The shareholder's lawyers argue that the compensation
package should be voided because it was dictated by Musk and the product of
sham negotiations with directors who were not independent of him. They also say
it was approved by shareholders who were given misleading and incomplete
disclosures in a proxy statement.
Delaware courts often defer to the “business judgment” of
corporate directors in decision-making absent a showing of wrongdoing. But
attorney Greg Varallo argued that the Tesla defendants should be required to
show that the compensation plan was “entirely fair” to stockholders because
Musk was a controlling shareholder.
Defense attorneys countered that the pay plan was fairly
negotiated by a compensation committee whose members were independent, contained
performance milestones that were so lofty they were ridiculed by some Wall
Street investors, and blessed by a shareholder vote that was not even required
under Delaware law. They also argue that Musk was not a controlling shareholder
because he owned less than one-third of the company at the time.
Tuesday's arguments followed a November trial at which Musk
denied that he dictated terms of the compensation package or attended any
meetings at which the plan was discussed by the board, its compensation
committee, or a working group that helped develop it.
Musk also downplayed the notion that his friendships with
certain Tesla board members, including sometimes vacationing together, mean
that they were likely to do his bidding.
The plan called for Musk to reap billions if Tesla hit
certain market capitalization and operational milestones. For each incidence of
simultaneously meeting a market cap milestone and an operational milestone,
Musk, who owned about 22 percent of Tesla when the plan was approved, would get
stock equal to 1 percent of outstanding shares at the time of the grant. His
interest in the company would grow to about 28 percent if the company's market
capitalization grew by $600 billion.
Tesla has achieved all twelve market capitalization
milestones and eleven operational milestones, providing Musk nearly $28 billion
in stock option gains, according to a post-trial brief filed by plaintiff's
attorneys. The stock option grants are subject to a five-year holding period,
however.
Varallo told Chancellor Kathaleen Jude McCormick that Musk
should be force to give back some, if not all, of the stock option grants he
has earned.
Defense attorney Evan Chesler said the compensation package
was a “high-risk, high-reward” deal that benefitted not just Musk, but Tesla
shareholders who have seen the value of the company based in Austin, Texas,
climb from $53 billion to more than $600 billion, having briefly hit $1
trillion last year.
Chesler also said Tesla made sure that the $55 billion
compensation figure was included in the proxy statement because the company
wanted shareholders to know that "this was a heart-stopping number that
Mr. Musk could earn.”
“Nobody's laughing now,” added Chesler, noting that, while
some Wall Street investors bet against Tesla, the company's leadership in
electric-vehicle manufacturing has transformed the US automobile industry.
Following Tuesday's hearing, McCormick ordered yet another
round of briefing on various legal issues.
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