Analysis-Elon Musk convinced Tesla investors to back his pay. Now he must persuade a judge

By Tom Hals

WILMINGTON, Delaware (Reuters) -Tesla has convinced an army of small investors and major funds to ratify Elon Musk's $56 billion pay package. Now comes the harder part: persuading an already skeptical Delaware judge to recognize it.

The company said Thursday that shareholders had approved both Musk's pay package and a board-sponsored move of Tesla's legal home to Texas from Delaware.

Musk is the driving force of Tesla and responsible for many of its advances, leading to vocal support for the pay package especially among small shareholders. Still, sales and stock price have fallen recently, adding to concerns that produced a concerted 'no' vote.

Before Tesla can give the shares to Musk, there will likely be months of litigation over the pay ratification vote, Musk's efforts to rally shareholders in support of his compensation and the appeal of the original ruling, four months after a Delaware judge voided the pay package.

A final legal result in Musk's favor is not certain and will not be quick.

Judge Kathaleen McCormick of Delaware's Court of Chancery rescinded the pay package in January because she found that Musk improperly controlled the 2018 board process to negotiate it. She also ruled that Tesla failed to fully inform investors before they voted for it.

"This thing is not over," said Brian Quinn, professor at Boston College Law School. He said McCormick will require Tesla to prove the vote was uncoerced, and the timing and strategy were not influenced by Musk. "So when they show up (to the Delaware court) saying it's all good now, they're going to have to come with receipts."

As Tesla sees it, Thursday's shareholder vote essentially reached back in time and corrected the 2018 shareholder vote by disclosing enormous amounts of information to investors, including McCormick's 200-page ruling.

Tesla argued it corrected the problem of Musk's domination of the process to negotiate the pay package as well. It created a special committee eventually composed only of Kathleen Wilson-Thompson, an independent board member, who reviewed the 2018 pay deal and decided it was in the best interest of shareholders.

But Tesla also acknowledged in securities filings that a favorable ratification might not resolve the pay dispute. Ratification is primarily seen as a tool for fixing problems such as technical glitches in corporate documents.

Many major shareholders and some smaller ones voted against the pay package, frustrated by the size of the award, slowing business at Tesla and Musk's growing list of distractions, including businesses in rockets, AI, social media, neuroscience and tunnel digging.

At least one shareholder has already filed a legal challenge to the vote.

The lawsuit in Delaware's Court of Chancery by Tesla investor Donald Ball accused Musk of using "strong-arm, coercive tactics" to get his pay package approved. It cited Musk messages on his X social media platform saying he was uncomfortable transforming Tesla into an AI leader unless he had 25% of the company's stock, almost double his current holdings.

But Tesla and Musk will likely argue that Musk is allowed to express his desire to leave the company.

Columbia Law School Professor Zohar Goshen said he thought the Delaware court decision should reverse itself after a yes vote, but acknowledged the situation was too unusual to say.

"It is hard to estimate how the court will rule because there is too much noise around this decision. But my personal view is that Tesla should succeed," Goshen said.

(Reporting by Tom Hals in Wilmington, Delaware; Additional reporting by Rachael Levy in Washington; Editing by Peter Henderson, Matthew Lewis and Miral Fahmy)