Judge hears final arguments in suit over Elon Musk’s Tesla pay

The suit focuses on whether the board gave shareholders enough information about Musk’s compensation before approving it

A lawsuit challenging the pay package that made Elon Musk the world’s wealthiest human, at least for a while, moved a step closer to conclusion Tuesday as lawyers for aggrieved Tesla shareholders and for the carmaker’s board made last-ditch attempts to sway a judge in their favor.

The suit was filed in Delaware, where Tesla is incorporated, and focuses on whether the board gave shareholders enough information about Musk’s compensation before approving it. But the case also raises many other issues swirling around Musk, including his management of Tesla, his acquisition of Twitter and whether the board can effectively monitor and control his behavior.

A group of shareholders challenged an options package that ended up giving Musk the right to acquire Tesla shares worth more than $70 billion before the stock began to lose value last year. For Musk to receive the award, which was one of the largest of its kind and later widely imitated by other corporations, Tesla had to meet certain revenue, profit and share price goals that were considered tough to achieve at the time.

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In their suit, the shareholders asserted that Tesla provided “materially misleading” information to investors when it asked them to approve the package. They have asked the Delaware court to void the deal.

The lawsuit took on added significance after Musk’s acquisition of Twitter last year. He faced widespread criticism for spending time trying to overhaul Twitter while Tesla shares slumped and its growth slowed amid rising competition. Musk sold billions of dollars worth of Tesla shares to raise cash to help pay for Twitter. One justification for Musk’s pay at Tesla was that it was a way of keeping him focused on building cars.

The case also raised questions about Tesla’s corporate governance and whether the board, which includes Musk’s brother, Kimbal Musk, and several of the CEO’s close friends, exercises any control over Elon Musk. The lawsuit contended that Musk played a large role in shaping his compensation and that the board, which was supposed to provide independent oversight, was stacked with people who owed their wealth to him.

Robyn Denholm, for example, made less than $1 million as an executive at an Australian telecommunications company before Musk “hand-picked” her to become chair of the Tesla board, Gregory Varallo, a lawyer for the shareholders, told Chancellor Kathaleen McCormick, the judge in the case, on Tuesday.

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Within a few years of joining the board, Denholm became “screamingly and dynastically rich,” earning more than $250 million from Tesla stock options, Varallo said, citing testimony.

McCormick oversaw a five-day trial in November that included testimony by Musk. The hearing Tuesday, which lasted nearly 3 1/2 hours, was one of the last opportunities for the two sides to offer their interpretations of the testimony.

At the end of the hearing, the judge asked the lawyers for additional written arguments to clarify their positions, a sign that she was not likely to issue a decision for several months. If she decides in favor of the shareholders, she could require Musk to pay back some or all of the money he has made.

Lawyers for Tesla and the directors contended that the pay package was the product of a rigorous decision-making process. The money motivated Musk to build Tesla into the most valuable car company in the world, they said.

Daniel Slifkin, a lawyer representing Musk and Tesla directors, noted that Tesla investors also became rich as the company’s value soared to more than $1 trillion at its peak. (The company’s value on the stock market Tuesday was about $620 million.)

Varallo contended that the board had set performance targets for Musk that were not that difficult to achieve.

Despite receiving “the largest compensation package ever in human history,” Varallo said, Musk was a “part-time CEO” who was often distracted by SpaceX, his rocket company, and by Twitter.

“Where was the adult in the board room to step forward and tell Mr. Musk that Tesla was not his playpen?” Varallo said.

Slifkin said that how much time Musk spent at Tesla was irrelevant. “If he got the results, he was entitled to the consideration,” Slifkin said.

When Tesla’s directors awarded Musk the pay package, no one believed that the company would prompt a nationwide transition to electric vehicles, said Evan Chesler, another lawyer for the company.

“Detroit was laughing at him,” Chesler said. “Nobody’s laughing anymore.”

McCormick asked numerous questions during presentations by Tesla’s lawyers, while allowing Varallo to present his case without interruption. That was a possible indication she was more skeptical of the arguments by Musk’s legal team.