Often billed as the world’s richest man, Elon Musk’s fortunes have ridden on the success of Tesla. While he doesn’t take a salary for his work at the EV company, he has been well compensated in the form of a stock-based compensation package approved in 2018 at one point worth an estimated $56 billion.
The deal was approved by shareholders after receiving the go from Tesla’s board. Nonetheless, it has come under widespread criticism from major investors like California teachers retirement system, or CalSTRS, as well as smaller stockholders like Richard Tornetta. The heavy metal drummer held a grand total of nine shares when he launched a lawsuit challenging the pay package in 2018.
In an unlikely David vs. Goliath-style battle, Tornetta’s lawsuit has survived long enough to reach court in Wilmington, Delaware, where Tesla is legally registered. A five-day, nonjury trial was set to begin Monday before Chancellor Kathaleen McCormick. She joined the Delaware Court of Chancery the same year Musk’s compensation package was approved and earlier this year presided over the battle between Musk and Twitter in the entrepreneur’s unsolicited bid to purchase the social media service.
Hitting the mark
What are known as “shareholder derivative lawsuits” are far from uncommon, especially in an era when large corporations frequently incentivize senior executives with lavish compensation packages tied to the company’s performance. In Musk’s case, the Tesla board laid out a series of ongoing challenges, including significant gains in the automaker’s stock price. That has jumped from a starting value of $50 billion to as much as $1 trillion before Tesla shares started tumbling earlier this year. In a sharp sell-off last week, the automaker briefly lost more $600 billion in market capitalization.
But Musk has so far hit 11 of the 12 marks laid out in his package and received billions in rewards. Even after last week’s market hit, the Wall Street Journal estimated his stock is now worth around $52 billion.
The suit brought by Tornetta is unusual in several ways, starting with the fact that it has made it all the way to Chancery Court despite Tesla’s best efforts to get it dismissed at numerous points over the last four years.
Then there’s the fact that the drummer-cum-shareholder has said he is seeking no compensation for himself should he prevail. While his lawyers could be in position to demand substantial payment following a victory, Tornetta has said he simply wants Musk’s compensation package rescinded.
A deep discount
The plan has allowed Musk to purchase more shares of Tesla at significant discounts whenever he has met one of the goals laid out by the company. The at-risk nature is one thing analysts say could stand as a strong defense for the plan crafted for Musk by Tesla’s board. He stood to gain nothing if he fell short of the goals.
“At a critical juncture for the Company, the Plan motivated Musk to focus his exceptional talents on Tesla when Musk’s future with Tesla was uncertain, especially given his other interests and opportunities,” lawyers representing Tesla and the board members who approved the deal said in a court filing.
The company has also stressed the deal with Musk was ultimately approved by a shareholder vote.
Musk has demanded others reduce their own compensation
One of the ironies of the lawsuit filed by Tornetta is that Musk has moved to reduce the non-pay compensation of some senior Tesla executives. That included the head of the company’s car division, Jerome Guillen, who quit after Musk demanded he forfeit some of his unvested equity estimated to be worth about $600 million, according to the Wall Street Journal.
Musk has frequently questioned the pay and other forms of compensation offered to executives and lower-ranked employees. That was an issue he pointedly raised after taking control of Twitter. Several top executives were immediately fired, with about half of the company’s workforce subsequently let go.
Now, Musk will have to defend his own compensation. And there are plenty of critics, including Tornetta, a well-known drummer on the New York thrash rock scene who has described the sound of his former band, “Dawn of Correction,” as “a swift kick to the face with a steel-toed work boot.”
There could be a long wait
A decision in the shareholder derivative lawsuit could take months to be determined, according to legal experts, based on the Chancery Court’s traditional timetable.
It’s not the first time Musk has faced a case there, the Twitter challenge the most recent. The social media service filed suit against Musk when he initially decided to back out of his $44 billion purchase offer.
The executive and Tesla previously prevailed in a 2021 case challenging the company’s 2016 purchase of SolarCity Corp., a home solar energy company that has several Musk relatives in senior positions. The court criticized both Musk and Tesla but let the acquisition stand.
Other legal challenges
The South African-born entrepreneur has faced a number of other challenges in recent years, including a defamation case filed by a diver who helped rescue teenagers trapped in a flooded Thai cave. Musk has also gone head-to-head with the Securities and Exchange Commission about his use of Twitter. He has paid several fines and agreed to tone down posts that could materially impact Tesla’s stock price.
Tesla itself is facing potential legal problems, notably related to the way it has used and promoted its semi-autonomous Autopilot and Full Self-Driving technologies.