Tesla has made Elon Musk a billionaire many times over by paying him generously in shares for his work as chief executive of the electric carmaker.
On Wednesday, Mr. Musk is expected in court to defend that compensation, much of which derives from a record-setting pay deal he struck in 2018 with Tesla’s board of directors. The package awarded Mr. Musk options that gave him the right to acquire nearly $50 billion of the company’s stock, helping to make him the world’s richest man. Compensation analysts consider his pay to be stunning even by the dizzying standards of what many chief executives earn in the United States.
In the years since shareholders voted in favor of the pay deal, Mr. Musk has received most of the stock included in the package after meeting goals for revenue, profits and share-price gains laid out in the deal.
In a case being tried in the Delaware Court of Chancery, a shareholder is contending that Tesla’s board did not act independently of Mr. Musk when crafting the package. The shareholder, Richard Tornetta, asserts that Tesla provided “materially misleading” information to investors when it asked them to approve the package. His lawyers have asked the court to void the deal.
The lawsuit contends that many of Tesla’s board members were not truly independent because of their financial and personal ties to Mr. Musk. James Murdoch, the media executive who has been on Tesla’s board since 2017, is expected to take the stand. A few other board members and executives testified on Monday and Tuesday, arguing that the pay package aligned Mr. Musk’s interests with those of shareholders and ensured that he would remain committed to Tesla.
It would be a “massive understatement” to say that Tesla shareholders have benefited from Mr. Musk’s leadership, Todd Maron, the carmaker’s former general counsel, said in court on Monday.
Tesla’s share price has soared in recent years. The stock was trading at around $21, adjusting for a stock split, when Mr. Musk’s compensation deal was finalized in March 2018. It climbed to about $410 at its peak in November 2021. It has since fallen a bit more than 50 percent, and is now trading at about $194, although it is still up 820 percent from when the package took effect.
Robyn Denholm, who chairs the Tesla board, defended its independence, testifying on Tuesday that Mr. Musk did not have the power to fire her and that she was not afraid of him. “My view is that Tesla would not be the company it is today without Mr. Musk,” she said.
One justification for the pay package, Ms. Denholm said, was a need to tie Mr. Musk to Tesla while he pursued other interests, including at SpaceX, where he is also chief executive. Under questioning from Gregory Varallo, who is representing Mr. Tornetta, Ms. Denholm acknowledged being aware of Mr. Musk’s involvement with Twitter, but said she did not know how much time he was spending on the social media network he acquired last month and was not worried about it.
“I’m not concerned about the amount of time that he spends” on other endeavors, she said, adding, “He will do whatever he needs to achieve the results.”
But the shareholder’s lawyers said in a court document that the compensation package was deficient because it did not contain a provision to claw back pay if Mr. Musk failed to focus on Tesla.
It is not clear what would happen to the stock awarded to Mr. Musk from the 2018 deal should the judge presiding over the trial, Chancellor Kathaleen McCormick, rule against him. When asked what might happen if the package were voided, Mr. Varallo suggested in an email that the stock options that Mr. Musk had obtained from the deal would be canceled.
Chancellor McCormick was also the judge who oversaw the short-lived lawsuit that Twitter filed against Mr. Musk to force him to complete his acquisition of the social media company, a deal he had sought to get out of. Mr. Musk bought Twitter late last month, selling billions of dollars of Tesla stock to help finance the acquisition.
Mr. Musk currently owns 14 percent of Tesla’s stock, which is worth nearly $90 billion. He has sold roughly $30 billion in shares this year and last.
Any undoing of the 2018 package would reverberate through the corporate world. Many boards of directors have used Mr. Musk’s deal as a template. The deal was praised by some executives and compensation experts because Mr. Musk got paid only if Tesla’s stock market value jumped by a huge amount and the company’s business, which was struggling in 2018, improved.
Mr. Musk has earned 11 of the 12 batches of stock available in the package. Even though Tesla’s stock price is now trading well below its peak, Mr. Musk gets to keep the stock he has received from the package. The deal requires him to hold onto the shares he receives for at least five years.
Critics of the deal, which included some academics and investor groups, argued that the amount of stock Mr. Musk could ultimately obtain from the package was excessive. These people argued that Mr. Musk’s interests were already aligned with those of other Tesla shareholders because, at the time, he owned 22 percent of the company. And the value of those shares was set to increase if Tesla did well.
The shareholder suit in Delaware argues that, even though a Tesla securities filing described the performance targets as “very difficult to achieve,” the company was internally forecasting that it would most likely soon achieve a level of sales and earnings that would enable Mr. Musk to fulfill three goals in the package. The suit says the internal forecasts were made before shareholders voted on the pay deal.
Lawyers for Mr. Musk and Tesla directors filed a motion to dismiss the suit, but, in 2019, another Delaware judge allowed most of the case to proceed.
Several legal questions will most likely drive the outcome of the case, said Jill Fisch, a professor of business law at the University of Pennsylvania. The court must determine whether Mr. Musk is a “controlling” shareholder — one who has outsize influence over the company, the board and other shareholders. It must also decide whether Tesla’s board took enough steps to protect the rights of minority shareholders when crafting the pay package.
If the shareholder suit survives those tests, the judge must then decide if the pay deal was fair.
“Yes, it’s a lot of money,” Ms. Fisch said, “but the performance hurdles were pretty high.”