Delaware Supreme Court Reverses the Remedy Applied by the Court of Chancery in In re Tesla, Inc. Derivative Litigation

Key Points

• The Court reinstated Elon Musk’s 2018 compensation package: The Delaware Supreme Court overturned the Delaware Court of Chancery’s order rescinding Elon Musk’s 2018 Tesla executive compensation package.
• The appellate ruling is narrow and specific to the remedy: The Court focused on the evidence from the Court of Chancery bench trial. The Court specifically noted the absence of evidence with respect to the board negotiations as applicable to the remedy imposed by the Court of Chancery. However, the Court did not make broader rulings as to liability, the standard for control or influence of a stockholder, or the effect of stockholder ratification—which may have had broader implications for Delaware corporations.
• The Court made clear that plaintiffs, not defendants, bear the burden for tailored remedies: The Court clarified that it is the plaintiff’s burden to establish entitlement to the remedy of rescission. While defendants may contest the fairness of rescission, they need not supply alternatives.
• The Court limited use of rescission remedy: The Court emphasized that equitable rescission is available only when all parties can be restored to their pre-transaction positions. Because significant performance had already occurred under the pay package (i.e., Musk had performed and achieved the plan’s milestones), rescission was not practical.

On December 19, 2025, the Delaware Supreme Court, sitting en banc, issued a per curiam opinion in In re Tesla, Inc. Derivative Litigation, addressing the remedy imposed by the Court of Chancery in litigation challenging Tesla’s 2018 CEO performance award (the “2018 Grant”) to Elon Musk. The Supreme Court affirmed in part and reversed in part. Specifically, the Court held that equitable rescission of the 2018 Grant was improper and reinstated the 2018 plan, while awarding the plaintiff nominal damages of $1 and directing that plaintiff’s counsel receive fees on a quantum meruit basis.

I. Case History and Background

Tesla had previously awarded CEO equity grants in 2009 and 2012. In January 2018, the board approved the 2018 Grant, a 12‑tranche performance‑based option award, which was conditioned on approval by a majority of the disinterested shares. That approval occurred on March 21, 2018, with 73% of votes cast in favor, excluding the holdings of Musk and Kimbal Musk. The award paired market capitalization milestones, ranging from $100 billion up to $650 billion, with operational milestones based on revenue and adjusted EBITDA targets. By early 2023, all options under the grant were vested and in-the-money.

In June 2018, a Tesla stockholder sued Tesla in the Delaware Court of Chancery, alleging Musk breached his fiduciary duties as controlling shareholder by forcing the board to approve the 2018 Grant. Following a five‑day trial, the Court of Chancery, applying the entire fairness standard, found “transaction‑specific” control, concluded the award was not entirely fair, identified disclosure deficiencies in the 2018 proxy and ordered rescission of the entire grant. A later motion to revise filed by the defendants, based on a second stockholder vote in June 2024 to ratify the grant, was denied. The Court of Chancery also awarded $345 million in attorneys’ fees to the plaintiffs.

On appeal, the defendants challenged the feasibility and equity of rescission, including whether status quo ante restoration was possible, the allocation of burdens regarding partial rescission or alternative remedies and aspects of the fee award. Tesla also argued that the second stockholder vote in June 2024 should be given effect.

II. The Delaware Supreme Court’s Decision

The Court held that equitable rescission was not reasonable and appropriate because the Court could not restore all parties substantially to the status quo ante. The record showed six years of effort and milestone achievement under the 2018 Grant. The Court reasoned that rescission would leave the CEO uncompensated for services performed under the 2018 Grant, and that Musk’s past or preexisting equity cannot serve as substitute consideration for that performance.

Rescission requires that the parties are restored to status quo ante, and equity requires mutual restoration. Where full or substantial restoration is not possible or equitable, rescission is unavailable. The Court emphasized Delaware precedent that limits rescission when “unscrambling the eggs” cannot realistically restore parties to pre‑transaction positions. Because the plaintiff sought only equitable rescission and did not develop an evidentiary basis for rescissory damages or other calibrated monetary relief, the Court awarded nominal damages of $1.

The Supreme Court also clarified the allocation of burdens in this context. The Court found it was an error to fault defendants for not proposing a viable alternative to total rescission. It is the plaintiff’s burden to establish entitlement to the remedy sought and to supply a record that permits tailoring relief, such as partial rescission. Defendants may contest fairness without being required to supply an alternative valuation to sustain a modified remedy.

The Court also addressed attorneys’ fees, directing that fees and expenses be awarded to plaintiffs on a quantum meruit basis with a four times lodestar multiplier, with post-judgment interest from December 2, 2024. Any fee disputes are to be resolved in the Court of Chancery.

III. Implications for Delaware Corporate Litigation

Defendants presented three different paths during oral argument under which the Supreme Court could overturn the Chancery Court’s decision: (1) overturning the Court of Chancery’s application of entire fairness; (2) holding rescission was an improper remedy; or (3) finding that the second stockholder vote in June 2024 ratified the transaction. The Supreme Court explicitly chose the narrower path, reversing the remedy, and did not resolve broader liability issues or the effect of stockholder ratification, focusing its holding on why rescission was unavailable and what relief was appropriate on the record presented.

The decision underscores that rescission is an exceptional remedy. Delaware courts will scrutinize whether mutual restoration to the status quo ante is actually possible and equitable. Where significant performance has occurred and benefits have accrued over time, rescission will be disfavored, even in duty of loyalty contexts, absent a realistic, equitable unwinding.

The Court also made clear that the evidentiary record is critical, and the remedy must fit the proof. Plaintiffs seeking equitable remedies must develop an evidentiary foundation for tailored relief, such as rescissory damages, partial rescission or disgorgement where appropriate. Courts will not reach beyond the record to construct remedies, and absent proof, nominal damages may be the ceiling.

In Delaware, the burden to prove entitlement to a remedy lies with the plaintiff. Even when defendants contest fairness, courts should not place on defendants the burden to craft alternative compensation structures or valuations for partial relief.

This decision also clarifies litigation strategy and the expected proof burdens in entire fairness cases. Where benefits are unquantifiable or rescission is reversed, Delaware courts may resort to quantum meruit with multipliers to recognize counsel’s contributions while aligning incentives and avoiding outsized percentage-of-benefit awards.

This opinion reinforces Delaware’s remedial restraint: equitable remedies must be workable and equitable, with courts prioritizing fit between remedy and evidentiary record. Even in cases evaluated under entire fairness, the availability of rescission turns on practical restoration, not merely liability findings. The Court’s explicit reliance on nominal damages and quantum meruit signals preferred paths when full unwinding of a remedy is not feasible and plaintiffs have not proved alternative damages.

This Delaware Supreme Court decision brings an end to the case that some commentators say was the genesis of the “DExit” debate. It will be interesting to see what impact, if any, the decision has going forward.