What the Tesla Decision Means for Executive Compensation and Other Corporate Issues

Key Points

• The decision will facilitate super-sized executive compensation being provided by other companies. Notably, the new safe harbors for controller transactions, provided under the 2025 DGCL amendments to the Delaware General Corporation Law (the “DGCL Amendments”), also will facilitate super-sized compensation for controller-executives. However, for the most part, the only public companies that are likely to want, and to be able, to grant super-sized compensation will be those that, like Tesla, are controlled or semi-controlled, have a superstar CEO, and have the potential for venture capital company-style growth even though a public company. When large private tech companies (such as the next Facebook or Uber) go public, we expect to see super-sized compensation “baked in.” There may also be some upward pressure on executive compensation more generally, given dramatic increases at the very top of the scale.
• The decision can be read as implicitly sanctioning the concept of super-sized compensation. The Court of Chancery, in the opinion below, appeared to suggest that super-sized compensation, at least at some extreme point, might be inherently unfair to a corporation and its shareholders. The Supreme Court, however, by leaving the compensation intact and awarding the Plaintiff nominal damages of $1, seems implicitly to have rejected that view. Moreover, although the Supreme Court stated that partial rescission (i.e., reducing the amount of the compensation) would have been a proper remedy if there had been evidence in the record as to what amount of compensation would be fair, the Supreme Court did not remand the case to the Court of Chancery for such evidence to be developed, but instead awarded nominal damages of $1—suggesting that it viewed the Plaintiff as not having been much damaged by the super-sized compensation that was granted.
• The actual holding was a narrow one, however, focused only on the remedy the Court of Chancery imposed. Notably, the Supreme Court stated in the opinion that the Justices had “varying views” on the lower court’s liability determination; and they therefore chose the “narrower path” of resolving the appeal by overturning the remedy the lower court imposed. Total rescission was an improper remedy, the Supreme Court held, as it left Musk without any compensation for his six years of efforts at Tesla. The Supreme Court expressly rejected the Court of Chancery’s suggestion that the massive increase in value of Musk’s pre-existing almost 22% stake in Tesla that resulted from Musk’s efforts had provided more than sufficient substitute compensation for his efforts. Further, as noted, the Supreme Court stated that partial rescission would have been a proper remedy if there had been evidence in the record as to what fair compensation would be. Thus, it appears that, in future cases challenging super-sized compensation, the judicial result could be a reduction in the compensation rather than its being left intact.
• The decision leaves unanswered many of the legal issues the case raised. As the Supreme Court did not address the underlying merits of the case, it is unclear to what extent it agrees or disagrees with the Court of Chancery’s holdings relating to the board’s process, Musk’s control, unfairness of the compensation, inadequacy of the disclosure to shareholders, and ineffectiveness of the shareholders’ ratification of the compensation package. Also left open is what evidence in the record would have been sufficient to support partial rescission being ordered as a remedy.
• Other super-sized compensation cases may be distinguishable. For example, in other cases, it may be that: the company did not face the unusual challenge Tesla faced in keeping Musk incentivized in the face of his strong interest in and important roles at several other large, growing companies; the company did not perceive the CEO as being so unique in his or her ability to achieve extraordinary growth as Tesla viewed Musk based on his track record of extraordinary growth at Tesla; or the milestones were not commensurate with the aggressiveness of the compensation.
• The decision may reflect growing judicial recognition that traditional corporate norms— particularly with respect to compensation and control—may be less apt when applied to new-style tech companies. Modern tech-focused companies, like Tesla, are currently driving the U.S. economy. The Mag 7 (i.e., “Magnificent 7,” an informal grouping of the seven largest and most influential tech-focused companies in the U.S. stock markets, which includes Tesla), over the past seven years, have grown 1,057%, while the other companies in the S&P 500 have grown 132%. Over the past three years, the Mag 7 accounted for roughly 75% of the gains in the S&P 500; and the seven companies currently account for more than one-third of the combined market capitalization of all of the S&P 500 companies. These companies reflect a continuation of venture capital/private equity-type models, expecting the CEO to be an innovative, high-profile risk-taker who can achieve the company’s potential for extraordinary growth—in contrast to a traditional public company model where the CEO tends to be hired for his or her professional managerial skills and ability to achieve slow and steady growth.
• The Delaware Supreme Court recently upheld the dismissal of a lawsuit challenging another outsized incentive compensation package. See below “The Trade Desk decision” and “Just how super-sized are the Green and Musk compensation packages?”

Background. When Tesla granted the 2018 compensation package to Musk, it was by far the largest compensation package ever awarded in the history of the public markets (and it has been exceeded since then only by the $1 trillion package that Tesla awarded Musk in 2025). The Court of Chancery, in Tornetta v. Musk (Jan. 30, 2024, “Tornetta I”), found that the board’s process in determining the compensation had been controlled by Musk; that the “unfathomable” amount of the compensation was unfair to the corporation and its shareholders; and that the disclosure to shareholders had been materially inadequate with respect to the extent of Musk’s influence over the board’s process. Chancellor Kathaleen McCormick granted the Plaintiff’s request for total rescission of the compensation package.

Tesla then supplemented the disclosure to shareholders, including with respect to Musk’s influence over the process and the court’s opinion that the compensation package was not entirely fair and should be rescinded. The shareholders unaffiliated with Musk then voted again, and again approved the compensation package. Based on that shareholder ratification, Tesla requested that the court revise its prior ruling ordering rescission. In Tornetta II (Dec. 2, 2024), Chancellor McCormick held that the ratification was ineffective as it came after the issuance of a post-trial decision that had invalidated the package.

Musk publicly decried the Court of Chancery’s decisions and appealed to the Delaware Supreme Court. Tesla reincorporated from Delaware to Texas, citing the Court of Chancery’s interference with the  shareholders’ wishes with respect to Musk’s compensation. Musk encouraged other companies to leave Delaware, spearheading a “DExit” campaign, as a result of which a few controlled companies reincorporated from Delaware. Once Tesla reincorporated, its board and the shareholders unaffiliated with Musk approved a $35 billion compensation package that would be paid to Musk if the Delaware Supreme Court affirmed the lower court’s rescission ruling. In addition, the board and the shareholders approved a new equity-based incentive compensation package for Musk, covering the next ten years, which will provide up to $1 trillion of compensation, contingent on new milestones for Tesla’s growth being met.

In Tesla, the Delaware Supreme Court reversed the Court of Chancery’s ruling rescinding the 2018 compensation package—thus, Musk will receive the full compensation provided for under that package. Any challenge to the new $1 trillion compensation package (which, as discussed below, is unlikely) would be governed under Texas law.

Discussion

Total rescission was an improper remedy. The Supreme Court stressed that total rescission of a contract is available as a remedy only when it will substantially “restore all of the…parties to their status quo ante (i.e., the position they occupied before the transaction).” In this case, the rescission did not accomplish such restoration, as it “leaves [Musk] uncompensated for his six years of time and efforts.” The Supreme Court commented that a party seeking rescission “cannot be permitted to derive all possible benefits from the transaction” (in this case, the increase in Tesla’s value based on Musk’s efforts), and then “claim to be relieved of [the] obligation[s]” under the contract.

The increase in value of Musk’s pre-existing equity stake was not appropriate substitute compensation for his efforts. Musk’s efforts at Tesla resulted in a more than $100 billion increase in the value of his pre-existing almost 22% equity stake in the company. The Supreme Court rejected the Court of Chancery’s view that this increased value provided sufficient substitute compensation to Musk for his efforts. While acknowledging that the preexisting equity stake provided a “powerful incentive” for Musk to exert his efforts, the Supreme Court stressed that Musk had bargained for compensation in addition to any increase in the value of his equity stake if the milestones were met.

Importantly, the Supreme Court stated that partial rescission could have been a proper remedy if there had been evidence in the record as to what amount of compensation would be fair. The Plaintiff had requested only total rescission as a remedy. The Supreme Court held that it was the Plaintiff’s burden to propose, and establish the fairness of, that remedy or any alternative remedy—and that the Court of Chancery erred by granting total rescission based on the Defendants not having offered a viable alternative. The Supreme Court stated that, although the Plaintiff requested only total rescission and the Defendants did not offer alternative remedies, that “did not prevent the [Court of Chancery] from fashioning a different remedy or more limited form of rescission.” The Supreme Court also suggested that partial disgorgement (which does not require that the parties be restored to their status quo ante) may have been an appropriate remedy. The Supreme Court stated that these alternative remedies were not possible in this case, however, as there was no evidence in the record as to what fair compensation would be.

The Supreme Court reduced the counsel fees award. The Court of Chancery had awarded Plaintiff’s counsel $345 million—the largest fee award, by far, in the history of Delaware litigation. The Supreme Court held, however, that, with just nominal damages now being awarded, the counsel fee must be based on quantum meruit (i.e., the reasonable value of counsel’s services). Rather than remanding to the Court of Chancery to determine the quantum meruit fee, the Supreme Court stated that the fee will be the counsel’s “lodestar” (reasonable hours times a reasonable hourly rate) with a four times multiplier—which, reportedly, equates to about $54 million.

Musk’s new $1 trillion compensation package is unlikely to be challenged. As permitted under Texas law, Tesla’s bylaws set a 3% ownership threshold to file a derivative lawsuit. At Tesla’s current market capitalization, acquiring a 3% interest would involve an investment of $45.3 billion. As a practical matter, only a combination of major institutional holders likely could challenge the compensation package. (By contrast, under Delaware law, any shareholder, regardless of percentage ownership, can file a derivative suit—indeed, the Plaintiff who brought suit in Delaware challenging the $56 billion compensation package was a former heavy metal band drummer who owned just nine Tesla shares.) Further, Texas law on fiduciary duties makes it unlikely that a challenge, if brought, would be successful.

The Trade Desk decision. In 2021, The Trade Desk awarded its founder-CEO-controller a ten-year equity-based incentive compensation package of up to $5.2 billion, dependent on specified milestones being met. This package is the largest ever granted other than Musk’s packages. The package was approved by the company’s board, but not submitted to a vote of shareholders. In In re The Trade Desk (Nov. 6, 2025), the Supreme Court affirmed the Court of Chancery’s dismissal of the suit, on demand futility grounds. The Court of Chancery had ruled that, although Green is the company’s controller (with majority voting power), the plaintiffs failed to establish with sufficient particularity their contentions that (i) the purportedly independent directors were beholden to Green based on professional, financial, and personal ties, (ii) Green’s attending compensation committee meetings exerted undue influence on the process, or (iii) the minutes of the committee meetings reflected a lack of negotiation over the compensation package.

Just how super-sized are the Green and Musk compensation packages? Green’s $5.2 billion package will fully vest if he grows The Trade Desk to 5 times its size—from a market capitalization of $33 billion on the grant date to a market capitalization of $156 billion. Thus, if he creates $123 billion of new value, he is to receive about 4% of the value he creates. Musk’s compensation packages reflect even more ambitious goals and even more aggressive compensation. Musk’s 2018 package ($56 billion at the time of grant) fully vested when he grew Tesla to 12 times its size—from a market capitalization of $54 billion to $650 billion. Thus, having created $596 billion of new value, he was to receive more than 9.1% of the value he created. Musk’s 2025 package ($1 trillion at the time of grant) will fully vest if he further grows Tesla about 8.5 times—from a market capitalization of $1 trillion to a market capitalization of $8.5 trillion. Thus, if he creates $7.5 trillion of new value, he is to receive over 13% of the value he creates.

Practice Points

• Board process for determining compensation for an executive who may be deemed to be a controller. Depending on the facts and circumstances, a compensation committee and board, to avoid the issues that arose in connection with Musk’s 2018 compensation package, should consider the extent to which it may be beneficial to: (i) craft a compensation package based on what compensation is “necessary” to meet the board’s objectives in retaining and incentivizing the executive; (ii) actively negotiate the compensation package (by pushing back on, or proposing counter-offers to, compensation terms that the executive proposes) and not simply capitulate to the executive’s wishes, and retain independent outside counsel to assist in the negotiations; (iii) seek analysis by, and an opinion of, an independent third-party compensation expert as to the appropriateness of the compensation (particularly in connection with a high level of compensation); (iv) even in a unique situation, consider market-based factors when setting the compensation, including a traditional benchmarking study (the Musk and Green compensation packages may be comparables for benchmarking super-sized compensation); (v) not permit the executive to dominate the process, and avoid any appearance of such domination; and (vi) tie the compensation decisions to the board’s objectives (for example, if an extraordinary level of compensation is required to incentivize the executive to continue to focus his or her attention on the company rather than other interests and roles at other companies, consider requiring that the executive commit to the company a specified minimum percentage of his or her time).
• Seeking to avoid total rescission of a compensation plan. Where a plaintiff seeks total rescission, the defendants will face a strategic decision whether to seek to enforce the full compensation, or instead (or in addition) to seek to avoid total rescission by arguing that at least part of the package is fair and submitting evidence into the record as to what amount clearly would be fair.
• Shareholder ratification of corporate acts. Pending any future clarification of the ruling on this issue in Tornetta II, if a board seeks shareholder ratification of a corporate act, the ratification vote should come before a post-trial decision is issued invalidating the act. Also, based on Tornetta II, when disclosing to shareholders the effect of a favorable vote to ratify a board transaction, (i) the company should be careful not to overstate the effect—for example, in an entire fairness context, stating that ratification will “cleanse” fiduciary breaches may be an overstatement if the ratification may only shift the burden of proof with respect to fairness; and (ii) the company should consider giving strong prominence to caveats in the disclosure with respect to the possibility that the court might find the shareholder vote invalid or the ratification otherwise ineffective. In the context of executive compensation, given the lack of clarity as to whether the Supreme Court has endorsed the Court of Chancery’s ratification ruling in Tornetta II, defendant companies and directors should consider arguing that, in terms of honoring the shareholders’ will, it would seem that, once shareholders are fully informed, their ratifying the same pay package as the court struck down would be the substantive equivalent of their simply approving a new package (whether with the same or different terms).
• Independent directors. Controlled companies should carefully weigh the benefits and disadvantages of including independent directors on the board. In the context of conflicted-controller transactions, there are significant advantages to having one or more directors who are independent of the controller. The DGCL Amendments provide safe harbor protection for conflicted-controller transactions that are approved by a majority of the independent directors on a special committee. The Amendments also provide a definition of “independence” that makes it easier to establish that directors were independent than was previously the case under Delaware common law. For companies with a founder or executive with a significant equity stake (over 33-1/3% if the Amendments are applicable), the board should establish a record of the independent judgment the directors brought to bear when considering compensation for (or other transactions affecting) a person who may be deemed to be a controller.
• Controllers. If the DGCL Amendments had been applicable in Tesla, under the new definition of “control” set forth in the Amendments, Musk would not have been deemed a controller as he did not own 33-1/3% of the outstanding voting power. But, notably, under the Amendments, even if he were a controller, the compensation package almost certainly would have been entitled to the safe harbor protection the Amendments provide. With respect to Jeff Green in The Trade Desk, if the Amendments had been applicable, he still would have been deemed a controller (as he owned a majority of the outstanding voting power), but his compensation package almost certainly also would have been entitled to the safe harbor protection.
• Controller fiduciary duties. We note that Musk himself may have had fiduciary duties to the other Tesla shareholders in connection with his executive compensation, given the court’s holding that he was a controller of that process. The Plaintiff, however, had asserted claims of fiduciary breach only against the board, not Musk (who, prior to Tornetta II, had never been adjudicated as being a controller, whether of Tesla in general or with respect to any particular board decision).
• Controller coercion. For a shareholder vote to be effective, for MFW and DGCL safe harbor purposes, it must have been not only fully informed but also non-coerced. The court did not need to address the coercion issue in Tornetta II, given its finding that the ratification vote was not fully informed. However, a controller should consider carefully any actions that might be construed as coercive with respect to a shareholder vote—such as threatening reincorporation to a different state, or threatening retaliation (e.g., directing resources away from the company), if the vote is not obtained.