Delaware Supreme Court Reinstates Elon Musk’s 2018 Tesla Incentive Package

Following years of litigation, on December 19, 2025, the Delaware Supreme Court reversed the Delaware Court of Chancery’s 2024 order rescinding a 2018 special incentive compensation award granted by Tesla, Inc. (“Tesla”) to Elon Musk (“Musk”). The grant, which was valued at approximately $56 billion at the time of issuance, is now worth over $100 billion.

The backdrop to this high-profile case, including events triggered by the Court of Chancery rescinding a grant that was approved twice by Tesla’s stockholders, is remarkable. Musk has been outspoken in his criticism of the court and has championed a movement to encourage businesses to reincorporate away from Delaware (“DExit”), as Tesla did in 2024. In early 2025, Delaware’s governor signed into law amendments to the Delaware General Corporation Law intended to provide a safe harbor for controlling stockholder transactions. And, in November 2025, the stockholders of Tesla, now a Texas corporation, approved a new performance-based equity compensation package for Musk that could be worth up to $1 trillion, but with the stipulation that there would be “no double dip” if the 2018 grant were reinstated.

Despite finding in favor of the defendants, the Delaware Supreme Court did so on narrow grounds, finding that rescission was an improper remedy under these facts while leaving alone the lower court’s rulings on liability.

Background

In March 2018, the board and stockholders of Tesla approved an incentive plan for Musk that included multiple tranches of stock options, the vesting of which was subject to satisfying certain market capitalization and other performance milestones. In June 2018, a stockholder (Richard Tornetta) brought a derivative action against Tesla’s directors alleging that Musk, as a controlling stockholder, coerced Tesla into approving an excessive compensation plan.

Following a trial, the Court of Chancery rescinded the compensation plan, finding that the defendants were unable to prove that the plan was entirely fair to the company and its stockholders and that the proxy statement included misleading disclosures.

In response, Tesla resubmitted the plan to its stockholders for a second vote, including a copy of the Court of Chancery’s opinion in the disclosure materials. In June 2024, a majority of the disinterested stockholders voted again in favor of the plan, after which Tesla’s directors asked the court to reverse its earlier opinion. The court refused, and this appeal to the Delaware Supreme Court followed.

For a more complete description of the underlying facts and background, please see the previous Stites & Harbison client alerts on the topic:

• Second Time’s No Charm: Delaware Court Rejects Elon Musk’s Tesla Incentive Package Despite Shareholder Ratification
• Easy Come, Easy Go: Delaware Court Upends Elon Musk’s $56 Billion Equity Incentive Plan

Delaware Supreme Court Decision

The Delaware Supreme Court considered three different paths for overturning the lower court: (i) that the use of the entire fairness standard of review was improper; (ii) that rescission was an inappropriate remedy; and (iii) that the second stockholder vote was an effective ratification of the plan. The court selected the most narrow path, holding that rescission was an improper remedy given that it would not be possible to return the parties to the status quo ante.

The court awarded $1 in nominal damages to the plaintiff. The court noted that nominal damages are appropriate where the plaintiff fails to show that it is entitled to any other form of relief.

The court significantly reduced a controversial $354 million fee award to plaintiff’s counsel to $54.5 million, representing a four-times multiplier under a quantum meruit approach.

Other Key Points

The DExit movement remains a high-stakes poker game for Delaware and other states. Over many years, Delaware established itself as a preferred jurisdiction for incorporations for many reasons, including having a court system with specialized expertise in corporate law and corporate statutes that provide flexibility and certainty in corporate governance. The Tornetta case has received heavy criticism in the business press, and Musk stated on social media, among other things, that “[s]hareholders should control company votes, not judges.” Nevada and Texas, among other states, are actively courting businesses as direct competitors to Delaware in corporate law matters, and the debate regarding DExit seems unlikely to fade into the background.

Since 2009, Musk’s compensation at Tesla has been in the form of stock options tied to the achievement of various milestones. The court did not accept the plaintiff’s argument that Musk had already received adequate compensation solely by virtue of the growth in the value of his existing Tesla shareholdings, independent of the 2018 grant. Rescission would have resulted in Musk receiving no compensation in exchange for years of service.

It is unclear what the Delaware Supreme Court’s opinion, including the statement that “the Justices have varying views of the liability determination,” means with respect to several findings of the lower court that were left unresolved. Although the Court of Chancery found that Tesla’s directors breached their fiduciary duties in approving the compensation package, the Supreme Court did not address this point. Were Tesla’s proxy disclosures adequate? Was Musk a controlling stockholder under applicable Delaware law? Was the entire fairness standard of review, which is difficult to satisfy, appropriate in this case? What is the legal effect of the Tesla stockholder ratification vote (i.e., the second vote)?

In the wake of this litigation, Delaware adopted amendments to Section 144 of the Delaware General Corporation Law. These amendments establish a framework and safe harbor for approving certain transactions, including those involving controlling stockholders. The amendments are currently the subject of a constitutional challenge in Delaware.

Although the plaintiff’s attorney fee award was reduced to $54.5 million from a record $354 million, that remains an astounding amount of money. The court stated that, “[a]lthough the Plaintiff failed in his main objective of achieving a complete rescission of the 2018 Grant and received nominal damages, Tesla and its stockholders benefited by counsel’s efforts.”

The story of Tesla and its charismatic CEO continues to be a fascinating one. Although the sheer size of the Musk compensation package is difficult to process, the growth in the company’s market capitalization over time is extraordinary. Within a few years of Tesla going public in 2010, many viewed the stock as being overvalued. Yet, as noted in Jason Zweig’s commentary to “The Intelligent Investor,” by Benjamin Graham, “[f]rom the beginning of 2011 through the end of 2021, a period when the S&P 500 rose 360%, Tesla’s shares gained an astonishing 18,400%.” At the end of 2025, Tesla’s market capitalization was estimated to be approximately $1.5 trillion.