The decision by Tesla directors to authorize a $55 billion (R1.01 trillion) pay package for Chief Executive Officer Elon Musk in 2018 was marred with conflicts of interest and improper disclosures about the performance benchmarks he’d be held to, a disgruntled investor argued in a court filing.
Musk, the world’s richest person and Tesla’s largest shareholder, must face a Delaware judge at a Nov. 14 trial over the claim by investor Richard Tornetta, who claims the billionaire engineered the windfall pay deal by pushing it through a “supine board.”
Musk dictated the “framework and financial terms, which remained fundamentally unchanged” throughout the board’s approval process, Tornetta’s lawyers said in a Delaware Chancery Court brief unsealed Wednesday.
Legal experts say the case will spotlight the role of courts in regulating executive compensation, and shine a light on the Musk’s peripatetic management of Tesla and other companies he owns. Last month, the entrepreneur closed his $44 billion acquisition of social-media platform Twitter Inc.
The case is being heard in Delaware because Tesla, like Twitter, is incorporated in the state, the corporate home to more than half of US public companies and more than 60% of Fortune 500 firms. Its Chancery judges are business law experts who hear cases without a jury, often on a fast-track basis.
Delaware Chancery Court Judge Kathaleen St. J. McCormick — who was overseeing Musk’s Twitter litigation — will review testimony about his Tesla pay package and decide whether it amounted to a waste of corporate assets.
In their pre-trial filing, Musk’s lawyers denied Tornetta’s claims the compensation package was excessive. They said he was a unique manager and deserved a bespoke pay plan based on Tesla’s astronomical rise in value over the last decade.
Tornetta’s lawyers rejected the claim by Tesla directors that they’d loaded up Musk with Tesla stock options to insure he remained at the head of the electric-car maker and would focus on its success. They noted Musk already splits management time between Tesla, Space X, his aerospace firm, and his other startups. So, the Tesla compensation plan rewards “part-time work,” the filing said.
The board’s compensation committee, headed by Musk’s friend and confidant Ira Ehrenpreis, was so beholden to the billionaire its members couldn’t begin to make an independent assessment of a reasonable compensation plan, Tornetta contends.
And their disclosures to investors about the pay plan’s goals violated Delaware law, according to the brief.
In proxy statements, the board said the pay package included a series of “stretch goals, selected to be very difficult to achieve,” but failed to disclose that three of those milestones likely already had been met as of the date of the shareholder vote approving the plan, Tornetta’s lawyers said.
Tornetta filed his derivative suit against Musk and other Tesla directors on behalf of the company in 2018. That means any money recovered will go back to the electric carmaker and not to Tornetta. The investor is asking McCormick to made Musk return stock options awarded under the compensation plan.