“This is a strong case,” Fleming said. “Tesla’s board appears to have misled Tesla’s stockholders” who voted to back the package, he said.

In addition, “the fact that Musk has spent all this time on the Twitter takeover” strengthens the argument that he’s spread too thin to focus enough on Tesla.

The case is playing out in Delaware because Tesla is incorporated in the state, the home to 1.8 million US companies and more than 60% of Fortune 500 firms. Judges in its chancery court are business-law experts who hear cases without a jury.

Heavy-Metal Drummer
The suit was filed by Richard Tornetta, who has owned nine Tesla shares since February 2018, according to court filings. Tornetta, whose business sells car parts for stereo systems and radar detectors, has been threatened online for bringing the case against Musk, his lawyers said.

Besides once playing drums for a now-defunct heavy-metal band, Tornetta is the lead plaintiff in another securities case in Delaware over Sirius XM’s 2018 buyout of Internet radio service Pandora. Tornetta didn’t respond to a request for comment.

Musk’s Tesla equity awards helped him become the world’s richest person last year. At his peak, Musk was worth $340 billion last November, according to the Bloomberg Billionaires Index. His net worth dropped below $200 billion this month as Tesla shares hit a 52-week low.

Tesla directors justify Musk’s compensation in court filings by pointing to the company’s 12-fold increase in value over four years to $690 billion as of last month -- including a brief period starting in October 2021 when it exceeded more than $1 trillion.

Most US companies have adopted a similar pay-for-performance model, they say.

Tornetta also contends Tesla’s board is loaded with Musk’s friends and confidantes, making it so rife with conflicts of interest that it was incapable of making an independent decision on the billionaire’s pay.

He points to Musk’s long ties to Ehrenpreis, who headed up the board committee responsible for reviewing the CEO’s pay, as an example of the conflicts. Ehrenpreis, a Silicon Valley venture capitalist, was one of Tesla’s early investors and served as one of Musk’s advisers on the Twitter buyout. He is set to be the first witness in the case.

Musk also had the help of Todd Maron -- Tesla’s general counsel at the time, who had previously served as Musk’s divorce attorney -- in finalizing the compensation plan, Tornetta said. Maron, who left Tesla in 2018, also will testify in the case.

Tesla directors denied in court filings that they were beholden to Musk or that their judgment about his pay was tainted by conflicting interests.

Tornetta wants McCormick to tag Musk as Tesla’s controlling shareholder even though he owned only about 22% of the car company’s shares as of early 2018.

If Musk is deemed Tesla’s effective controller, the company must prove his pay package was “entirely fair,” a higher legal standard to meet rather than just relying on directors’ business judgment.

Tornetta filed his so-called derivative suit against Musk and other Tesla directors on behalf of the company. That means any money recovered will go back to the electric-car maker and not to Tornetta.

The case is Tornetta v. Musk, 2018-0408, Delaware Chancery Court (Wilmington).

This article was provided by Bloomberg News.

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