June 3rd 2025 | Carla Abon
Edited by Sajiv Mehta
In the world of corporate governance, few figures retain as much attention as Elon Musk. Considered by Forbes as the wealthiest man in 2025, with a personal fortune of $342 billion, he is the founder of leading tech companies in vehicle construction and spatial exploration such as Tesla and SpaceX, respectively [1]. Most of Musk’s empire has been constructed around his visionary leadership, so much so that, for many, Musk is inseparable from his companies. But when the Delaware Chancery Court struck down his 2018 record pay package of $56 billion, it sent shockwaves to all corporate actors in America. The ruling was not only about one Chief Executive Officer’s (CEO) pay– it was inscribed within deeper tensions in corporate governance. Especially, it raises the question of who runs the show in corporations: CEOs, boards of directors, or shareholders?
As required under Delaware General Corporation Law (DGCL) section 141(a), a corporation must be structured with shareholders, a board of directors, and executives. Shareholders own the company and elect the board of directors. The board of directors has fiduciary duties towards shareholders and makes major corporate decisions, including appointing and overseeing the CEO and other executives. Finally, executives such as the CEO or Chief Financial Officer (CFO) run the daily operations of the corporation but are ultimately accountable to the board. The monitoring role of the board has increased over the past decades, with directors expected to ensure that officers are effectively pursuing the interests of the corporation and its shareholders.
In this trio, board members are responsible for setting executive pay. As executive pay continues to skyrocket and superstar CEOs amass unprecedented power, the Tesla ruling could mark a turning point. This article explores the implications of the Tesla ruling and what it could mean for the future of corporate governance. Through this case, I will argue that superstar CEOs are changing the landscape of corporate governance, and that the US legal system should change in order to adapt to this new trend, drowning insights from the European framework. I argue that to address the challenges posed by superstar CEOs and platform dominance, the US should consider adopting stronger shareholder rights, mandatory transparency on executive compensation, and enforceable say-on-pay votes.
Executive Pay and Fiduciary Duties under Delaware law
Corporate law is primarily a state-level matter. Each state has its own corporate statutes and judicial interpretations [3]. While distinct, courts are not insulated from one another; they often draw inspiration from others’ decisions. In this respect, Delaware courts and laws have a strong influence across all jurisdictions. Indeed, the state is home to many major corporations due to its corporate-friendly legal framework, its specialized Court of Chancery, and its well-developed body of corporate law [4]. It has historically been the preferred locus for incorporation, and as of today, 60% of Fortune 500 companies have chosen Delaware as their legal home [5]. Courts have maintained stability of corporate law by sticking to well-established doctrines and precedent, increasing the predictability of corporate litigation and the expertise of the Court of Chancery in resolving complex corporate disputes. As noted by Reuters, “Delaware’s law on fiduciary duties is well established and widely followed in other jurisdictions” [6].
A fiduciary duty is a legal obligation requiring one party to act in the best interests of another party. In corporate law, fiduciary duties apply to directors who must act in the best interests of the corporation and its shareholders. Two main fiduciary duties can be distinguished. First, under the duty of care, the board must make informed decisions, notably about CEO pay. It means that directors have to be fully and adequately informed and act with care when making decisions and acting for the corporation [7]. Delaware courts recognize that they should use the amount of care that an ordinarily careful and prudent person would use in similar circumstances [8]. As part of the duty of care, Delaware courts follow the business judgment rule. Established in Aronson v. Lewis, the business judgment rule presumes that “in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action was taken in the best interests of the company” [9]. This means that the burden of proof is on the plaintiff to show that the board acted without the correct information or intent. Additionally, the DGCL protects directors from liability for good faith violations of the duty of care [10]. Combined, these rules make it extremely difficult for plaintiffs to overcome this presumption and to prove a breach of the duty of care.
The second fiduciary duty of board members is the duty of loyalty. Directors must act independently and not favor any personal interest or relation. They make decisions in the best interests of the corporation and its shareholders. Directors can take actions that do not immediately increase profits as long as there is a “connection to a rational business purpose” [11]. But breach of duty of loyalty has also proved to be extremely difficult to prove, as some business actions might be respectful of the letters of the law but not the spirit. Delaware courts have decided to complement the duty of loyalty to account for this with the duty of good faith. It is meant to address harmful behavior to the corporation that does not fit into the fiduciary duty categories [12].
These duties apply to the board when setting CEO’s pay package. Traditionally, Delaware courts rarely intervene unless there is a clear misconduct. For example, Michael Ovitz was appointed president of Disney in 1995 by Eisner and the Disney board, but he was dismissed after 14 months for bad management which did not advance Disney’s growth. Upon departure, he walked away with $140 million for a year’s work, as approved by Disney’s board. Shareholders sued Eisner and the board for wasting corporate money and overcompensation. The Delaware court ruled in favor of the defendants, stating that although Eisner’s leadership was far from ideal, there was no breach of fiduciary duty [13]. The 2005 Disney case set a clear legal precedent, which would continue to be applied. Similarly, in 2009, shareholders sued Citigroup’s board for approving a $68 million severance package to the ex-CEO Charles Prince, despite the company suffering important subprime mortgage losses. Once again, the court emphasized that directors have broad discretion in setting compensation, unless there is fraud or bad faith [14]. Both cases reinforce the business rule, making it difficult for shareholders to challenge executive pay in court.
Many corporate actors have criticized Delaware law as being ineffective in regulating such high pay. Several scholars argue that corporate law has done a very poor job with outsized executive pay, most notably those tied to performance [15]. Compensation is rarely second-guessed as long as a non-conflicted process is followed [16]. Courts limit their intervention to cases of fraud or bad faith.
Modern Challenges to Laissez-Faire Executive Pay
The vision of the board’s discretion in setting an executive pay package has for long been strongly affirmed by the Delaware courts. But recent changes in the corporate landscape have called for an evolution of this laissez-faire vision. This includes the recent rise of “superstar CEOs” and the growing claims against outsized compensation.
A superstar CEO has a unique vision, charisma, superior leadership, and other exceptional qualities that make him uniquely valuable to his corporations. They may or may not possess these qualities, but what matters more is that investors believe they do [17]. Superstar CEOs embody the firm and are usually indissociable from its branding. Because of their unique contribution to company value, they acquire significant power over board members. They influence directors and their ability to faithfully discharge their fiduciary duty [18].
Elon Musk serves as a notable example of this trend. As characterized by Hamdani, “Elon is Tesla, Tesla is Elon” [19]. Being the founder of the company, he has remained its CEO as of today. He is widely perceived as one of the main factors of Tesla’s success, and the automaker’s extraordinary achievements are usually labelled as ‘Musk-made.’ His embodiment of the company and his influence over it and the board is very far-reaching, despite Musk not being a majority shareholder. Other examples of superstar CEOs include Jeff Bezos or Marck Zuckerberg.
The rise of superstar CEOs has been followed by an increase in pay packages over the last decades. As exemplified in the Disney and Citigroup cases, CEOs’ compensation remains central in debates. It remains very challenging for courts to assess whether compensation might be excessive. When a pay package is tied to performance, an additional issue revolves around evaluating the easiness with which the targeted business objectives are reachable. These assessments issues, in a context of inflation and rising wages for top professionals, contribute to the failure of Delaware law in controlling CEOs’ compensation.
Along with practical evaluation issues, Delaware courts also have to fight against the ability of corporate actors to play with the law. With highly remunerated and skilled attorneys, top CEOs and board members find ways to comply with regulations in form while circumventing their aims [20]. Their ability to bypass the spirit of the law goes faster than regulations do, and courts do not follow.
The Tesla Case: Redefining Executive Compensation Precedents
In this context, a lawsuit was filed against Tesla’s board of directors regarding Musk’s 2018 compensation as a CEO of the company. Tesla’s board members awarded Musk with a 10-year performance-based option plan. The package included stock grants worth around 1% of Tesla’s equity each time the company achieved one of 12 tranches of escalating operational and financial goals [21]. The package was valued at $55.8 billion in total.
Richard Tornetta, an investor owning nine Tesla shares, decided to challenge the package in front of Delaware courts. He claimed that Musk’s package was unfair and that the board had breached his fiduciary duty. Specifically, Tornetta made three distinct claims. He accused directors of being too loyal to Musk, leading to a lack of independence and a breach of the duty of loyalty. Additionally, he argued that board members were not told how easily the goals (reaching some predefined market capitalization) would be achieved when they voted on the package. This lack of adequate information about the ease of meeting performance targets was accounted for as a breach of the duty of care. Finally, Tornetta claimed the oversized package as unnecessary to align Musk’s incentives with Tesla. Owning 22% of the automaker’s stock, high pay was useless to incentivize him and only contributed to drain cash out of Tesla. In support of this claim, one could remark that Tesla’s stock has indeed risen about 10-fold since 2018, raising the value of Musk’s take by more than $100 billion [22].
On the other hand, defendants argued that the board and shareholders were fully informed upon making the decision, and that the goals were challenging yet attainable. Additionally, defense emphasized that the pay package was a necessary incentive to align Musk’s interests with shareholders and to keep him focused on the company, especially as he is the CEO in many companies. Finally, Tesla’s board made the argument that in this performance-based compensation, Musk bore financial risk as he received no other compensation than the stock options. Therefore, if Tesla had not achieved its targets, Musk would not have received anything for his work as a CEO [23].
Traditionally, considering long-established case law over CEOs compensation, most actors expected the Delaware Chancery Court to uphold the pay package. But in its 2024 decision, the Court struck down the package as unfair to shareholders [24]. The Court justified this decision by explaining that Tesla’s board did not negotiate Musk’s pay properly because Musk exercised excessive influence over Tesla’s board, especially linked to his status as a founder of the company and one of the major stockholders [25]. The judge ruled that Musk effectively controlled Tesla’s board and had engineered the outsize pay package during sham negotiations.
Therefore, the Tesla case suggests a shift in corporate governance law, as courts may start scrutinizing CEO pay more closely. Traditionally, executive compensation has been approved by boards with little judiciary oversight. However, the recent legal challenges to Musk’s performance-based package indicate that Delaware’s Courts will from now on assess whether these pay packages are fair, transparent, and in shareholders’ best interests. This increased scrutiny could lead to stronger standards for board independence and reshape how CEO pay is reviewed and negotiated in the future. The Tesla ruling breaks with the long-standing case law tradition and shifts who runs the show in firms between executives, board members, and shareholders.
On the Other Side of the Atlantic: Insights from the European Approach to CEO Pay
When it comes to executive compensation, US jurisdictions following Delaware and Europe take fundamentally different approaches, shaped by distinct legal traditions, corporate governance structures, and cultural factors. European compensation tends to be lower than the ones of Americans [26]. This can be mainly explained by two factors: regulations and corporate governance models.
Many European nations impose stricter regulations on executive pay to ensure alignment with company performance and broader economic stability. Specifically, CEO pay is tied to long-term performance and social responsibility. In the United Kingdom, sharing a common law tradition with the United States, the “say on pay votes” rule applies. It is mandatory for shareholders to vote on executive compensation, even though the vote can be non-binding [27]. This instrument allows for greater shareholders oversight and can prevent the intervention of courts by giving shareholders the opportunity to express their views over the management of the company.
It should be noted that corporate governance models in the old continent differ significantly from the ones adopted in America. European corporate governance structures often feature a two-tier board system, with a supervisory board that exercises more direct oversight over management. Additionally, employee representation on boards is more common, adding additional checks on executive pay. This difference in structure allows for a diversification of the actors who oversee CEOs, increasing the likelihood of independent decisions.
Rethinking CEO Pay: Should Shareholders and Courts Step In?
CEO compensation has long been a controversial point in corporate governance debates. The question of judicial intervention is directly raised through the Tesla case. If courts have traditionally deferred to boards on executive pay decisions, this case highlights how powerful superstar CEOs can influence their own compensation. The Delaware Chancery Court decision to strike down Musk’s massive pay package raises broader concerns: how much control should boards really have? And in the era of superstar CEOs, can traditional oversight mechanisms still work? This is when courts are expected to intervene.
The Tesla case reflects a deeper tension in corporate law: should courts step in when boards fail to effectively oversee executives? It has been argued that greater judicial scrutiny can be a solution to prevent excessive pay packages that do not align with company performance and shareholders’ interests. But this approach faces strong resistance. Following the decision, Tesla announced on X that it will appeal the decision, along with the message, “the ruling, if not overturned, means that judges and plaintiffs’ lawyers run Delaware companies rather than their rightful owners – the shareholders” [28]. Delaware corporate law and broader American tradition have been established on the recognition of freedom of enterprise and corporate governance, which should only be minimally limited. This case therefore highlights the tension between the necessity for courts to take the lead when traditional overseeing mechanisms fail in a transformed corporate landscape, and the risk of falling into a corporate government of judges and judicial overreach into business decisions.
The state of CEO pay in America has become a central point of debate, particularly as the economy rapidly evolves along with technological advancements and globalization. In recent years, the structure of executive compensation has increasingly been tied to performance, with large bonuses and stock options. However, this trend has raised concerns with long-term shareholder interests, especially as packages have increased often without corresponding improvements in companies’ performance. Future recourses may include greater oversight, such as increased transparency requirements and judicial scrutiny of executive pay decisions, as well as a broader participation of shareholders in holding boards accountable. It could lead to a more balanced approach where CEO compensation is more closely tied to a sustainable view of company growth, and corporate governance practices evolve to ensure fairness, equity and long-term value creation.
Notes:
[1] Peterson-Withorn, C. “Forbes Billionaires List 2025: World’s Wealthiest Now Worth More Than Nearly All Nations’ GDPs.” Forbes, April 1, 2025. https://www.forbes.com/sites/chasewithorn/2025/04/01/forbes-39th-annual-worlds-billionaires-list-more-than-3000-worth-16-trillion/.
[2] Delaware general corporation law § 141(a).
[3] Bainbridge, S. Corporate Law (Concepts and Insights). 3e ed. Foundation Press, 2015.
[4] Acevedo, S. “Delaware’s Corporate Crack-Up: The ‘Great’ Business Exodus and Its Legal Fallout.” Fordham Journal of Corporate and Financial Law, March 31, 2025. https://news.law.fordham.edu/jcfl/2025/03/31/delawares-corporate-crack-up-the-great-business-exodus-and-its-legal-fallout/.
[5] Wilson, S. “Delaware’s Status as the Favored Corporate Home: Reflections and Considerations.” April 23, 2024. https://www.wsgr.com/en/insights/delawares-status-as-the-favored-corporate-home-reflections-and-considerations.html.
[6] “Fiduciary Duties of the Board of Directors.” Thomson Reuters, 2023. p. 2. https://law.stanford.edu/wp-content/uploads/2023/01/Fiduciary-Duties-of-the-Board-of-Directors.pdf.
[7] “Fiduciary Duties of the Board of Directors.” Thomson Reuters, 2023. p. 7. https://law.stanford.edu/wp-content/uploads/2023/01/Fiduciary-Duties-of-the-Board-of-Directors.pdf.
[8] Graham v. Allis-Chalmers Manufacturing Co, (Supreme Ct. Del. 1963).
[9] Aronson v. Lewis, 812 (Supreme Ct. Del. 1984).
[10] Delaware general corporation law § 102(b)(7).
[11] “Fiduciary Duties of the Board of Directors.” Thomson Reuters, 2023. p. 9. https://law.stanford.edu/wp-content/uploads/2023/01/Fiduciary-Duties-of-the-Board-of-Directors.pdf.
[12] Hill, C., McDonnell, B. “Executive Compensation and the Optimal Penumbra of Delaware Corporation Law.” Va. L. & Bus. Rev 4, 2009.
[13] In re The Walt Disney Co. Derivative Litig., 907 A.2d 693 (Del. Ch. 2005).
[14] In re Citigroup Inc. Shareholder Derivative Litig., 964 A.2d 106 (Del. Ch. 2009).
[15] Hill, C., McDonnell, B. “Executive Compensation and the Optimal Penumbra of Delaware Corporation Law.” Va. L. & Bus. Rev 4, 2009.
[16] Hill, C., McDonnell, B. “Executive Compensation and the Optimal Penumbra of Delaware Corporation Law.” Va. L. & Bus. Rev 4, 2009.
[17] Hamdani, A., Kastiel, K. “Superstar CEOs and Corporate Law.” Wash. UL Rev. 100, 2022.
https://heinonline.org/HOL/Page?handle=hein.journals/walq100&div=39&g_sent=1&casa_token=IfCGSj3mRQgAAAAA:_pGJbXxVo9S1GIG3_2PZ7lXa3WerrfGnclVcn0ccDty3FHxWYBw69yWb-yaRwy6Q_96wHxo_&collection=journals.
[18] Aneiros, A. “Limiting the Power of Superstar CEOs.” Berkeley Bus. LJ 21, 2024. https://heinonline.org/HOL/Page?handle=hein.journals/berkbusj21&div=11&g_sent=1&casa_token=E_lsU3PmnH4AAAAA:q2A-JL2fLRxPf96pEq1MUz_HARc7s7Ds2Cfi6tVo1FsaSHbkvq3VJmAHuvygCmb6wr12UTnw&collection=journals.
[19] Hamdani, A., Kastiel, K. “Superstar CEOs and Corporate Law.” Wash. UL Rev. 100, 2022.
https://heinonline.org/HOL/Page?handle=hein.journals/walq100&div=39&g_sent=1&casa_token=IfCGSj3mRQgAAAAA:_pGJbXxVo9S1GIG3_2PZ7lXa3WerrfGnclVcn0ccDty3FHxWYBw69yWb-yaRwy6Q_96wHxo_&collection=journals.
[20] Ibid.
[21] Godoy, J., Hals, T. “Explainer: The Case against Elon Musk’s $56 Billion Pay Package.” Reuters, January 30, 2024.
https://www.reuters.com/legal/case-against-elon-musks-56-billion-pay-package-2024-01-30/.
[22] Ibid.
[23] Tornetta v. Musk, 2024 WL 4930635 (Del. Ch. Dec. 2, 2024).
[24] “A Judge Has Once Again Rejected Musk’s Multi-Billion-Dollar Tesla Pay Package. Now What?” AP News, December 3, 2024.
https://apnews.com/article/elon-musk-pay-delaware-judge-texas-9d8c2212443a8fb77ef030ca96022b65.
[25] Tornetta v. Musk, 2024 WL 4930635 (Del. Ch. Dec. 2, 2024).
[26] Hill, C., McDonnell, B. “Executive Compensation and the Optimal Penumbra of Delaware Corporation Law.” Va. L. & Bus. Rev 4, 2009.
[27] Ibid.
[28] “A Judge Has Once Again Rejected Musk’s Multi-Billion-Dollar Tesla Pay Package. Now What?” AP News, December 3, 2024.
https://apnews.com/article/elon-musk-pay-delaware-judge-texas-9d8c2212443a8fb77ef030ca96022b65.
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