonable value of services.

Tesla and Musk agreed that attorney’s fees should be four times what the attorney would normally charge, and the Supreme Court agreed. 

The amount will be much lower than the multimillion-dollar package the attorney stood to gain after the Chancery Court decision in their favor.

All judges participated in the decision, and no dissent was noted.