The legal battle over Tesla’s $56 billion deal from Elon Musk begins

Elon Musk will seek to prove he deserves a multi-billion dollar pay package from Tesla as a lawsuit has been launched in Delaware by shareholders accusing the electric carmaker of enriching its co-founder and CEO at their expense.

The richest man in the world is set to testify this week in a trial that began Monday alleging that he, Tesla and board members breached their duties by granting Musk stock options valued at a maximum of nearly $56 billion.

The proceedings come just weeks after the 51-year-old took control of Twitter, adding the social media company to an ever-growing list of companies for which he is at least nominally responsible, including Tesla, SpaceX, and Neuralink The Boring Company.

Attorneys for the Tesla investors who filed the lawsuit argued that Musk’s growing portfolio means he’s too sparsely saturated to be considered the automaker’s full-time CEO, let alone one deserving of an accolade from the they claim that “the salary package dwarfs any CEO of any other public company.” The lawsuit was filed ahead of Musk’s $44 billion deal for Twitter.

Musk also faces claims that his pay package, which plaintiffs call the “biggest . . . in human history” was awarded in 2018 by a “supine” board composed largely of his friends, and that an independent group of directors would have vetoed such a scheme. Lawyers representing the board members did not respond to a request for comment.

Prominent proxy advisors ISS and Glass Lewis condemned the package at the time, with the latter concluding that “any relative comparison of the size of the grant would be tantamount to piling nickels against dollars.”

Glass Lewis also noted that Musk already owned more than a fifth of Tesla and had reasonable incentives to grow the company.

Ultimately, the package — dubbed Tesla’s “CEO Performance Award” — was accepted by shareholders, and Musk was awarded 12 tranches of his stock, each representing 1 percent of the automaker’s share capital.

Eleven of the 12 tranches vested when the Group’s market capitalization, sales and profitability reached certain levels.

Both Tesla Compensation Committee Chairman Ira Ehrenpreis and former General Counsel Todd Maron were questioned for several hours Monday about the decision-making process that led to Musk’s salary promise.

When asked whether Musk could be believed when he claimed in a pre-trial testimony that he was negotiating against himself over how many tranches of stock he would receive, Ehrenpreis quipped, “I suppose it’s an effective negotiation if the Opposite thinks it was her idea.”

Speedwell also said he wasn’t aware that Musk allegedly asked Maron to call shareholders and tell them to vote in favor of the plan, and acknowledged he would have been concerned had he known.

Among the investors who didn’t vote for the multibillion-dollar payment plan was Capital Group, confirmed Ehrenpreis. The company remains one of the largest active outside investors in Tesla, with a stake of more than 3 percent.

Capital Group did not immediately respond to a request for comment

Musk’s attorneys allege that his compensation plan “was designed to maximize shareholder value through incentives [him] to focus its efforts on transforming Tesla,” at a time when the future of the rapidly expanding manufacturer remained uncertain.

In a pre-trial brief, they said that Musk never received any cash salary from Tesla and that the stock plan had served its purpose. The company’s market value has increased more than 1,200 percent to nearly $700 billion since 2018, although it recently fell to about $600 billion.

“There are no other executives like this,” Musk’s attorneys argued, adding that there are “no other companies like it.”

The case is still being closely watched by companies in the US, who fear a victory for Tesla shareholders will trigger a wave of similar challenges in Delaware, where most of the country’s public companies are incorporated.

However, Rupert Russell, a partner at law firm Shartsis Friese, said he doesn’t see the Tesla case as “a precedent for the rest of American companies” due to the size of the pay plan and Musk’s unique position.

He added that Musk is “definitely taking a risk by not resolving the case,” especially after he “essentially conceded that the previous cases were tried by the same judge.”

This week’s trial comes before Kathaleen McCormick, who oversaw the case in which Twitter accused Musk of unlawfully withdrawing from a $44 billion deal to buy the tech giant. He eventually agreed to go through with the acquisition last month, days ahead of a court deadline to close the deal or set a November hearing date.

Musk has sold nearly $20 billion of his Tesla stock since making his takeover bid for Twitter, which is saddled with billions of dollars in debt and which the billionaire said is now losing about $4 million a day. Tesla’s share price has fallen more than 50 percent this year.

While the stock options granted to Musk as part of his compensation plan do not contain clawback provisions, the plaintiffs want them to be cancelled, which would increase the value of Tesla’s remaining equity.

https://www.ft.com/content/14e3c290-b406-40b6-afd5-d2ec390419ef The legal battle over Tesla’s $56 billion deal from Elon Musk begins

Adam Bradshaw

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