WILMINGTON, Del. (AP) — The testimony began Monday in a Delaware courtroom where a Tesla shareholder is challenging a compensation plan for CEO Elon Musk that may be 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 voted to approve the fee based on an incomplete and misleading proxy statement. More specifically, the plaintiff alleges that proxies erroneously describe the members of the compensation committee as “independent” and characterize all milestones leading to the vesting of the stock options as “stretched” targets that were difficult to achieve, even though internal projections indicated that three operational milestones were likely to be achieved within 18 months of the shareholder vote.
“Any action by shareholders based on a materially misleading power of attorney is void and the grant fails,” said a briefing from plaintiff’s attorneys.
Attorneys for the defendants countered in their preliminary briefing that two institutional proxy advisors noted that the plan would require “significant and perhaps historic performance” and would require growth that “seems to stretch by any measure.”
The first witness to testify was Ira Ehrenpreis, a prominent venture capitalist and longtime friend of Musk’s, who chaired Tesla’s compensation committee when the grant was formulated.
Under the plan, Musk would reap billions if the electric car and solar panel maker reached certain market cap and operational milestones. For each of the cases where a market cap and operating milestone were reached simultaneously, Musk, who already owned about 22% of Tesla when the plan was approved, would receive shares equal to 1% of the shares outstanding at the time of the grant. His stake in the company would grow to about 28% if the company’s market cap grew by $600 billion.
Each milestone in the plan includes expanding Tesla’s market cap by $50 billion and meeting an aggressive pre-tax sales or profit growth target. Musk would receive the full benefit of the reward plan, $55.8 billion, only if Tesla reached a $650 billion market cap and unprecedented revenue and earnings within ten years.
To date, Tesla has achieved all 12 market capitalization milestones and 11 operating milestones, resulting in the final award of 11 of the award’s 12 terms and providing more than $52.4 billion in stock option gains to Musk, according to the lawsuit. Since the grant was awarded, Tesla’s market capitalization has risen from $59 billion to more than $690 billion, after briefly reaching $1 trillion early this year.
Shares of Tesla Inc. have been battered this year, like all automakers, due to a mix of backup supply chains and rising inflation. Tesla shares are down 46% this year, while shares of Ford and GM are down about 31%.
However, the Austin, Texas company made $5.5 billion in 2021, wiping out last 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 a result of Musk’s leadership, which he said combined bold vision with “a maniacal focus on execution.”
“He both has a bold vision, but he’s worked as hard as he can as CEO,” said Ehrenpreis.
When asked by attorney Evan Chesler, Ehrenpreis described the nearly year-long process in which he and other directors discussed and developed the compensation plan with the help of legal and independent consultants, as well as input from major institutional investors.
Ehrenpreis described the milestones in the plans as “extremely ambitious and difficult”.
According to the minutes of a 2017 compensation committee meeting, the directors wanted to strike a good balance between the motivation of “stretched” goals for Musk while avoiding “demotivating factors caused by seemingly impractical, unrealistic or unachievable goals.”
Ehrenpreis also testified that his friendship with Musk played no part in his vote to approve the plan.
“It was very important to me to ensure Elon’s leadership in this next chapter of the company’s life,” he said, adding that it was the kind of ambitious plan that drives Musk and would make it one of the most valuable companies in the world. to create.
On Monday, Todd Maron, former Tesla general counsel, was also a witness.
Maron testified that Musk never dictated the terms of the plan, but that the process was cooperative and collaborative, “not a knock-down, drag-out affair.”
“There were 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 necessary to keep Musk at the helm, noting that there is no evidence that he ever considered leaving Tesla.
“I plan to be actively involved with Tesla for the rest of my life,” Musk said during an analyst call in May 2017, just weeks after work began on the new compensation plan.
Plaintiff’s lawyers pointed to a July 2017 email to Maron in which Musk said he wanted to use the proceeds from the new compensation plan to help fund his dream of colonizing Mars.
Testimony resumes Tuesday morning.