A Silicon Valley venture capitalist who worked for Tesla Board Inc. testified that it is necessary to preserve the largest executive pay package in US corporate history Elon Musk was “doing” the electric car manufacturer he founded.
Speaking as the first witness in a court hearing Monday about the legitimacy of paying Musk about $55 billion, Ira Ehrenprice said Tesla’s board recognized in 2017 that the chief executive was a “serial entrepreneur” and wanted to make sure he wasn’t. . leave the company to pursue other interests.
“We wanted Elon to lead Tesla for a long time,” Ehrenprice testified.
Ehrenprice’s testimony, which was intended to show that the compensation deal was determined by the board of directors, not Musk, underscored lingering concerns about Tesla’s CEO. Since it recently completed its controversial acquisition of Twitter Inc. for $44 billion, Musk has plunged the social media platform into chaos and threatened bankruptcy with a series of political, product and HR shake-ups and advertiser exodus.
In the midst of all this, Musk himself is expected to appear in court this week in Delaware Chancery.
How Elon Musk’s Twitter Takeover Turned into Chaos: QuickTake
The lawsuit stems from a lawsuit by a shareholder who claims Tesla’s board failed to act independently of Musk when crafting a new pay package for its charismatic CEO. If Judge Kathleen St. J. McCormick sides with the shareholder (a good chance), she could order Musk to return some or all of the Tesla stock award.
McCormick is the same judge who presided over a showdown between Musk and Twitter in recent months, when the latter tried to abandon the buyout — before he capitulated and agreed to honor his original offer.
According to court filings, Musk admitted he had little to fear from Tesla’s board of directors considering his pay proposal. “I’m negotiating against myself,” is how he described the process of changing payment details in a pretrial deposition.
During Ehrenpreis’ cross-examination, the shareholder’s attorney brought up a March 2018 email Musk sent to the company’s then-chief legal officer, Todd Moron, in which the CEO warned that if a particular institutional investor voted against the package, they would be told they were “no longer welcome” at Tesla .
Ehrenprice, who obtained a copy of the email, testified that he did not believe it was a threat to all major shareholders and said he did not know why Musk was nervous about this one investor.
It’s unclear whether Musk was directly communicating his warning to the investor. Moron, who spoke after Ehrenprice, was not asked about that Monday.
Ehrenprice said the board discussed Musk’s compensation with the company’s 10 largest institutional investors, all of whom agreed on the need to keep Musk at Tesla.
Fidelity Investments officials said they were “all for Elon making a ton of money” when Tesla took a leap in value, Ehrenprice recalled.
Musk devotes a lot of time to his other startups, including aerospace company Space Exploration Technologies Corp., Boring Co. and Neuralink Corp. and now Twitter.
Executive compensation lawsuits have traditionally faced a high bar, in part because the packages depend on ambitious stock price targets. Under Delaware law, directors are generally given discretion to use their “business judgment” to set compensation.
“It’s true that the executive compensation package approved for Elon Musk is extremely large, but Delaware courts are generally quite deferential” to directors’ pay decisions if a majority of shareholders vote to support the plan, said Paul Regan, a Widener University law professor. who specializes in Delaware corporate law.
Still, the failure of Tesla directors to disclose to investors some of the “difficult” payout milestones, which are likely to be reached in a little more than a year, could be problematic, said Joel Fleming, a partner at the law firm Block & Leviton, who is not involved in the case.
“It’s a strong argument,” Fleming said. “Tesla’s board appears to have misled Tesla shareholders” who voted to support the package, he said.
Also, “the fact that Musk spent all this time trying to take over Twitter” strengthens the argument that he’s too thin to focus on Tesla.
The case is being heard in the state of Delaware because Tesla is incorporated in a state that is home to 1.8 million American companies and more than 60% of the Fortune 500. The judges in the Chancery Court are business law experts who hear cases without jurors.
The lawsuit was filed by Richard Tornetto, who has owned nine Tesla shares since February 2018, according to court filings. Tornetta, whose business sells car parts for stereo systems and radar detectors, was threatened online for taking the case against Musk, his lawyers said.
In addition to once playing drums in a defunct heavy metal band, Tarnetta is the lead plaintiff in another Delaware securities case over Sirius XM’s 2018 buyout of Pandora, an internet radio service. Tornetta did not respond to a request for comment.
Tesla Equity awards last year helped make him the world’s richest man. Musk was worth $340 billion last November, according to the Bloomberg Billionaires Index. His net worth fell below $200 billion this month as Tesla shares hit a 52-week low.
Tesla executives have justified Musk’s compensation in court filings, pointing to a 12-fold increase in the company’s value over four years to $690 billion as of last month — including a brief period beginning in October 2021 when it exceeded more for $1 trillion.
According to them, most American companies have adopted a similar pay-for-performance model.
Tarnetta also claims that Tesla’s board of directors is filled with Musk’s friends and confidants, making it so full of conflicts of interest that it cannot make an independent decision about the billionaire’s salary.
As an example of the conflicts, he points to Musk’s long association with Ehrenprice, who chaired a board committee responsible for reviewing CEO pay. Ehrenprice was an early investor in Tesla and served as one of Musk’s advisers on the Twitter buyout.
Musk also enlisted Maron’s help in finalizing the compensation plan, Tarnetto said. Maron left Tesla in 2018.
Tesla directors have denied in court filings that they owed Musk or that their judgment about paying him was tainted by a conflict of interest.
Read more: Musk can’t avoid investor claims over ‘extraordinary’ reward
Tornetta wants McCormick to name Musk as Tesla’s controlling shareholder, even though he only owned about 22% of the car company at the start of 2018.
If Musk is found to be Tesla’s effective controller, the company must prove that his pay package was “entirely fair,” a higher legal standard to meet than simply relying on the business judgment of directors.
Tornetto filed his so-called derivative suit against Musk and other Tesla directors on behalf of the company. This means that all money received will go back to the electric car manufacturer, not Tornetta.
In the matter: Tornetto v. Musk, 2018-0408, Delaware Chancery Court (Wilmington).