Elon Musk, Tesla Board Members to Justify CEO’s Pay in Court

Elon Musk will appear in court this week to defend his multibillion-dollar pay package at Tesla Inc. TSLA 2.75%. This comes after shareholders filed a lawsuit challenging the compensation, which they argue is excessive and not tied to performance. Musk is one of the richest men in the world, and Tesla is one of the most valuable companies, so the outcome of this case could have major implications.

A Tesla shareholder has filed a lawsuit asking Delaware’s business-law court to rescind Elon Musk’s CEO pay package. The pay package, which was approved in 2018, is valued at around $52 billion at recent share prices. The plaintiff has alleged that Tesla’s board at the time failed to disclose key information about the deal and how it came together.

Attorneys representing current and former Tesla board members have said that the compensation package has been successful and was approved through a fair process. They point to the company's performance, which has made Tesla the world's most valuable car company with a market capitalization of nearly $620 billion. When shareholders approved Mr. Musk's latest pay deal, the company was valued at less than $60 billion.

The case is set to go to trial on Monday in Wilmington, Del. Chancellor Kathaleen McCormick, who presided over Twitter Inc.'s lawsuit seeking to compel Elon Musk to close his $44 billion deal for the social-media company, will hear the case. The transaction closed late last month, before the case went to trial.

This week's trial is coming at a busy time for Mr. Musk, who has been making changes to Twitter, including laying off around 50% of its staff. He also runs rocket company SpaceX.

Tesla CEO Elon Musk is expected to take the stand on Wednesday in a trial where there are no opening or closing statements, and judgment is typically rendered by the judge months after the trial concludes. Also scheduled to testify are several current and former Tesla board members.

Mr. Musk has taken the stand several times in recent years, most notably in 2021 to defend Tesla’s takeover of home-solar company SolarCity Corp. The Delaware court ruled in favor of Tesla, allowing the roughly $2.1 billion takeover to proceed.

A Delaware judge ruled in favor of Mr. Musk, saying that the board's vetting of the SolarCity deal was meaningful, though the process was imperfect and Mr. Musk was too involved. That decision is being appealed.

In 2019, Mr. Musk was in court defending himself in a defamation case. He argued that his comments were not defamatory, and the court agreed, ruling in his favor.

A key question in the recent case is whether or not Mr. Musk had control over the board's deliberations regarding his pay package. At the time, Mr. Musk owned approximately 22% of Tesla, and had close relationships with several directors. The plaintiff alleges that Mr. Musk controlled the board, that the board misled shareholders in order to get approval for the stock grant, and that the deal was not necessary to motivate him.

According to the Bloomberg Billionaires Index, Mr. Musk is the world's richest man. He does not accept a salary from Tesla, but is compensated in stock options that vest based on the company's valuation and achievement of various operational milestones. Tesla has achieved the targets required for all but one of Mr. Musk's 12 tranches of options to vest.

The plaintiff's lawyers said in a court filing that the Board characterized each of the Grant's milestones as 'challenging' and 'difficult to achieve,' but omitted that three performance milestones were probable of achievement within one-and-a-half years of the Grant date.

The attorneys representing the current and former board members said that Mr. Musk did not control Tesla's consideration of his pay package, and that shareholders were fully informed when they signed off on it.

The Plan motivated Musk to focus his exceptional talents on Tesla when his future with the company was uncertain, the court filing said. This was a critical juncture for Tesla, and Musk's focus was essential to the company's success. Given Musk's other interests and opportunities, the Plan was key in keeping him committed to Tesla.

The plaintiff's attorneys will have a tough time winning the case, according to some experts. They point to the fact that Mr. Musk's compensation is at risk, and Tesla's performance has been poor since the board and shareholders approved the plan.

"I don't think the average public company CEO would be interested in this kind of package," said Robert Miller, a corporate law professor at the University of Iowa.

Greg Varallo, an attorney for the plaintiff, said that his side is looking forward to presenting its case.

Employee stock options have been at the heart of several controversies at Tesla, where the question of who should benefit from the company’s stratospheric rise has led to tension, as The Wall Street Journal recently reported. An issue of broader concern for Mr. Musk has been that some employees were making more at Tesla than he thought their contributions merited.