A spectacular trial began on Monday in Wilmington, Delaware. It’s about the whopping $56 billion salary package that Tesla-Boss Elon Musk (51) negotiated with the automaker’s board in 2018. It was underpinned by performance targets that were too easy to achieve and investors were caught off guard into agreeing to the package, the accusation goes. A Tesla investor hopes to prove during the five-day trial that Musk used his dominance of the board to dictate terms that didn’t even require him to work full-time at Tesla.
The plaintiff is a certain Richard Tornetta. He had already sued four years ago, when he only owned four Tesla shares. Musk, the richest man in the world, tried to prevent the trial but was turned away. Now he should testify in court on Wednesday, said Tornetta’s lawyer Greg Varallo.
At the beginning of the hearing, Ira Ehrenpreis, a Tesla board member since 2007 and chair of the committee overseeing the pay package, outlined the process of creating the record-breaking pay package. “I wanted to ensure that Elon remained at the helm of Tesla for an extended period of time,” said Speedwell, who is a Tesla investor himself through his venture capital firm DBL Partners.
A short video clip of Musk’s testimony in the case was shown to the court. He describes how Honorprice called him to discuss a pay package to replace his 2012 salary agreement, which was about to expire at the time. He then proposed to Ehrenpreis “a higher amount, but with much tougher milestones” than in the 2012 agreement, Musk said.
The salary package is one of the most spectacular that a CEO has ever negotiated. At first glance, the deal resembles a bet: it allows Musk to buy Tesla shares at a deep discount whenever certain performance and financial goals are met. Should Tesla miss the target values, Musk would have gotten nothing. A total of 12 such milestones were set.
As a result of the electric car boom and the meanwhile market value of more than one trillion dollars, Musk had achieved eleven of the twelve agreed goals in a relatively short time. Overall, the total from the pay package was six times higher than the top 200 CEO salaries in 2021 combined, according to market research firm Equilar’s Amit Batish.
Musk and Tesla executives, who are also defendants, have denied the allegations. They argue that the pay package served its purpose — to ensure the entrepreneur successfully guided Tesla through a critical period, which helped boost the stock’s valuation 10-fold.
The case is particularly explosive due to the current disputes surrounding Twitter. The lawsuit argues that the pay package should have required Musk to work full-time at Tesla. It’s obvious right now that Musk doesn’t spend a lot of his time on Tesla. He recently even sold more Tesla shares worth around $4 billion to stabilize Twitter. The course then collapsed further, which outraged Tesla investors. Musk himself said on Monday at an economic conference on the sidelines of the G20 summit in Bali that he has a lot on his plate at the moment.
The lawsuit is not considered hopeless. According to legal experts, the board has a lot of leeway in determining executive compensation. However, the deals must meet stricter legal requirements if the compensation package involves a controlling shareholder. Part of the process will likely focus on whether this applies to Musk. Although he owned just 21.9 percent of Tesla stock in 2018, plaintiffs are likely to cite his dominant personality and connections to board members.
Irony of fate: The case of Kathaleen McCormick will be decided. The judge is an old acquaintance for Musk. She oversaw the legal battle between Twitter and Musk, which ended at the last moment before Musk eventually bought the social media platform for $44 billion. A decision is likely to come about three months after the hearing and could be appealed in the Delaware Supreme Court.