WILMINGTON, Del. (AP) – Testimony began Monday in a Delaware courtroom where a Tesla shareholder is challenging a compensation plan for CEO Elon Musk that could potentially exceed $55 billion.
The lawsuit alleges that the performance-based stock option grant was discussed by the compensation committee and approved in 2018 by members of Tesla’s board of directors, who have a conflict of interest because of their personal and professional ties to Musk.
The lawsuit, filed in 2018, also alleges that the shareholder voted to approve the compensation based on an incomplete and misleading attorney’s statement. Specifically, the plaintiff alleges that counsel falsely described the members of the compensation committee as “independent” and characterized all milestones leading to the vesting of stock options as “stretch” goals that were difficult to achieve, even though internal projections indicated that there would be three. Operational milestones were likely to be achieved within 18 months of the shareholder vote.
According to a brief filed by the plaintiff’s attorneys, “Any action by the stockholders based on a materially misleading proxy will be void and the grant will fail.”
Attorneys for the defendants countered that two institutional advisers said in pretrial briefings that the plan would require “significant and perhaps historic accomplishments” and would require an increase “of any size that seems reasonable.”
The first witness to testify was Ira Ehrenpreis, a well-known venture capitalist and longtime friend of Musk’s who chaired Tesla’s compensation committee when the grant was made.
Under the plan, Musk would earn billions if the electric car and solar panel maker reached certain market capitalization and operational milestones. Musk, who owned about 22% of Tesla when the plan was approved, would have received shares equal to 1% of the shares outstanding at the time of the grant for each of the simultaneous achievement of a market cap and operating milestone. If the company’s market capitalization increases by $600 billion, his interest in the company will increase to about 28%.
Each milestone in the plan includes expanding Tesla’s market capitalization by $50 billion and meeting an aggressive revenue or pretax profit growth target. Musk would have received the full benefit of the $55.8 billion payment plan if only Tesla had achieved a $650 billion market capitalization and unprecedented revenue and profits over a decade.
To date, Tesla has achieved all 12 of its market capitalization and 11 of its operational milestones, resulting in 11 of 12 installments of the grant and earning Musk more than $52.4 billion in stock options, according to the lawsuit. After the grant, Tesla’s market capitalization rose from $59 billion to $690 billion, briefly hitting $1 trillion earlier this year.
Shares of Tesla Inc., like all automakers, have been battered this year by a mix of supported supply chains and rising inflation. Tesla shares are down 46% this year, while Ford and GM shares are down about 31%.
However, the Austin, Texas-based company will earn $5.5 billion in 2021, blowing away the previous year’s profit of $721 million. It also produced a record 936,000 vehicles that the company rolled off the assembly line in 2020.
Ehrenpreis testified that much of Tesla’s success was the result of Musk’s leadership, which he said combined a bold vision with a “maniacal focus on execution.”
“He has both a bold vision, but he’s worked as hard as he can as a CEO,” Ehrenpreis said.
Under questioning from defense attorney Evan Chesler, Ehrenpreis described a nearly year-long process in which he and the other directors negotiated and developed a compensation plan with the help of legal counsel and independent counsel, as well as major institutional investors.
Ehrenpreis called the milestones in the plans “extraordinarily ambitious and challenging.”
According to the compensation committee’s 2017 meeting minutes, directors wanted to properly balance the motivation of “stretch” goals for Musk while avoiding “the demotivating factors created by goals that seem unrealistic, unrealistic, or unattainable.”
Ehrenpreis also said his friendship with Musk played no role in his vote to approve the plan.
“I felt it was very important to provide Elon’s leadership in this next chapter of the company’s life,” he said, adding that it was the kind of ambitious plan that would drive Musk and create one of the world’s most valuable companies.
Also testifying Monday was former Tesla general counsel Todd Maron.
Maron said that Musk never dictated the terms of the plan, but that the process was cooperative and collaborative, “not a knock-on, drag-and-drop thing.”
“There were times when the board wanted something and Elon didn’t.”
While cross-examining Maro, plaintiffs’ attorney Jeroen van Kwawegen asked whether a compensation plan was necessary to keep Musk at the helm, noting there was no evidence he was considering leaving Tesla.
“I intend to be actively involved with Tesla for the rest of my life,” Musk said on an analyst call in May 2017, just weeks after work on the new compensation plan began.
The plaintiff’s attorneys pointed to a July 2017 email to Maron in which Musk said he wanted to use the proceeds from the new compensation plan to fund his dream of colonizing Mars.
Testimony continues Tuesday morning.