Tesla has made Elon Musk a billionaire many times over by paying him generously in stock for his work as CEO of the electric car maker.
On Wednesday, Mr. Musk is expected to defend that compensation in court, much of which comes from a record pay deal he struck with Tesla’s board of directors in 2018. The package awarded Mr. Musk options that gave him the right to acquire nearly $50 billion in company stock, making him the richest man in the world. Compensation analysts consider his salary staggering, even by the dizzying standards of what many CEOs in the United States earn.
In the years since shareholders voted in favor of the pay deal, Mr. Musk has received the bulk of the shares in the package after meeting the revenue, profit and capital gains targets set in the deal.
In a case pending before the Delaware Court of Chancery, a shareholder alleges that Tesla’s board did not act independently of Mr. Musk in drafting the package. The shareholder, Richard Tornetta, alleges that Tesla provided “materially misleading” information to investors when it asked them to approve the package. His lawyers have asked the court to annul the deal.
The lawsuit alleges that many Tesla board members lacked true independence because of their financial and personal ties to Mr. Musk. James Murdoch, the media executive who has served on Tesla’s board since 2017, is expected to take the stand. A few other board members and executives testified on Monday and Tuesday, arguing that the compensation package aligned Mr. Musk’s interests with those of shareholders and ensured he would remain committed to Tesla.
It would be a “massive understatement” to say Tesla shareholders have benefited from Mr. Musk’s leadership, Todd Maron, the automaker’s former general counsel, said in court Monday.
The share price of Tesla has risen enormously 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 climbed to around $410 at its peak in November 2021. Since then, it’s down just over 50 percent, now trading at around $194, though it’s still up 820 percent from when the package went into effect.
Defending his independence, Robyn Denholm, chairman of the board of Tesla, testified Tuesday that Mr. Musk did not have the power to fire her and that she was not afraid of him. “My view is that Tesla wouldn’t be the company it is today without Mr. Musk,” she said.
One justification for the compensation package, Ms. Denholm said, was the need to tie Mr. Musk to Tesla while he pursued other interests, including at SpaceX, where he also serves as CEO. After being questioned by Gregory Varallo, who represents Mr Tornetta, Ms Denholm acknowledged knowing about Mr Musk’s involvement with Twitter, but said she did not know how much time he spent on the social media network he acquired last month and don’t worry about it.
“I’m not concerned about the amount of time he spends” on other endeavors, she said, adding, “He’ll do what he needs to to get the results.”
But shareholder lawyers said in a court document that the compensation package was inadequate because it did not include a provision to recover wages if Mr. Musk did not focus on Tesla.
It is not clear what would happen to the shares awarded to Mr Musk from the 2018 deal if the judge presiding over the trial, Chancellor Kathaleen McCormick, rules against him. When asked what might happen if the package were declared null and void, Mr. Varallo in an email that the stock options Mr. Musk obtained from the deal would be cancelled.
Chancellor McCormick was also the judge overseeing Twitter’s short-lived lawsuit against Musk to force him to complete its takeover of the social media company, a deal he had wanted to get out of. Mr. Musk bought Twitter late last month and sold billions of dollars worth of Tesla stock to help fund the acquisition.
Mr. Musk currently owns 14 percent of Tesla’s stock, which is worth nearly $90 billion. He sold about $30 billion worth of stock this year and last year.
Any undoing of the 2018 package would reverberate in the corporate world. Many boards of directors have accepted Mr. Musk used as a template. The deal was praised by some executives and compensation experts because Mr. Musk would only be paid if Tesla’s stock market value soared and the company’s business, which had struggled in 2018, improved.
Mr. Musk has earned 11 of the 12 lots of shares available in the pack. Although Tesla’s share price is now trading well below its all-time high, Mr. Musk gets to keep the shares he received from the package. The deal requires him to hold the shares he receives for at least five years.
Critics of the deal, including some academics and investor groups, argued that the amount of stock Mr Musk was ultimately able to get out of the package was excessive. These people argued that Mr. Musk’s interests were already aligned with those of other Tesla shareholders because he owned 22 percent of the company at the time. And the value of those stocks would rise if Tesla did well.
The Delaware shareholder case argues that while a Tesla stock filing described its performance goals as “very difficult to meet,” the company internally predicted that it would most likely soon reach sales and earnings levels that would allow Mr. Musk to achieve three goals in reach the package. The lawsuit says the internal projections were made before shareholders voted on the pay agreement.
Attorneys for Mr. Musk and Tesla’s directors filed a motion to dismiss the lawsuit, but in 2019 another Delaware judge allowed most of the case.
Several legal questions will most likely determine the outcome of the case, said Jill Fisch, 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, its board of directors and other shareholders. It must also decide whether Tesla’s board has taken sufficient steps to protect the rights of minority shareholders when designing the compensation package.
If the shareholder’s lawsuit survives those tests, the judge must decide whether the compensation agreement was fair.
“Yes, it’s a lot of money,” Ms. Fisch said, “but the performance hurdles were pretty high.”