Ann Lipton – Business Law Prof Blog: “On Tuesday, Chancellor Kathaleen McCormick of the Delaware Court of Chancery issued her long-awaited opinion in Tornetta v. Musk, where she took the extraordinary step of holding that Elon Musk’s Tesla pay package from 2018 was not “entirely fair” to Tesla investors, and ordered that it be rescinded.  In practical effect, she ordered the cancelation of stock options worth about $51 billion, or, according to news reports, about a quarter of his current wealth.  Put that together with the Twitter purchase, the State of Delaware and Chancellor McCormick have cost Musk about $90 billion, give or take (though a contrary take would involve the words “actions” and “consequences”). The legal standards – Normally, the decision of what to pay a corporate CEO – like any other business decision – is controlled by the board of directors, and not subject to second-guessing by a court.  But, like any other business decision, that changes if the executive pay package can be seen as self-dealing, namely, the decisionmakers have a financial interest in the arrangement. In a normal company, that isn’t a problem; the corporate directors act at arm’s length from the CEO for the purposes of negotiating the pay package.  In companies with controlling shareholders – like Meta and Mark Zuckerberg, for example, which McCormick namechecks in her opinion – any compensation package would necessarily be tainted with the specter of self-dealing (how seriously can the Meta board bargain against Zuckerberg?), and so controllers tend to forego compensation entirely, which, of course, seems reasonable because they already have so much equity in the company that they are plenty incentivized to come to work every day. That said, if a company chooses to engage in a conflicted transaction, it is not automatically illegal; it simply is assessed under a complex set of legal standards if it is later challenged in court by a stockholder. The basic rule is, if an independent decisionmaker interposes themselves in the process, the court will defer to that decisionmaker.  If not, the court will closely examine the transaction to ensure its fairness…”