Elon Musk is keeping the Delaware Chancery Court busy. The same judge who made months of controversial findings in the billionaire’s legal battle with Twitter will preside over a shareholder lawsuit against Tesla’s board over his 2018 compensation package, calling it “the largest in human history.”
Telsa shareholder Richard Tornetta – “Individually and on behalf of everyone else in similar situations” is suing board members James Murdoch, Robyn Denholm, Antonio Gracias, Linda Johnson Rice, Brad Buss, Ira Ehrenpries and Musk over the grant, worth up to $56 billion US dollars if the electric car manufacturer reaches certain market capitalizations and financial milestones.
Proceedings begin Monday morning with Musk intrigued by Twitter since his purchase. There is blue-check chaos, thousands of employees are being laid off and others are resigning, the FTC is sticking their necks out, advertisers are wary, debt payments are looming and, he told employees, bankruptcy is out of the question.
The shareholder turns the spotlight on Tesla, calling its board “conflicted” and “sitting back” to the CEO, and claims Musk designed and enforced the package himself. It states that three of the first milestones were easily achievable and the shareholders who voted in favor of the package were not fully aware of all the details. It also called Musk a “part-time” employee who split his time between several companies, and said Musk asked for the package “with the avowed goal of colonizing Mars (the planet).”
“This is a very unusual request. But what is not unusual about Elon Musk?” said Rosanna Landis-Weaver, a governance and compensation expert with shareholder advocacy As You Sow.
Compensation cases have a high standard. If Chancery Court Judge Kathleen McCormick was skeptical of Musk’s case against Twitter, it’s even gloomier. One of the most prominent, and perhaps only, lawsuits of this type to come to court was a failed 2005 lawsuit against Walt Disney’s board of directors over the approval of a $140 million severance payment to Michael Ovitz after 14 months with the company . Ovitz was hired and fired by CEO, Chairman Michael Eisner. Shareholders said he was responsible for a board full of friends and associates.
“The court’s standard position is: ‘It’s not my problem. [They] no historical police compensation. The plaintiffs will suffer. But maybe not an impossible time,” said Ann Lipton, a law professor at Tulane University who has watched Musk closely.
Again, plaintiffs say that directors were close friends of Musk and his family, as well as business partners who enthusiastically invested in his various ventures. They say Musk effectively controlled the company and controlled the board as Tesla’s founder and largest shareholder, even without a majority stake. He owned about 20% of the company.
Directors insist the board was independent and spent months scrutinizing the package with advice from outside experts.
Lipton noted that the board was completely confused and didn’t take the right steps, even though the judge ruled: “It just means the court has to decide if it’s fair to the shareholders. And they can say yes.” But getting that far would be something of a victory for the plaintiffs, she thinks, and a potential catalyst for further legal action regarding CEO pay issues more generally.
The lawsuit raises issues commonly raised in CEO pay arguments in companies and industries, including the media, where shareholders have begun to whistle. Boards guarantee the high compensation needed to attract and retain managers. But how high? Musk would never have resigned as CEO of Tesla, the lawsuit says. And his great interest was enough to direct his interest with less incentive to the company’s performance. Directors/defendants said in their preliminary police report that Musk did discuss stepping down from the CEO role.
His 2018 package consisted of 12 tranches of 100 million stock options, the first of which required Musk to nearly double Tesla’s market capitalization from $53 billion to $100 billion and to reach a specific revenue or adjusted EBITDA target range. Each remaining part required an additional $50 billion in market capitalization, up to $650 billion, and a financial milestone, or Musk received nothing. The first part was awarded in May 2020 and directors said it scored 11 out of 12. Achieving the milestones was “far from a foregone conclusion” at the time, they said, as Tesla faced challenges, was wasting money and was not sustainably profitable. As Tesla shares soared afterward, Musk became the richest person in the world.
“The 2018 plan was developed with Musk in mind. [It was] not a typical pay package designed to compensate the ordinary manager for overseeing the day-to-day operations of a mature company,” the defendants said.
The trial begins at 09:15 in Delaware Chancery Court. According to a preliminary filing, the list of witnesses at the trial will include board members of James Murdoch and Tesla, as well as Elon Musk and his brother Kimbal Musk.
Writer: Jill Goldsmith
Source: Deadline
Joseph Fearn is an entertainment and television aficionado who writes for The Fashion Vibes. With a keen eye for what’s hot in the world of TV, Joseph keeps his readers informed about the latest trends and must-see shows.
