Delaware Corporate Law at an Inflection Point: Delaware Supreme Court Restores Tesla’s 2018 Performance-Based Equity Award to Elon Musk

On December 19, 2025, the Delaware Supreme Court reversed the Court of Chancery’s decision rescinding Elon Musk’s 2018 Tesla compensation package, thereby restoring to Musk an award that is now worth more than $100 billion. The Court’s opinion, although noteworthy because it concludes the battle over a record-setting equity award, is also remarkable because of what it leaves unanswered. Namely, a host of doctrinal questions at the center of an ongoing debate about Delaware’s preeminence as a state of incorporation.

The Court of Chancery Decision

Musk's 2018 compensation package, which was approved by Tesla’s board and a majority of disinterested stockholders, granted Musk options to purchase 1% of Tesla’s shares for each of the 12 tranches that could vest upon achievement of certain market capitalization and operational milestones.  By early 2023, all milestones had been met and Musk's options fully vested. 

In the wake of Musk’s equity grant, a Tesla stockholder sued Musk and Tesla’s board, alleging that Musk had forced the board to award him excessive compensation. After trial in 2022, the Court of Chancery rescinded the entire compensation package on the ground that the grant was subject to—and failed—the “entire fairness” test.  In reaching this conclusion, the Court of Chancery held that Musk was a “controller," evincing a broad view of “controllership.”  It reasoned that even though Musk only had a 21.9% ownership stake in the company, his “superstar” status and personal ties to Tesla’s directors made him a de facto “controller,”  creating a “distortion field” that prevented the board from negotiating at arm’s length. 

In April 2024, Tesla’s board resubmitted the rescinded grant for a second stockholder vote, including with its submission a copy of the Court of Chancery's opinion.  After a majority of disinterested shares voted in favor of the grant in June 2024, Tesla moved the Court of Chancery to revise its post-trial opinion.  The court declined to do so, reasoning that a ratification defense could not be raised post-trial. Defendants appealed.

The Delaware Supreme Court’s Decision

In a per curiam opinion issued on December 19, 2025, the Delaware Supreme Court reversed the Court of Chancery’s rescission. In a footnote, the Court observed that there were three potential paths for reversal: overturning the Court of Chancery’s application of entire fairness review and with it, the lower court’s expansive definition of “controller,” holding that rescission was an improper remedy, or finding that the subsequent stockholder vote ratified the 2018 equity grant. The Justices, who had “varying views on liability," chose the “narrower path” of evaluating the rescission remedy. 

The Court noted that rescission is appropriate only if all parties can be restored to the status quo ante.  Here, that standard was not met because: (i) rescission left Musk uncompensated for his time and efforts over a period of six years; (ii) Musk could not undo the efforts he put into Tesla over that time period; and (iii) Tesla stockholders could not return the benefits they received over that time period.  

Ultimately, the Delaware Supreme Court restored Musk's 2018 equity grant, awarded nominal damages of $1 to the plaintiff, and reduced plaintiff’s attorneys’ fee award from $345 million to approximately $54.5 million.

Potential Implications

The Delaware Supreme Court’s opinion, though measured in its analysis, is remarkable in its result. For starters, it comes during a period of uncertainty for Delaware corporations that was sparked, in part, by Musk public critique of what he perceived as the state's hostility toward corporations.  His criticism, coupled with the Court of Chancery's heightened judicial scrutiny, prompted fears of a so-called “DExit” as Tesla, and numerous other companies, sought to reincorporate in Texas or Nevada. In an effort to stem this potential exodus, Delaware lawmakers proposed amendments to Delaware General Corporation Law (“DGCL”) that were designed to, among other things, clarify when a controlling stockholder exists under Delaware law and impose guardrails on implicated transactions. It remains to be seen what effect those amendments, which became law in 2025, will have on pending cases and the “DExit” movement more broadly. 

Against this backdrop, the Delaware Supreme Court had an opportunity to weigh in the debate  surrounding the balance of power among boards, founders, and large stockholders.  By deciding on the narrowest grounds on which the Justices agreed, the Delaware Supreme Court refrained from wading into the policy discussion.  The Court's approach, while appropriately conservative given the environment, left several questions unanswered.  Chief among these were Tesla’s ratification-based arguments, the outer limits of “controllership,” and the application of entire fairness review—all of which had contributed to Musk’s “DExit” campaign. 

Although it remains to be seen whether the restoration of Musk’s compensation package will have any impact on corporations that are still considering exiting Delaware, the immediate takeaway for companies is this: Delaware courts are going to tread lightly.  While the impact of the DGCL amendments works its way through the court system, issuers should remain mindful of the Chancery Court’s skepticism toward late-stage ratification defenses and continue to approach transactions involving “controlling stockholders” with an eye towards making process- and disclosure-related enhancements where possible.