WILMINGTON, Del. – 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 the performance-based stock option grant was negotiated by a compensation committee and approved in 2018 by Tesla TSLA,
board members who had conflicts of interest due to personal and professional ties to Musk.
The lawsuit, filed in 2018, also alleges the shareholder voted to approve that the compensation was based on an incomplete and misleading proxy statement. Specifically, the plaintiff alleges that the proxy misrepresented the members of the compensation committee as “independent” and characterized all of the steps that triggered the vesting of the stock options as “stretch” targets intended be difficult to achieve, although 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 proxy is void and the grant fails,” according to a memorandum from the plaintiff’s attorneys.
Lawyers for the defendants countered in their pre-trial brief that two institutional voting advisers noted that the plan would require “significant and possibly historic accomplishments” and would require growth that “seems to stretch relative to any what a point of reference”.
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 could reap billions if the electric car and solar panel maker hit certain market caps and operational milestones. For each incidence of simultaneously reaching a market capitalization milestone and an operational milestone, Musk, who already owned approximately 22% of Tesla when the plan was approved, would obtain shares equal to 1% of the outstanding shares at the time of the plan. time of allocation. His stake in the company would rise to around 28% if the company’s market capitalization increased by $600 billion.
Each stage of the plan includes increasing Tesla’s market capitalization by $50 billion and hitting an aggressive goal of revenue growth or pretax profits. Musk could only benefit from the full compensation plan, $55.8 billion, if Tesla reached a market capitalization of $650 billion and unprecedented revenues and profits within a decade.
To date, Tesla has reached all 12 market capitalization milestones and 11 operational milestones, resulting in the vesting of 11 of the 12 grant installments and providing Musk with more than $52.4 billion in stock option gains. stock purchase, according to the lawsuit. Since the grant was awarded, Tesla’s market capitalization has grown from $59 billion to more than $690 billion, after briefly hitting $1 trillion earlier this year.
Shares of Tesla Inc. have been battered this year, like all automakers, due to a mix of bailed-out supply chains and runaway inflation. Shares of Tesla have fallen 46% this year, while shares of Ford and GM have fallen around 31%.
However, the Austin, Texas-based company earned $5.5 billion in 2021, blasting earnings of $721 million from the previous year. It also produced a record 936,000 vehicles, nearly double what the company rolled off the assembly line in 2020.
Ehrenpreis said much of Tesla’s success was the result of leadership from Musk, who he said combined bold vision with “manic focus on execution.”
“He has both a bold vision, but he’s worked as hard as he can as CEO,” Ehrenpreis said.
Interviewed by defense attorney Evan Chesler, Ehrenpreis described the nearly year-long process during which he and other directors discussed and developed the compensation plan with the help of legal counsel and independent consultants. , as well as the contribution of major institutional investors.
Ehrenpreis described the plans’ milestones as “extraordinarily ambitious and challenging”.
According to the minutes of a 2017 compensation committee meeting, the directors wanted to properly balance the motivation of “stretch” goals for Musk while avoiding “the disincentives created by seemingly impractical, impractical, or impractical 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 of the company’s life,” he said, adding that it was the kind of ambitious plan that animated 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 flip-flop, dragging affair.”
“There were times when the board wanted something and Elon didn’t,” he said.
In his cross-examination of Maron, plaintiff’s attorney Jeroen van Kwawegen questioned whether the compensation plan was even necessary to keep Musk in charge, 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 on a call with analysts in May 2017, just weeks after work began on the new compensation plan. .
Plaintiff’s attorneys pointed to an email to Maron in July 2017 in which Musk said he wanted to use proceeds from the new compensation plan to help fund his dream of colonizing Mars.
Testimony resumes Tuesday morning.
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