Lawyers for Tesla shareholders on Tuesday urged a Delaware judge to invalidate the 2018 compensation package awarded to CEO Elon Musk by the company’s board of directors, which could be worth more than $55 billion (about Rs 4,55,600 crore).
Lawyers for shareholders argued that the compensation package should be invalid because it was determined by Musk and was the result of sham negotiations with directors who were not independent of him. They also said the bill was approved by shareholders who disclosed misleading and incomplete information in their proxy statements.
Delaware courts generally defer to a company’s directors’ “business judgment” in making decisions without having to prove wrongdoing. But attorney Greg Varallo argued that Tesla defendants should be required to prove that the compensation plan is “entirely fair” to shareholders because Musk is the controlling shareholder.
Defense attorneys countered that the pay plan was fairly negotiated by a compensation committee whose members are independent, contained performance milestones so lofty that they were derided by some Wall Street investors, and was supported by shareholder votes that are not even required under Delaware law. They also argued that Musk was not a controlling shareholder because he owned less than a third of the company at the time.
Tuesday’s arguments followed a trial in November in which Musk denied that he determined the terms of the pay package or participated in any meetings where the plan was discussed by the board of directors, the compensation committee or the task force that helped develop the plan.
Musk also played down the idea that his friendship with some Tesla board members, including sometimes vacationing together, meant they might do his bidding.
The plan calls for Musk to receive billions of dollars in revenue if Tesla reaches certain market capitalization and operational milestones. For each event in which both market capitalization and operating milestones are met, Musk (who owned about 22% of Tesla when the plan was approved) will receive shares equal to 1% of the shares outstanding at the time of the grant. If the company’s market capitalization grows by $600 billion (approximately Rs. 49,700 billion), his stake in the company will increase to about 28%.
According to a post-trial brief filed by the plaintiff’s lawyers, Tesla has achieved all 12 market capitalization milestones and 11 operational milestones, bringing Musk nearly $28 billion (approximately Rs. 2,31,980 crore) in stock option proceeds. However, stock option grants have a five-year holding period.
Varallo told Treasury Secretary Catherine Jude McCormick that Musk should be forced to return some, if not all, of the stock options he received.
Defense lawyer Evan Chesler said the compensation package was a “high-risk, high-reward” deal that would benefit not only Musk but Tesla shareholders, who have seen the Austin, Texas-based company’s value climb from $53 billion (roughly Rs. 4,400,000 crore) to more than $600 billion (roughly Rs. 4,49,69,700 crore), briefly touching $1 trillion (roughly Rs. 1 trillion). 82,85,000 crore last year.
Chesler also said Tesla made sure to include the $55 billion compensation figure in the proxy statement because the company wanted shareholders to know “it was a heart-breaking number that was available to Mr. Musk.”
“No one is laughing right now,” Chesler added, noting that while some Wall Street investors are bearish on Tesla, the company’s leadership in making electric vehicles has transformed the U.S. auto industry.
Following Tuesday’s hearing, McCormick ordered another round of briefings on various legal issues.