WILMINGTON, Del, Nov 14 (Reuters) – A lawsuit opened on Monday over allegations by shareholders that Tesla CEO Elon Musk’s $56 billion pay package was rigged with easy performance targets and that investors were duped into approving it, with Musk expected to take a stand later this week.
A Tesla shareholder TSLA.O hopes to prove during the five-day trial that Musk used his dominance over the EV maker’s board to dictate the terms of the 2018 package, which didn’t even bind him to work full-time at Tesla.
Musk, the world’s richest person, will testify on Wednesday, said Greg Varallo, attorney for shareholder Richard Tornetta, in a court in Wilmington, Delaware, on Monday.
The lawsuit began with Ira Ehrenpreis, a member of Tesla’s board of directors since 2007 and chairman of the committee that oversaw the salary package, outlining the process of crafting the record-breaking severance agreement.
“I wanted to make sure that Elon remains the leader of Tesla for a longer period of time,” Ehrenpreis said.
The court played a brief video clip of Musk’s testimony in the case. He described how Ehrenpreis called him to discuss creating a pay package to replace his 2012 pay deal, which was nearing completion. Musk said he suggested Ehrenpreis “a larger amount but with much more difficult stages” than the 2012 deal.
Tornetta asked the court to overturn the salary package, which is six times higher than the top 200 CEO salaries combined in 2021, according to Amit Batish of research firm Equilar.
Directors of Musk and Tesla, who are also accused, have denied the allegations. They argued that the salary package did what it was intended to do – ensure that the contractor successfully guides Tesla through a critical period, which helped boost the stock tenfold.
The Tesla shareholders’ lawsuit argues that the salary package should have required Musk to work full-time at Tesla.
Company shareholders fear Musk could be distracted by Twitter, which he warned may not survive an economic downturn.
The case will be decided by Chancellor Kathaleen McCormick of the Delaware Court of Chancery. She oversaw the legal dispute between Twitter Inc and Musk that ended with his purchase of the social media platform for $44 billion last month.
Musk told a business conference on the sidelines of the G20 summit in Bali, Indonesia on Monday that he had too much to do right now.
Legal experts said Musk was in a better legal position in the compensation case than he was in the Twitter lawsuit, which prevented him from walking away from the takeover.
Boards of directors have wide latitude to set executive compensation, according to legal experts.
However, directors must meet stricter legal tests if the salary package involves a majority shareholder, and part of this lawsuit will likely focus on whether that description fits Musk. While he owned just 21.9% of Tesla in 2018, plaintiffs are likely to cite what is seen as his overbearing personality and connections to directors.
The contested package allows Musk to buy 1% of Tesla shares at a steep discount whenever performance growth and financial goals are met. Otherwise, Musk gets nothing.
Tesla achieved 11 of 12 goals as its value briefly soared to more than $1 trillion from $50 billion, according to court documents.
A decision will likely take about three months after the trial and could be appealed to the Delaware Supreme Court.
Reporting by Tom Hals in Wilmington, Delaware; additional reporting by Hyunjoo Jin in San Francisco; Editing by Jonathan Oatis, Noeleen Walder and Bill Berkrot
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