Elon Musk’s pay package to Tesla challenged in court

WILMINGTON, Del. (AP) – Testimony began Monday in a Delaware courtroom, where a Tesla shareholder is contesting a compensation plan for CEO Elon Musk that could be worth more than $ 55 billion.

The lawsuit alleges that the performance-based stock option grant was negotiated by a clearing 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 claims that the shareholder vote to approve the compensation was based on an incomplete and misleading proxy statement. In particular, the plaintiff argues that the proxy incorrectly described the members of the remuneration committee as “independent” and characterized all the milestones that triggered the vesting of stock options as “stretch” objectives that were difficult to achieve, even if internal projections indicated that three operational milestones could have been reached within 18 months of the shareholder vote.

“Any shareholder action based on a materially misleading proxy is void and the concession fails,” according to a memoir of the plaintiff’s lawyers.

The defendants’ attorneys retorted in their preliminary brief that two institutional proxy consultants noted that the plan would require “significant and possibly historical results” and would require growth that “appears to stretch 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 would have raised billions if the electric car and solar panel maker reached certain operational and market capitalization milestones. For each incidence of simultaneously achieving a market capitalization milestone and an operating milestone, Musk, who already owned approximately 22% of Tesla when the plan was approved, would get shares equal to 1% of the shares outstanding at the time. of the concession. His interest in the company would increase to about 28% if the company’s market capitalization grew by $ 600 billion.

Each milestone of the plan includes expanding Tesla’s market cap by $ 50 billion and meeting an aggressive revenue growth or pre-tax profit target. Musk would have received the full benefit of the salary plan, $ 55.8 billion, only if Tesla achieved a market cap of $ 650 billion and unprecedented revenues and earnings within a decade.

To date, Tesla has achieved all 12 market capitalization milestones and 11 operational milestones, resulting in 11 of the 12 grant payments being accrued and providing Musk with over $ 52.4 billion in stock option earnings, according to it causes. Since the grant was awarded, Tesla’s market capitalization has increased from $ 59 billion to over $ 690 billion, after briefly reaching $ 1 trillion earlier this year.

Shares of Tesla Inc. have been beaten this year, like all automakers, due to a mix of sustained supply chains and soaring inflation. Shares of Tesla were down 46% this year, while shares of Ford and GM were down about 31%.

However, the Austin, Texas-based company made $ 5.5 billion in 2021, wiping out 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 was the result of Musk’s leadership, who said he combined a bold vision with “an obsessive focus on execution.”

“They both have a bold vision, but worked hard as CEO,” said Ehrenpreis.

Questioned by defense attorney Evan Chesler, Ehrenpreis described the nearly one-year process during which he and other directors discussed and developed the compensation plan with the help of legal and independent counsel, as well as input from key institutional investors.

Ehrenpreis described the milestones of the plans as “extraordinarily ambitious and difficult”.

According to the minutes of a 2017 remuneration committee meeting, the directors wanted to adequately balance the motivation of “stretched” goals for Musk by avoiding “demotivating factors created by apparently impractical, unrealistic or unattainable goals.”

Ehrenpreis also testified that his friendship with Musk played no role in his vote to approve the plan.

“I felt it was very important to secure Elon’s leadership in this next chapter in the company’s life,” he said, adding that it was the kind of ambitious plan that drives Musk and would create one of the most valuable companies in the world.

Todd Maron, Tesla’s former general counsel, also testified on Monday.

Maron testified that Musk never dictated the terms of the plan, but that the process was cooperative and collaborative, “not a deal to be pulled down and dragged along.”

“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 wondered if the compensation plan was necessary to keep Musk at the helm, noting that there is no evidence that he ever thought about leaving Tesla.

“I intend to be actively involved with Tesla for the rest of my life,” Musk said in an analyst call in May 2017, just weeks after work began on the new compensation plan.

Plaintiff’s lawyers pointed to an email to Maron in July 2017 in which Musk said he wanted to use the proceeds from the new compensation plan to finance his dream of colonizing Mars.

Witnessing resumes Tuesday morning.

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