WILMINGTON, Del. Lawyers for a Tesla shareholder on Tuesday urged a Delaware judge to dismiss a 2018 compensation package awarded by the company’s board of directors to CEO Elon Musk, potentially worth more than $55 billion. to be declared invalid.
The shareholder’s lawyers argue that the compensation package should be annulled because it was dictated by Musk and is the product of sham negotiations with directors who were not independent of him. They also say it was approved by shareholders who received misleading and incomplete disclosures in a proxy statement.
Courts in Delaware often rely on the “business judgment” of business leaders when making decisions in the absence of evidence of wrongdoing. But attorney Greg Varallo argued that the Tesla
defendants should be required to show that the compensation plan was “entirely fair” to shareholders because Musk was a controlling shareholder.
Defense attorneys countered that the compensation plan had been fairly negotiated by a compensation committee whose members were independent, contained performance milestones so lofty they were ridiculed by some Wall Street investors, and blessed by a shareholder vote that, under Delaware law, wasn’t even required. They also claim that Musk was not a controlling shareholder because he owned less than a third of the company at the time.
Tuesday’s arguments followed a lawsuit in November in which Musk denied that he dictated the terms of the compensation package or attended meetings where the plan was discussed by the board of directors, the compensation committee or any working group that helped develop it.
Musk also downplayed the idea that his friendships with certain Tesla board members, including sometimes going on vacation together, mean they were likely to do his bidding.
The plan called for Musk to reap billions if Tesla hit certain market cap and operational milestones. For each incidence of simultaneously achieving a market cap milestone and an operating milestone, Musk, who owned approximately 22% of Tesla when the plan was approved, would receive shares equal to 1% of the shares outstanding at the time of the grant. His stake in the company would grow to about 28% if the company’s market cap grew by $600 billion.
Tesla has achieved all 12 market capitalization milestones and 11 operating milestones, netting Musk nearly $28 billion in stock option gains, according to a post-trial brief filed by plaintiff’s attorneys. However, the grant of stock options is subject to a five-year holding period.
Varallo told Chancellor Kathaleen St. Jude McCormick that Musk should be forced to return some, if not all, of the stock option awards he earned.
Defense attorney Evan Chesler said the compensation package was a “high risk, high reward” deal that benefited not only Musk, but also Tesla shareholders, who have increased the value of the Austin, Texas-based company. increased from $53 billion to more than $53 billion. $600 billion, after briefly reaching $1 trillion last year.
Chesler also said that Tesla made sure to include the $55 billion compensation figure in the proxy statement because the company wanted to let shareholders know that “this was a heartbreaking number for Mr. Musk to earn.”
“Nobody’s laughing right now,” Chesler added, noting that while some Wall Street investors are betting against Tesla, the company’s leadership in electric vehicle production has transformed the U.S. auto industry.
After Tuesday’s hearing, McCormick ordered another round of briefings on several legal issues.