The case is being heard in Delaware because Tesla, like Twitter, is incorporated in the state, the corporate home to more than half of U.S. public companies and more than 60 percent of Fortune 500 firms. Its chancery judges are business law experts who hear cases without a jury, often on a fast-track basis. More than 1.8 million companies are incorporated in the state.
Judge Kathaleen St. J. McCormick — who was overseeing Musk’s Twitter litigation — will review testimony about his Tesla pay package and decide whether it amounted to a waste of corporate assets. She’ll hand down a written decision sometime after the five-day trial concludes.
Defending Pay
In their pre-trial filing, Musk’s lawyers denied Tornetta’s claims the compensation package was excessive. They said he was a unique manager and deserved a bespoke pay plan based on Tesla’s astronomical rise in value over the last decade.
“The plan designed and approved by the board was not a typical pay package intended to compensate the ordinary executive for overseeing the day-to-day operations of a mature company,” his attorneys said in Musk’s pre-trial brief. “That is because Musk is not the typical CEO.”
According to court filings, the compensation plan included an award of more than 100 million Tesla stock options — to be doled out over 12 periods, but only if the car company hit certain performance goals.
The EV maker far surpassed those metrics, with Tesla’s market capitalization jumping from $53 billion to more than $690 billion over four years, Musk’s lawyers said.
‘Part-time work’
Tornetta’s lawyers rejected Tesla directors claims they’d loaded up Musk with Tesla stock options to ensure he remained at the head of the company and focused on its success. The investor noted Musk already splits management time between Tesla, Space X, his aerospace firm, and his other startups. So, his Tesla pay plan rewards “part-time work,” the filing said.
The board’s compensation committee, headed by Musk’s friend and confidant Ira Ehrenpreis, was so beholden to the billionaire its members couldn’t begin to make an independent assessment of a reasonable compensation plan, Tornetta contends.
And the Tesla board’s disclosures to investors about the pay plan’s goals violated Delaware law, according to the brief.
In proxy statements, the board said the pay package included a series of “stretch goals, selected to be very difficult to achieve,” but failed to disclose that three of those milestones likely already had been met as of the date of the shareholder vote on the plan, Tornetta’s lawyers said.
Tornetta filed his derivative suit against Musk and other Tesla directors on behalf of the company in 2018. That means any money recovered will go back to the electric carmaker and not to Tornetta. The investor is asking McCormick to make Musk return stock options awarded under the compensation plan.
The case Tornetta v. Musk, 2018-0408, Delaware Chancery Court (Wilmington).
