The Texas Plan B if Delaware won’t reinstate Elon Musk's Tesla pay haul

Tue, May 20, 2025, 9:34 AM 10 min read

Texas to the rescue?

Tesla (TSLA) is exploring alternative ways to pay CEO Elon Musk in a new deal that, if put on the table, would be the first time the electric vehicle maker’s pay proposal for the world’s richest man would be subject to Texas rather than Delaware law.

The Financial Times reported last week that Tesla’s board formed a two-member special committee to evaluate a pay package that could reward the CEO for his past work if the Delaware Supreme Court denies the $56 billion-plus performance-based deal that the state's Chancery Court invalidated.

The compensation has been hung up in court for seven years and is now pending Musk and Tesla's appeal. The state's Supreme Court has not publicly indicated when it will issue a decision. Meanwhile, in an objection to the Chancery Court's controversial decision, Tesla dissolved its incorporation in Delaware and reincorporated in Texas.

Tesla did not respond to a request for comment on its board's reported backup pay plan considerations.

For roughly the past century, Delaware has been the dominant place to incorporate because of its so-called corporate-friendly laws, specialized business courts, and ease of filing company documents. But in the wake of Tesla's highly publicized litigation, other states have been vying for its business, and a wave of corporations followed Tesla's decision to reincorporate elsewhere.

University of California, Berkeley law professor, Stavros Gadinis, believes that what Tesla's board does next will test and help settle the defining features of where corporate law is headed. Texas and Delaware courts, he explained, may part ways is in their views over what qualifies a director as "independent" and Texas courts are not bound to follow Delaware's law.

Delaware's interpretation of independence is strict, Gadinis added. One of the ways it can find a director not independent is if the director's board compensation represents a substantial part of their total wealth.

"How Texas deals with this question is going to be very critical on how people see Texas, moving forward, and how people see Delaware, moving forward, and ultimately how they see corporations," Gadinis said. "I don't think that Texas courts would necessarily be willing to be aligned with Delaware."

The Delaware court's concern about board independence in Musk's case was elevated because, although Musk wasn't a controlling shareholder of Tesla, his influence over its board was considered substantial. That influence permitted the Delaware court to apply a stricter standard to the pay deal, which it used to rule that the board had breached its fiduciary duty to Tesla's shareholders.