On December 19, 2025, in a highly-anticipated decision, the Delaware Supreme Court, via a per curiam opinion, reversed the Court of Chancery’s prior decision to rescind Elon Musk’s 2018 Tesla equity compensation plan. The decision reinstates the 2018 compensation plan and awards the Plaintiff stockholder only nominal damages. Based on this result, the decision also reverses the Court of Chancery’s award of attorneys’ fees and holds that such fees must be based on quantum meruit plus expenses.
The facts underlying the decision are well known to anyone who has followed the multi-year saga of this litigation through the Delaware courts. In early 2018, the Tesla Board approved a compensation plan for Elon Musk (the “2018 Grant”). The 2018 Grant had twelve vesting tranches, with each tranche vesting upon achievement of one market capitalization milestone and one operational milestone (revenue-based or adjusted EBITDA-based). The 2018 Grant was also approved by a majority vote of disinterested stockholders. As of December 31, 2023, all market capitalization milestones and twelve operational milestones were achieved, meaning Musk had fully performed under the 2018 Grant.
In 2018, a Tesla stockholder filed suit in the Court of Chancery alleging breach of fiduciary duty claims, and other claims, against both Musk, as controlling stockholder of Tesla, and the Tesla Board for approval of the 2018 Grant. After trial, the Court of Chancery ruled for Plaintiff and found that Musk, as a controlling stockholder of Tesla with transaction-specific control over the 2018 Grant, failed to demonstrate that the transaction was entirely fair.
As a remedy for the breach of fiduciary duties, the Court of Chancery ordered total rescission of the 2018 Grant. In so doing, the Court of Chancery rejected Defendants’ argument that rescission was not an appropriate remedy because it would unfairly fail to compensate Musk for his nearly six years of work on behalf of Tesla, in part because the Court of Chancery noted that the appreciation of Musk’s existing equity stake in Tesla would adequately compensate Musk.
After the post-trial decision, Tesla formed a special committee to consider whether to reincorporate Tesla in another jurisdiction and whether to request a stockholder vote to “ratify” the 2018 Grant. The special committee recommended that reincorporating in Texas and ratifying the 2018 Grant were in the best interests of Tesla and all its stockholders. A majority of Tesla’s disinterested stockholders voted in favor of the proposals. Based on the second stockholder vote, the Defendants filed a motion to revise the post-trial opinion of the Court of Chancery, which the Court of Chancery denied. With the motion to revise denied, the Court of Chancery considered the appropriate fee award for Plaintiff’s counsel and awarded $345 million in fees, based on 15% of the value of the benefit of rescission at $2.3 billion.
Notably, in deciding the appeal, the Justices acknowledged that they “have varying views on the liability determination” from the Court of Chancery. However, all Justices agreed that rescission was an improper remedy, and therefore the Delaware Supreme Court’s decision focuses only on that narrower ground for reversal. The Delaware Supreme Court based its reversal of the rescission remedy on three factors: “(i) Musk could not be restored to the status quo ante after working six years to meet the 2018 Grant’s market capitalization and operational milestones; (ii) his existing equity value increase based on his 2009 and 2012 Grants did not substitute for his return to the status quo ante; and (iii) it was not the Defendants’ burden to prove that the parties could be placed in the same position before Musk’s performance.”
After concluding as a threshold issue that Defendants had not waived their rescission arguments, the Delaware Supreme Court moved to the merits of the appeal. The Delaware Supreme Court noted that Plaintiff sought only one remedy, equitable rescission. The Court of Chancery based its rescission remedy on its finding that Defendants had breached their fiduciary duties in approving the 2018 Grant. However, the Delaware Supreme Court highlighted that rescission requires a “mutual return to the status quo” and therefore “the impracticability or impossibility of returning to the status quo ante can defeat a rescission remedy.” Rescission is always a remedy within a court’s discretion and is an extreme remedy that “should only be granted by a court of equity when it is clearly warranted.” In sum, “there must be a restoration of the status quo ante, not only of the plaintiff but of the defendant as well” and if the court cannot “realistically effectuate a decree which would restore the parties to the status that existed at the time the contract of sale was executed then rescission will be denied.” The Delaware Supreme Court also noted that while rescissory damages may be available as the economic equivalent of rescission in cases in which rescission is warranted but not feasible, Plaintiff here did not seek rescissory damages, only equitable rescission.
Considering the rescission remedy on the record before it, the Delaware Supreme Court held that the Court of Chancery erred in finding that rescission was both a “reasonable and appropriate” remedy for two reasons. First, the parties could not be restored substantially to their status quo ante positions. Second, Musk’s existing equity stake could not serve as substitute consideration to restore the parties to the status quo ante.
On the inability to restore all parties to the status quo ante, the Delaware Supreme Court stated that rescission is inequitable here because it would leave “Musk uncompensated for his time and efforts over a period of six years.” With respect to his existing equity stake, the Delaware Supreme Court held that although this equity stake was a “powerful incentive . . . it cannot restore Musk to the status quo ante because it was not consideration for the services and labor he provided under the 2018 Grant.” In short, any benefits from his preexisting equity stake were not the consideration Musk was promised as compensation if the 2018 Grant milestones were achieved.
The Delaware Supreme Court also held that the Court of Chancery had erred in requiring Defendants to offer an alternative remedy to rescission. The Delaware Supreme Court highlighted that “[i]t was the Plaintiff’s burden to establish an entitlement to rescission as a form of relief and his entitlement to any alternative remedies.” Therefore, “[t]he Court of Chancery erred in assigning to the Defendants the burden to identify a viable alternative because it always remained the Plaintiff’s burden to satisfy the prerequisites for any form of relief awarded.”
The Delaware Supreme Court concluded that because Plaintiff did not offer another form of appropriate relief beyond total rescission, the most Plaintiff could receive is nominal damages. Nominal damages is an appropriate award “when plaintiffs fail to present any evidence upon which the court could fashion a damages award in some other form.” The Delaware Supreme Court held that Plaintiff was entitled to a nominal damages award of $1.
Finally, on the issue of the appropriate award of attorneys’ fees, the Delaware Supreme Cout held that a fee award based upon quantum meruit was appropriate due to Plaintiff’s entitlement to only nominal damages. Tesla argued that Plaintiff’s counsel’s attorneys’ fees should be based on four times their lodestar. Although the Delaware Supreme Court noted that it would normally remand for a reassessment of fees, the Justices stated that they were making an exception “based on the length of this litigation and not to burden the Court of Chancery, which has devoted enormous time and attention to this case over many years, at great personal sacrifice.” Therefore, the Delaware Supreme Court ruled that Plaintiff’s counsel was entitled to a payment of their lodestar with a four times multiplier, because although “Plaintiff failed in his main objective of achieving a complete rescission of the 2018 Grant and received nominal damages, Tesla and its stockholders benefitted by counsel’s efforts.”