Tesla made Elon Musk a billionaire several times over by paying him handsomely in stock for his work as CEO of the electric car maker.
On Wednesday, Musk is expected to defend in court that compensation, much of which comes from a record-breaking salary deal he struck in 2018 with Tesla’s board of directors. The package granted Mr. Musk options that gave him the right to receive nearly $50 billion in company stock, helping make him the richest man in the world. Compensation analysts consider his salary staggering even by the staggering standards of what many CEOs earn in the United States.
In the years since shareholders voted in favor of the payment deal, Mr. Musk has received most of the shares included in the package after achieving the revenue, earnings and share price gain targets set out in the deal.
In a case being tried in Delaware Chancery Court, a shareholder argues that Tesla’s board did not act independently of Mr. Musk when crafting the package. Shareholder Richard Tornetta maintains that Tesla provided “materially misleading” information to investors when it asked them to agree to the package. His lawyers asked the court to annul the deal.
The lawsuit asserts that several members of Tesla’s board of directors were not truly independent due to their financial and personal relationships with Mr. Musk. James Murdoch, a media executive who has been on Tesla’s board since 2017, is expected to take the stage. A handful of board members and executives testified Monday and Tuesday, saying the pay package was in line with shareholder interests and ensured he would remain committed to Tesla.
Todd Maron, the automaker’s former general counsel, said in court Monday that it would be a “gross understatement” to say Tesla shareholders have benefited from Mr. Musk’s leadership.
Tesla’s share price has skyrocketed in recent years. The stock was trading at about $21, adjusted for a stock split, when Mr. Musk’s compensation deal was finalized in March 2018. It rose to about $410 at its peak in November 2021. It has since fallen just over 50 percent, and It is now trading at around $194, although it is still up 820 percent since the package went into effect.
Robyn Denholm, who chairs Tesla’s board of directors, has defended her independence, testifying Tuesday that Mr. Musk did not have the power to fire her and that she was not afraid of him. “My point is that Tesla wouldn’t be the company it is today without Mr. Musk,” she said.
Denholm said one of the justifications for the pay package was the need to tie Mr. Musk to Tesla while he pursued other interests, including at SpaceX, where he is also CEO. Under cross-examination from Gregory Varallo, who is representing Mr. Tornita, Ms. Denholm acknowledged that she knew about Mr. Musk’s involvement with Twitter, but said she did not know how much time he was spending on the social network he had acquired last month and was not worried about it.
“I’m not worried about the amount of time he’s spending” on other endeavors, she said, adding, “He’ll do whatever it takes to get results.”
But attorneys for the shareholders said in a court document that the compensation package was deficient because it contained no provision for reimbursement of wages if Mr. Musk failed to focus on Tesla.
It’s not clear what will happen to the stock awarded to Mr. Musk from the 2018 deal if the judge presiding over the trial, Counsel Kathleen McCormick, rules against it. When asked what might happen if the package were to be cancelled, Mr. Farallo suggested in an email that the stock options Mr. Musk received from the deal would be cancelled.
Counsel McCormick was also the judge who oversaw Twitter’s short-lived lawsuit against Mr. Musk to force him to complete his acquisition of the social media company, a deal he sought out of it. Mr. Musk bought Twitter late last month, selling billions of dollars worth of Tesla stock to help fund the acquisition.
Mr. Musk currently owns 14 percent of Tesla shares, which is worth about $90 billion. He has sold nearly $30 billion in stocks this year and last.
Any cancellation of the 2018 package will reverberate through the corporate world. Many boards have used Mr. Musk’s deal as a model. Some executives and compensation experts applauded the deal because Mr. Musk only got paid if Tesla’s stock market value jumped by a significant amount and the company, which had been struggling in 2018, had an improvement in business.
Mr. Musk got 11 out of the 12 batches of stock available in the package. Even though Tesla’s share price is now trading well below its peak, Mr. Musk can keep the stock he got from the package. The deal requires him to hold the shares he receives for at least five years.
Critics of the deal, who included some academics and investor groups, argued that the amount of stock Mr. Musk could ultimately get from the package was excessive. These people argued that Mr. Musk’s interests were already aligned with those of other Tesla shareholders because, at the time, he owned 22% of the company. These shares are set to increase in value if Tesla does well.
The Delaware shareholder lawsuit argues that although Tesla’s stock filing described performance targets as “extremely difficult to achieve,” the company internally expected that it would soon achieve a level of sales and profits that would enable Musk to meet three targets in the package. . The suit says internal projections were made before shareholders voted on the wage deal.
Attorneys for Musk’s managers and Tesla filed a motion to dismiss the lawsuit, but in 2019 another Delaware judge allowed most of the case to proceed.
Many legal questions will likely drive the outcome of the case, said Jill Fish, a professor of business law at the University of Pennsylvania. The court must determine whether Mr. Musk is a “controlling” shareholder — someone who has significant influence over the company, the board of directors, and other shareholders. It must also decide whether Tesla’s board of directors took sufficient steps to protect the rights of minority shareholders when crafting the pay package.
If the shareholder’s lawsuit survives those tests, the judge must then decide whether the salary deal is fair.
“Yes, it’s a lot of money,” said Ms. Fish, “but the performance hurdles were pretty high.”