A lawsuit challenging the salary package that made Elon Musk the world’s richest human being, at least for a while, moved one step closer to conclusion Tuesday when lawyers for aggrieved Tesla shareholders and the board The automaker’s board made desperate attempts to sway a judge in their favor
The lawsuit was filed in Delaware, where Tesla is incorporated, and centers on whether the board gave shareholders enough information about Musk’s compensation before approving it. But the case also raises many other issues revolving around Musk, including his management of Tesla, his acquisition of Twitter and whether the board can effectively monitor and control his behavior.
A group of shareholders challenged an option package that ended up giving Musk the right to buy more than $70 billion worth of Tesla shares before the shares began to lose value last year. For Musk to receive the award, which was one of the largest of its kind and later widely imitated by other corporations, Tesla had to meet certain revenue, profit and share price targets that were considered difficult to achieve at the time. .
In their lawsuit, the shareholders claimed that Tesla provided “materially misleading” information to investors when it asked them to approve the package. They have asked the Delaware court to void the deal.
The lawsuit took on greater prominence after Musk’s acquisition of Twitter last year. He faced widespread criticism for spending time trying to reform Twitter as Tesla’s shares plunged and its growth slowed amid increasing competition. Musk sold billions of dollars worth of Tesla stock to raise cash to help pay for Twitter. One justification for Musk’s payment at Tesla was that it was a way to keep him focused on building cars.
The case also raised questions about Tesla’s corporate governance and whether the board, which includes Musk’s brother Kimbal Musk and several of the CEO’s close friends, exercises any control over Musk. The lawsuit contended that Musk played a significant role in shaping his compensation and that the board, which is supposed to provide independent oversight, was filled with people who owed him their wealth.
Robyn Denholm, for example, earned less than $1 million as an executive at an Australian telecommunications company before Musk “handpicked” her to become Tesla’s chairwoman, said Gregory Varallo, a lawyer for the shareholders, to Chancellor Kathaleen McCormick, the judge in the case, on Tuesday.
Within a few years of joining the board, Denholm became “hugely and dynamically rich,” earning more than $250 million from Tesla stock options, Varallo said, citing testimony.
Foreign Minister McCormick oversaw a five-day trial in November that included Musk’s testimony. Tuesday’s hearing, which lasted nearly 3 1/2 hours, was one of the last opportunities for the two sides to offer their interpretations of the testimony.
At the end of the hearing, the judge asked the lawyers for additional written arguments to clarify their positions, a sign that she likely would not issue a decision for several months. If he decides in favor of the shareholders, he could require Musk to return some or all of the money he has earned.
Tesla’s lawyers and the directors maintained that the pay package was the product of a rigorous decision-making process. The money motivated Musk to make Tesla the most valuable car company in the world, they said.
Daniel Slifkin, a lawyer representing the directors of Musk and Tesla, noted that Tesla investors also became rich as the company’s value soared to more than $1 trillion at its peak. (The company’s value on the stock market on Tuesday was about $620 million.)
Varallo maintained that the board had set performance targets for Musk that were not that difficult to achieve.
Despite receiving “the largest compensation package in human history,” Varallo said, Musk was a “part-time CEO” who was often distracted by SpaceX, his rocket company, and Twitter.
“Where was the adult in the boardroom who stepped forward and told Mr. Musk that Tesla was not his playground?” Mr. Varallo said.
Slifkin said the amount of time Musk spent at Tesla was irrelevant.
“If he got the results, he was entitled to the consideration,” Slifkin said.
When Tesla directors awarded Musk the pay package, no one believed the company would drive a nationwide transition to electric vehicles, said Evan Chesler, another company attorney.
“Detroit was laughing at him,” Chesler said. “No one laughs anymore.”
Chancellor McCormick asked numerous questions during presentations by Tesla’s lawyers, while allowing Varallo to present his case without interruption. That was a possible indication that she was more skeptical of the arguments of Musk’s legal team.
