The largest executive-pay package in US corporate history was born in a text message from Elon Musk.
On April 8, 2017, the entrepreneur was asked by his friend Ira Ehrenpreis, a Tesla Inc. board member, about how to structure his future compensation as the electric-vehicle maker’s CEO.
Musk replied that he should end up “owning 10 percent of the company” in a performance plan built around a progression of targets that would each grant him 1% of Tesla’s outstanding shares, according to a court filing. As Musk later mused to one of his co-founders in an email, he was “planning on something really crazy, but also high risk.”
Less than a year later, Tesla’s directors awarded Musk a trove of stock options that could potentially pay out $55 billion based on the company’s share price at the time -- about $3 billion more than the company was then worth. The package had the same core features that Musk suggested in his initial messages with Ehrenpreis.
Had Musk just given himself $55 billion?
That’s a key question at the center of a lawsuit headed to trial on Monday. The trial caps a drama-filled month for the mercurial Musk, who completed his controversial $44 billion acquisition of Twitter Inc., only to plunge the social-media platform into chaos and a threat of bankruptcy with a series of policy, product and personnel upheavals and an exodus of advertisers.
Little to Fear
At issue in Delaware Chancery Court is whether Tesla’s board, which is responsible for setting its CEO’s compensation, failed to exercise independence from Musk as it drew up a new pay package for its charismatic chief executive.
Musk, who will testify at the trial, has acknowledged he had little to fear from the board’s review of his pay proposal, according to court filings. “Me negotiating against myself” is how he described the process of tweaking the pay package’s details in a pretrial deposition.
If Judge Kathaleen St. J. McCormick sides with a shareholder who accused the board of acting improperly -- a long shot -- she could order Musk to pay back some or all of the stock awards to Tesla.
McCormick is the same judge who presided over a showdown between Musk and Twitter in recent months when he was trying to back out of the buyout -- before he capitulated and agreed to honor his original offer.
In defense of Musk’s lucrative pay package, board members have cited the need to keep the CEO, who doesn’t take a salary from Tesla, focused on the EV company’s growth.
Time Spent Elsewhere
The peripatetic billionaire spends considerable time on his other startups, including aeronautics firm Space Exploration Technologies Corp., Boring Co. and Neuralink Corp., and now, Twitter.
Lawsuits targeting executive compensation traditionally face a high bar, partly because the packages are contingent on ambitious share-price targets. Under Delaware law, directors generally get leeway to use their “business judgment” to set pay.
“It’s true the executive compensation package approved for Elon Musk is remarkably large, but Delaware courts are usually rather deferential” to directors’ decisions on pay when a majority of shareholders vote to back the plan, said Paul Regan, a Widener University law professor who specializes in Delaware corporate law.
Still, the failure of the Tesla directors to disclose to investors some of the pay package’s “challenging” milestones were likely to be achieved within a little over a year could be problematic, said Joel Fleming, a partner at law firm Block & Leviton, who isn’t involved in the case.