A trial over shareholder allegations that Tesla chief executive Elon Musk’s $56bn pay package was based on easy-to-achieve performance targets, and which investors were duped into approving, has begun, with Musk slated to take the stand later this week.
A Tesla shareholder hopes to prove during the five-day trial that started Monday that Musk used his dominance over the electric vehicle maker’s board to dictate terms of the 2018 package, which did not require him to work at Tesla full-time.
Musk, the world’s richest person, will testify on Wednesday, Greg Varallo, a lawyer for shareholder Richard Tornetta, told a court in Wilmington, Delaware, on Monday.
The trial began with Ira Ehrenpreis, a Tesla board member since 2007 and chair of the committee that oversaw the pay package, describing the thinking behind the record-breaking compensation deal.
“I wanted to make sure that [Musk] remained as the leader of Tesla over a longer period of time,” Ehrenpreis testified, adding that he had been leading other ventures from rocket company SpaceX to tunnelling firm, The Boring Company.
The court was shown a brief video clip of Musk’s deposition in the case. He described how Ehrenpreis called him to discuss creating a pay package to replace his 2012 pay deal. Musk said he suggested to Ehrenpreis “a larger amount but with much harder milestones” than the 2012 deal.
Tornetta has asked the court to rescind the pay package, which is six times larger than the top 200 CEO salaries combined in 2021, according to Amit Batish of research firm Equilar.
Musk and Tesla’s directors, who are also defendants, have denied the allegations, arguing that the pay package ensured the entrepreneur would guide Tesla through a critical period, which helped drive the stock tenfold higher.
The lawsuit argues that the pay package should have required Musk to work full-time at Tesla.
The company’s shareholders have become concerned that Musk is distracted by Twitter, which he bought for $44bn last month.
Musk told a business conference on the sidelines of the G20 summit in Bali, Indonesia, on Monday that he had too much on his plate at the moment.
The case will be decided by Chancellor Kathaleen McCormick of Delaware’s Court of Chancery, who also oversaw the legal dispute between Twitter Inc and Musk.
Wide latitude to set pay
Legal experts said Musk is in a better legal position in the pay package case than he was in Twitter’s lawsuit, which prevented him from walking away from the takeover.
Boards have wide latitude to set executive compensation, according to legal experts.
However, directors must meet more stringent legal tests if the pay involves a controlling shareholder. Part of this trial is likely to focus on whether that description fits Musk.
While he owned 21.9 percent of Tesla in 2018, plaintiffs are likely to cite what is seen as his domineering personality and ties to directors.
“There is no case in which a 21.9 percent shareholder who is also the chief executive has received a structured payout plan of this magnitude,” Lawrence Cunningham, a corporate law professor at George Washington University, said of the lack of precedent.
A pay battle between The Walt Disney Co and a shareholder shows how much deference Delaware courts give boards in setting compensation.
A Disney shareholder sued in 1997 over a $130m severance payment to former president Michael Ovitz, who was with the company less than two years. The shareholder lost at trial in 2005, and the Delaware Supreme Court upheld the ruling in 2006.
The disputed Tesla package allows Musk to buy one percent of Tesla’s stock at a deep discount each time escalating performance and financial targets are met. Otherwise, Musk gets nothing.
Tesla has hit 11 of the 12 targets as its value ballooned briefly to more than $1 trillion from $50 billion, according to court papers.
A decision will likely take about three months after the trial and could be appealed to the Delaware Supreme Court.
