Delaware Supreme Court Reverses Court of Chancery’s Rescission of Elon Musk’s 2018 Tesla CEO Equity Award

Background

In January 2018, Tesla granted a “moonshot” award to Elon Musk, its founder, chair, and CEO. The award represented the largest equity award ever granted to a public company executive, anticipated to have an approximate value of $55.8 billion if the applicable performance criteria were achieved (which would have resulted in, among other things, an increase in Tesla’s market capitalization by $600 billion) and covering up to 12% of the total outstanding shares. The award was subject to 12 equal performance-based vesting tranches, each requiring an increase of the company’s market capitalization by $50 billion and the satisfaction of certain revenue or EBITDA targets.

In June 2018, a stockholder sued the board and Musk for, among other things, breaches of fiduciary duty, unjust enrichment, and waste. The case went to trial in November 2022, and, in January 2024, the Delaware Court of Chancery ordered that the moonshot award be rescinded in full after finding that it was tainted by improper board and stockholder approval processes and did not satisfy the entire fairness test.

After the rescission decision, a new special committee of the board recommended, and Tesla’s stockholders later approved, “ratification” of the 2018 grant in June 2024. However, the Court of Chancery refused to revise its opinion in light of that vote (rejecting the ratification), concluding the defense was waived post-trial and the proxy statement disclosures for the ratification were materially misleading.

Many aspects of the Court of Chancery decisions were controversial among corporate law practitioners and the founders, executives, board members, and others that they advise, fueling the recent perception that Delaware corporate law is becoming less predictable and its courts may be potentially hostile to the interests and expectations of Silicon Valley founders and investors.

What the Delaware Supreme Court Decided

Although the opinion noted that the justices held varying views on the underlying liability findings, the Supreme Court took the “narrower path” of reversing solely on remedy grounds, declining to address the underlying issues and holding that equitable rescission was improper because the parties could not be restored to the status quo ante and the trial court misallocated the burden of proposing alternative remedies to full rescission. The opinion was issued per curium (i.e., not authored by or attributed to a specific judge).

Rescission Was Not Feasible or Equitable

The Supreme Court held rescission requires a “mutual return to the status quo,” which was not possible after Musk’s six years of performance under the 2018 grant that led to full vesting of all tranches and substantial corporate value creation. The inability to “unscramble” Musk’s years of labor and Tesla’s realized benefits made rescission inequitable notwithstanding that the options remained unexercised.

The Supreme Court emphasized that equitable rescission aims to “unmake” a transaction and restore all parties substantially to their pre-transaction positions, a remedy to be ordered only when clearly warranted and feasible under current circumstances.

Musk’s Preexisting Equity Cannot Substitute as Consideration

The Supreme Court rejected the Court of Chancery’s reliance on Musk’s preexisting equity stake and earlier compensation grants to justify rescission, holding while it was “powerful incentive” and relevant to his engagement with the company, it could not restore Musk to the status quo ante because it was not consideration for the additional services and labor he provided under the 2018 grant. Furthermore, the benefits from his preexisting equity stake were not the compensation he was promised if he achieved the 2018 grant milestones.

Court of Chancery Misallocated Burden; Plaintiff Must Prove Entitlement and Alternatives

The Supreme Court held that the Court of Chancery erred in requiring defendants to propose a “viable alternative” to total rescission. The Supreme Court held that the plaintiff, having sought only equitable rescission, bore the burden to establish entitlement to that remedy and to propose and support entitlement to any alternative remedial framework if it was not entitled to full rescission.

Remedies

Because the plaintiff sought only equitable rescission and failed to establish entitlement to any alternative remedy or evidentiary basis for damages, the Supreme Court awarded nominal damages to the plaintiff of $1.

The Supreme Court adopted Tesla’s proposed quantum meruit approach to the plaintiff’s counsel fees, awarding cash equal to “lodestar” (reasonable hours worked at a reasonable rate) with a 4x multiplier as well as expenses, plus post-judgment interest from December 2, 2024. The court reasoned that, while complete rescission was denied, the litigation conferred benefits on Tesla and its stockholders, meriting the counsel fee award.

What the Delaware Supreme Court Did Not Decide

The Delaware Supreme Court resolved the appeal on the narrow ground of remedy and expressly declined to reach the Court of Chancery’s liability determinations and related threshold questions. Accordingly, numerous questions raised by the Court of Chancery remain unanswered, including:

• Whether Elon Musk was a controlling stockholder (including based on “transaction-specific” control) and whether it was proper for the Court of Chancery to apply entire fairness review. The Court of Chancery found that while Musk lacked mathematical voting control of the company (holding only 21.9% of Tesla’s voting power), he exercised transaction-specific control over the 2018 grant, wielding “considerable power in the boardroom by virtue of his high-status roles and managerial supremacy.” The Court of Chancery also pointed to the absence of any evidence of adversarial negotiations between the board of directors and Musk concerning the size of the grant and the lack of a traditional benchmarking analysis comparing the grant to plans at comparable firms (despite the defendants’ argument that no comparable firms existed). In reaching its decision, the Court of Chancery included a footnote in its decision suggesting that control could exist with holdings as small as 10%. The Supreme Court declined to weigh in on the Court of Chancery’s control analysis and conclusion.
• Whether a well-functioning, independent committee of directors existed for burden-shifting under Lynch. The Court of Chancery found that the majority of the board, including the compensation committee that approved the 2018 grant, were not sufficiently independent to shift the burden of persuasion to the plaintiff. In reaching its conclusion, the Court of Chancery pointed to Musk’s close relationships with his board members, which included his brother and several longstanding business associates and personal friends. The Court of Chancery also noted that several directors were sufficiently close to Musk to have vacationed with his family and other directors had earned what the trial court characterized as “life-changing” or “dynastic” wealth from their investments in Musk’s companies and/or compensation as members of Tesla’s board of directors. The Supreme Court declined to decide these director independence/burden-shifting questions. While the director independence presumption adopted earlier in 2025 in new § 144(d)(2) of the Delaware General Corporation Law (DGCL) provides some assurance to public companies, private companies remain fully subject to the prior common law. Supreme Court analysis may also have benefited public companies considering whether plaintiffs might overcome the presumption.
• Whether the 2018 stockholder vote was fully informed or tainted by disclosure deficiencies. The Court of Chancery held that the first proxy statement soliciting stockholder approval for the 2018 award omitted material information regarding the conflicts and the negotiation/grant process for the award and thus did not cleanse the transaction. The Supreme Court did not reach the adequacy of the proxy disclosures. 
• Whether the award was entirely fair in terms of fair dealing and fair price. The Court of Chancery found that the defendants failed to prove entire fairness and concluded that the approval process was not fair due to a rushed CEO-led consideration process and a lack of meaningful negotiation by the general counsel and the board/compensation committee. The trial court also concluded that the award was not financially fair due to the sheer size of the award; a lack of benchmarking data (irrespective of the exceedingly unusual nature of the grant) or consideration of other award/incentive structures; the possibility that his existing holdings may have already provided sufficient motivation to Musk; and the award’s projected likelihood of achievement and actual achievement within a relatively short period following the grant. The Supreme Court did not review or resolve the Court of Chancery’s entire fairness findings, instead reversing solely on the impropriety of rescission.
• Whether the 2024 second stockholder vote ratified the transaction or otherwise altered the standard of review. The Court of Chancery rejected ratification of the 2018 grant and held that the second proxy statement, which clearly addressed all the matters that the Court of Chancery had identified as shortcomings in the first proxy statement (including attaching a copy of that court’s opinion), was materially misleading. The Court of Chancery found that irrespective of any disclosure regarding the risk and legal uncertainty, it made multiple, inaccurate statements concerning the potential ratifying effect of the stockholder vote, including that ratification could (i) extinguish claims for breach of the fiduciary duty of loyalty by authorizing an act that otherwise would constitute a breach, (ii) cure the disclosure and procedural deficiencies identified by the court, and (iii) restore the 2018 award. On appeal, the defendants presented ratification as one of three possible “paths,” but the Supreme Court declined to resolve this question or address the proxy statement disclosure issues.

Takeaways

In addition to the unanswered questions described above, the opinion does not discuss the text or operation of amended DGCL § 144 (adopted after the Court of Chancery’s decision in this case). Amended DGCL § 144 provides safe harbors for certain conflicted transactions involving officers, directors, and controlling stockholders, but by its terms does not apply to suits commenced prior to its adoption. Accordingly, any interaction between this strictly remedies-based holding and the amended statute will have to be developed in future decisions, assuming DGCL § 144 survives the litigation currently challenging its constitutionality.

Because the Supreme Court’s decision does not address any of the procedural and other issues raised by the Court of Chancery, companies should continue to structure conflicted executive compensation transactions (and other conflicted transactions, including controller transactions) with rigorous process and fulsome disclosure, and avail themselves of the safe harbors provided by DGCL § 144, when possible.

The Delaware Supreme Court’s approach to its ruling in this case could also have larger implications in the great “DExit” debate and Delaware’s status as the preferred jurisdiction for corporations. Delaware courts have been under the spotlight in recent years for how they balance stockholder rights with managerial discretion, as well as their consistency with the settled expectations of practitioners, among other reasons. In response to the earlier Court of Chancery ruling rescinding the 2018 award, Tesla reincorporated from Delaware to Texas, citing concerns about legal unpredictability. A number of other companies have followed, citing similar concerns and reincorporating primarily to Nevada or Texas. While the Supreme Court’s ruling in this case and recent statutory changes may ease some of these concerns, it leaves in place other uncertainties for corporations considering whether or not to remain incorporated in Delaware.