In this courtroom sketch, venture capitalist Ira Ehrenpreis, left, is cross examined by attorney Gregory Varallo, standing at right, as testimony started in Wilmington, Delaware, on Monday, Nov 14, 2022, in a shareholder lawsuit challenging approval by Tesla's board of a compensation plan potentially worth more than US$55bil for CEO Elon Musk. Chief Judge Kathaleen McCormick, center, presided. — Elizabeth Williams via AP
A Silicon Valley venture capitalist who served on Tesla Inc’s board testified that the largest executive-pay package in US corporate history was necessary to keep Elon Musk “engaged” in the electric carmaker he founded.
Taking the stand on Nov 14 as the first witness in a trial over the propriety of paying Musk some US$55bil (RM252.31bil), Ira Ehrenpreis said the Tesla board recognised in 2017 that the chief executive officer was a “serial entrepreneur” and wanted to make sure he didn’t leave the company to pursue other interests.
“We wanted Elon to be at the head of Tesla for a long time,” Ehrenpreis testified.
Ehrenpreis’s testimony, which aimed to establish that it was the board rather than Musk that determined the compensation deal, underscored a continuing concern about the Tesla CEO. Since he recently completed his controversial US$44bil (RM201.85bil) acquisition of Twitter Inc, Musk has plunged 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.
Amid all of that, Musk is expected to take the stand himself this week in Delaware Chancery Court.
The trial stems from a shareholder’s suit that claims Tesla’s board failed to exercise independence from Musk as it drew up a new pay package for its charismatic CEO. If Judge Kathaleen St. J. McCormick sides with the shareholder – 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 honour his original offer.
‘All for Elon’
Musk has acknowledged he had little to fear from the Tesla 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.
During cross-examination of Ehrenpreis, a lawyer for the shareholder raised a March 2018 email Musk sent to the company’s then-Chief Legal Officer Todd Maron in which the CEO warned that, if a particular institutional investor voted against the package, they would be told they “weren’t welcome” at Tesla anymore.
Ehrenpreis, who was copied on the email, testified that he didn’t think it was threat against all major shareholders, and said he didn’t know why Musk got worked up about that one investor.
It’s not clear if Musk ever directly communicated his warning to the investor. Maron, who took the stand after Ehrenpreis, wasn’t asked about it on Monday.
Ehrenpreis said the board discussed Musk’s compensation with 10 of the company’s largest institutional investors, who all agreed on the need to keep Musk at Tesla.
Representatives of Fidelity Investments said they were “all for Elon making a bunch of money” when Tesla made leaps in value, Ehrenpreis recalled.
Time spent elsewhere
Musk 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 specialises 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.
“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 US$340bil (RM1.55 trillion) last November, according to the Bloomberg Billionaires Index. His net worth dropped below US$200bil (RM917.50bil) 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 US$690bil (RM3.16 trillion) as of last month – including a brief period starting in October 2021 when it exceeded more than US$1 trillion (RM4.58 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 was one of Tesla’s early investors and served as one of Musk’s advisers on the Twitter buyout.
Musk also had the help of Maron in finalising the compensation plan, Tornetta said. Maron left Tesla in 2018.
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. – Bloomberg
