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 performance-based stock option grants were negotiated by a compensation committee and approved in 2018 by Tesla board members who had conflicts of interest because of Musk’s personal and business ties.
The lawsuit, filed in 2018, also alleges that shareholders voted to accept that the compensation was based on incomplete and misleading proxy statements. Specifically, plaintiffs allege that the proxy independently falsely represented members of the compensation committee.
All milestones to be vested in stock options are shown as extended targets, although internal projections indicated that operational milestones were most likely to be achieved within 18 months of the three stockholder votes.
According to a brief by plaintiff’s attorneys, any action taken by stockholders on the basis of a materially deceptive proxy is void and the grant fails. Defense lawyers said in their pretrial briefs that two institutional proxy advisers said the plan would require significant and perhaps historical achievements and developments that appear to be stretched by any benchmark.
The first witness to testify was Ira Ehrenparis, a prominent venture capitalist and longtime friend of Musk, who chaired Tesla’s compensation committee when the electric car and solar panel maker had a certain market capitalization and operating miles. Grant was planned upon reaching the stone.
For each event of meeting a market cap milestone and an operational milestone simultaneously, Musk, who already owned about 22% of Tesla when the plan was approved, equals 1% of the shares outstanding at the time of the grant. If the company’s market capitalization rises to $600 billion, its interest in the company will increase by approximately 28%.
The plan includes increasing Tesla’s market capitalization by $50 billion and each milestone to meet an aggressive revenue or pre-tax profit growth target. Elon Musk stood to reap the full benefits of the $55.8 billion pay plan only when Tesla achieved a market capitalization of $650 billion and unprecedented revenue and earnings within a decade.
To date Tesla has achieved all 12 market capitalization milestones and 11 operating milestones, resulting in the settlement of 11 of the 12 installments of the grant and $52.4B in stock option gains to Musk, according to the lawsuits.
Tesla’s market capitalization has grown from $59 billion to more than $690 billion since the grant, reaching $1 trillion earlier this year due to a combination of a back-up supply chain and rising inflation.
Tesla shares are down 46% this year, while Ford and GM’s shares are down about 31%, although the Austin Texas company is forecast to earn $5.5 billion in 2021, breaking last year’s record of $721 million in profits. It produced 936,000 vehicles, which is almost double that of the company.
Ehrenparis testified that much of Tesla’s success is the result of Musk’s leadership, what he called bold vision combined with a frantic focus on execution. Ehrenpreis said he has a bold vision but is working hard as a CEO.