Elon Musk’s $44-billion takeover of Twitter is helping provide ammunition for an upcoming trial where an investor will argue the CEO’s $56-billion pay package from Tesla Inc TSLA-Q is a waste of money that failed to secure his full-time services.
The deal for Twitter Inc TWTR-N and its potential to distract Musk from Tesla will play an important part of the trial in October, according to one of the shareholder’s attorneys.
The lawsuit alleges Musk created the 10-year package and Tesla’s board rubber-stamped it in 2018 without requiring the celebrity CEO devote himself to the electric vehicle maker.
“Look at most CEO contracts. The first line, it says ‘you’re going to be a full-time CEO and devote substantially full time to the business and affairs of the company.’ That’s standard,” said Greg Varallo of Bernstein Litowitz Berger & Grossmann, the firm that is leading the case against the pay deal.
Musk and Tesla did not respond to requests for comment. In court papers, the defendants said the plan was properly crafted by independent directors, approved by stockholders and has generated unprecedented gains for investors.
Tesla’s stock has fallen more than 20 per cent since Musk disclosed he had taken a 9 per cent stake in Twitter on April 4, partly on concerns he was distracted from the electric vehicle maker’s supply chain problems.
In addition to Twitter, the multi-tasking entrepreneur is already chairman of rocket company SpaceX, founder of tunnelling venture The Boring Company and owns Neuralink, a brain-chip startup. His stated ambitions include colonizing Mars.
The 2018 Tesla pay package grants stock options as the company meets escalating financial goals, which the company said would incentivize his continued leadership. If Tesla met all targets, described as “stretch” goals, the plan would be worth a minimum $56-billion, although as Tesla’s stock rises so does the plan’s value.
Currently, Musk’s stock vested under the plan is worth around $75-billion, according to Amit Batish of research firm Equilar. He estimated that is about 35 times the combined value of the 100 highest CEO pay packages from 2021.
The lawsuit in Delaware’s Court of Chancery by shareholder Richard Tornetta alleges the package was unnecessary, since Musk at the time owned 22 per cent of Tesla, giving him plenty of incentive to make the company a success.
Tornetta seeks to cancel the plan, including stock options already granted.
Musk is using his Tesla stock as collateral for loans to buy Twitter.
Musk and Tesla’s directors argued in court filings that the pay package did what it set out to do – align Musk’s incentives with shareholders and create value.
“Since it was implemented, Tesla’s value has increased by more than 1,800 per cent from about $53-billion to over $1-trillion,” the filing said. They noted that despite the enormous growth in value, Musk has not reached all the milestones.
Shareholders in March 2018 approved the package, which in securities filings were called “challenging.”
The lawsuit said shareholders should have been informed before the vote that management knew some milestones were likely to be achieved, which was described as a materially misleading omission.
Tesla countered in court papers that the internal projections were “stretch” targets.
“Nothing that Elon touches or does is not bold and super stretched and aggressive,” Tesla’s former chief financial officer, Deepak Ahuja, testified in a deposition in the case, according to a court filing.
Despite the outlandish size of the pay, the trial will likely turn on the thinking of directors in negotiating the package and what the board told shareholders before the vote.
“No one could have looked in the crystal ball and seen the Twitter situation,” said Minor Myers, a professor at University of Connecticut School of Law. “But they could have negotiated for some measure of Musk’s time at Tesla.”
The trial is scheduled to begin Oct. 24 in Wilmington, Delaware and last five days.
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