Testimony began Monday in a Delaware courtroom where a Tesla shareholder is challenging a compensation plan for CEO Elon Musk potentially worth more than $55 billion.
The lawsuit alleges that the performance-based stock option
grant was negotiated by a compensation committee and approved in 2018 by Tesla
board members who had conflicts of interest due to personal and professional
ties to Musk.
The lawsuit, filed in 2018, also alleges that the
shareholder vote to approve that compensation was based on an incomplete and
misleading proxy statement. Specifically, the plaintiff alleges that proxy
wrongly described members of the compensation committee as “independent,” and characterized
all the milestones that triggered vesting in the stock options as “stretch”
goals meant to be difficult to achieve, even though internal projections
indicated that three operational milestones were likely to be achieved within
18 months of the stockholder vote.
“Any action by stockholders based on a materially misleading
proxy is a nullity and the grant fails,” according to a brief by the
plaintiff's attorneys.
Attorneys for the defendants countered in their pretrial
brief that two institutional proxy advisers noted that the plan would require
“significant and perhaps historic achievements” and require growth that “appear
stretching by any benchmark.”
The first witness to testify was Ira Ehrenpreis, a prominent
venture capitalist and longtime friend of Musk who chaired Tesla's compensation
committee when the grant was formulated.
Under the plan, Musk stood to reap billions if the electric
car and solar panel maker hit certain market capitalization and operational
milestones. For each of incidence of simultaneously meeting a market cap
milestone and an operational milestone, Musk, who already owned about 22
percent of Tesla when the plan was approved, would get stock equal to 1 percent
of outstanding shares at the time of the grant. His interest in the company
would grow to about 28 percent if the company's market capitalisation grew by
$600 billion.
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 stood to receive the full benefit of the pay plan,
$55.8 billion, only if Tesla hit a market capitalisation of $650 billion and
unprecedented revenues and earnings within a decade.
To date, Tesla has achieved all 12 of the market
capitalisation milestones and 11 of the operational milestones, resulting in
the vesting of 11 of the grant's 12 installments and providing Musk over $52.4
in stock option gains, according to the lawsuit. Since the grant was awarded,
Tesla's market capitalisation has increased from $59 billion to more than $690
billion, having briefly hit $1 trillion early this year.
Shares of Tesla have been battered this year, like all
automakers, due to a mix of backed-up supply chains and soaring inflation.
Tesla shares have fallen 46 percent this year, while shares of Ford and GM have
fallen around 31 percent.
However, the Austin, Texas, company earned $5.5 billion in
2021, blowing away the previous year's profit of $721 million. It also produced
a record 936,000 vehicles, nearly double what the company rolled off the
assembly line in 2020.
Ehrenpreis testified that much of Tesla's success has been
the result of Musk's leadership, which he said combined bold vision with “a
maniacal focus on execution."
“He has both a bold vision, but he has been as hard working
a CEO as there can be,” Ehrenpreis said.
Under questioning from defense attorney Evan Chesler,
Ehrenpreis described the nearly yearlong process under which he and other
directors discussed and developed the compensation plan with the help of legal
advisers and independent consultants, as well as input from major institutional
investors.
Ehrenpreis described the milestones in the plans as
“extraordinarily ambitious and difficult.”
According to minutes from a 2017 meeting of the compensation
committee, the directors wanted to properly balance the motivation of “stretch”
goals for Musk while avoiding “demotivating factors created by seemingly
impractical, unrealistic or unachievable goals.”
Ehrenpreis also testified that his friendship with Musk
played no role in his vote to approve the plan.
“I felt that it was very important to ensure Elon's
leadership in this next chapter of the company's life,” he said, adding it was
the kind of ambitious plan that drives Musk and would create one of the most
valuable companies in the world.
Also testifying Monday was Todd Maron, Tesla's former
general counsel.
Maron testified that Musk never dictated terms of the plan,
but that the process was cooperative and collaborative, “not a knock-down,
drag-out affair.”
“There would be times when the board wanted something and
Elon didn't,” he said.
In his cross-examination of Maron, plaintiff attorney Jeroen
van Kwawegen questioned whether the compensation plan was even needed to keep
Musk as the helm, noting that there is no evidence he has ever thought about
leaving Tesla.
“I intend to be actively involved with Tesla for the rest of
my life,” Musk said in analyst call in May 2017, just weeks after work on the
new compensation plan began.
Plaintiff's attorneys pointed to an email to Maron in July
2017 in which Musk said he wanted to use proceeds from the new compensation
plan to help finance his dream of colonizing Mars.
Testimony resumes Tuesday morning. © Reuters