Monday saw testimony in Delaware where Tesla shareholders challenged the compensation plan of CEO Elon Musk, which could have a potential value of more than $55billion.
According to the lawsuit, the performance-based stock option grant was negotiated in 2018 by a compensation board and approved in 2018 at Tesla Board meetings by members who had conflict of interest because they had personal and professional ties with Musk.
In 2018, the lawsuit was filed. It also claims that the shareholder vote to approve compensation was based upon a misleading proxy statement.
The first witness called to testify was Ira Ehrenpreis, a prominent venture capitalist and longtime friend of Musk who chaired Tesla’s compensation committee when the grant was formulated.
Musk can expect to make billions if the solar panel and electric car maker reaches certain milestones and market capitalization. Musk, who owned 22% of Tesla at the time the plan was approved, would receive stock equal to 1% for each milestone. Musk’s interest in the company would grow to about 28% if the company’s market capitalization grew by $600 billion.
Each milestone in the plan includes growing Tesla’s market capitalization by $50 billion and meeting aggressive revenue and pretax profit growth targets. Musk would be eligible for the $55.8 billion bonus under the plan if Tesla reaches a market capitalization in excess of $650billion and reaches unprecedented earnings and revenues within a decade.
To date, Tesla has achieved all 12 of the market capitalization milestones and 11 operational milestones, resulting in the vesting of 11 of the grant’s 12 tranches and providing Musk over $52.4B in stock option gains, according to the lawsuit. Since the grant was awarded, Tesla’s market capitalization has increased from $53 billion to more than $690 billion, having briefly hit $1 trillion early this year.
Tesla Inc. shares were battered this past year, as all automakers are, because of high inflation and backed up supply chains. Tesla shares fell 46% this fiscal year. Ford and GM share prices have fallen by around 31%.
But the Austin, Texas, company earned $5.5 billion in 2021, blowing away the previous year’s profit of $721 million, and it produced a record 936,000 vehicles, nearly double what the company rolled off the assembly line in 2020.
Ehrenpreis testified that much of Tesla’s success has been the result of Musk’s leadership, which he said combined bold vision with “a maniacal focus on execution.
“He has both a bold vision, but he has been as hard working a CEO as there can be,” Ehrenpreis said.
Evan Chesler asked Ehrenpreis about the nearly one-year-long process he and the other directors underwent to develop the compensation plan. He was assisted by independent consultants and legal advisers as well institutional investors.
Ehrenpreis described milestones in the plans like “extraordinarily ambitious and difficult.”
Minutes from a 2017 meeting show that the directors sought to balance the motivation of “stretch” Musk has goals, but Musk can avoid them “demotivating factors created by seemingly impractical, unrealistic or unachievable goals.”
Ehrenpreis also stated that Musk’s friendship was not a factor in his decision to approve the plan.
“I felt that it was very important to ensure Elon’s leadership in this next chapter of the company’s life,” He added that Musk’s ambitious plan would make the company one of the top-valued in the world.
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