In another startling episode in the saga of Elon Musk’s $55.8bn Tesla remuneration, a Delaware court has thrown out the billionaire’s appeal against a January ruling that concluded the Tesla board has failed to prove the pay deal was “fair”.

This week, the same judge—Kathaleen McCormick—ruled the appeal had failed because its “unprecedented theories go against multiple strains of settled law”.

Musk’s lawyers had based their appeal on the pay package being “ratified” by shareholders after the initial “fairness” ruling. McCormick ruled that this was not enough.

Musk responded with a series of angry posts on X, formerly Twitter. “Shareholders should control company votes, not judges,” he wrote in one post.

McCormick also awarded $345m in costs to the plaintiff—Richard Tornetta, a thrash-metal drummer and Tesla shareholder— and his lawyers.

The clash once again raises big questions about US corporate governance over executive compensation, about what constitutes fair pay and who should decide. It could potentially raise questions about the role of Delaware Courts, historically viewed as the senior arbiter of corporate law and governance in the US.

Fatally flawed appeal

In her latest ruling, McCormick sticks to the legal merits of Musk’s appeal. She finds against the Tesla, SpaceX and X chief based on “four fatal flaws”, any one of which, she says, would be enough on their own to see off the case.

Her first is that there is “no procedural ground” for changing the outcome of the original ruling “based on evidence they created after trial”. The evidence being the shareholder vote.

Second, she said evidence should have been part of the original trial, or “timely raised”—meaning “it cannot be raised for first time after the post-trial opinion”.

Next, she rules there is no legal precedent for a board decision (Musk’s pay) ruled “conflicted” (Musk was too close to the board) to be “ratified” by a shareholder vote.

Lastly, McCormick says that, even if such a board decision could be ratified by shareholders, “it could not do so here due to multiple, material misstatements in the proxy statement”. McCormick’s January ruling concluded the proxy statement had “inaccurately described key directors as independent and misleadingly omitted details about the process”.

Musk received some support this week. Cathie Wood, chief executive of ARKInvest, a fund manager with a stake in Tesla, posted on X that McCormick was an “activist judge at its worst”.

Wood writes: “No judge has the right to determine CEO compensation.” She goes on to predict McCormick will lose the argument in the Supreme Court.

Dismissive and defiant

Academics warned the Tesla board to take the January ruling seriously. Lucian Bebchuk, a law professor at Harvard, warned in June that the ruling should not be treated “dismissively”. This came after Tesla’s chair, Robyn Denholm, was quoted in the Financial Times describing the ruling as “absolute BS” and “crap” .

“The protection that corporate law accords to public company shareholders is substantially dependent on effective judicial oversight of corporate decisions that are challenged by investors,” wrote Bebchuk.

“For this system to work well, it is important that corporate boards take court decisions seriously and respectfully, drawing lessons from them to address identified deficiencies and not react to such decisions dismissively and defiantly.

“Unfortunately, Tesla’s board seems to be taking the wrong approach.”

Bebchuk asks why the Tesla board did little to address the independence of its members, a key issue examined by McCormick.

Musk has already moved the registration of his companies from Delaware to Texas, though this will not change the outcome of the ruling.

Corporate America now waits to see  Tesla’s next move. Governance experts will be weighing the implications for US governance of the negotiation of CEO pay.