Official

Elon Musk takes stand, says he didn't dictate terms of $56 billion pay package

'I was entirely focused on the execution of the company'

WILMINGTON, Del. — Elon Musk said he was completely focused on Tesla in 2017 as the electric car maker was in "crisis," taking the stand in a Delaware court on Wednesday to rebut claims that his $56 billion pay package was based on easy performance targets and approved by a compliant board of directors.

Musk, known for his combative testimony, told the court in his opening remarks that he thought it was "extremely unlikely" that Tesla Inc would succeed in achieving his vision in 2016, requiring his full attention.

Tesla shareholder Richard Tornetta sued Musk and the board in 2018 and hopes to prove that Musk used his dominance over Tesla's board to dictate terms of the package, which did not require him to work at Tesla full-time.

Musk's testimony before Chancellor Kathaleen McCormick comes as he is struggling to oversee a chaotic overhaul of Twitter Inc, the social media platform he was forced to buy for $44 billion in a separate legal battle before the same judge after trying to back out of that deal.

"I was entirely focused on the execution of the company," Musk said when questioned about Tesla by his attorney Evan Chesler, adding that he did not dictate the terms of the pay plan.

Musk, the world's richest person, described how the automaker was struggling to survive in 2017, when the pay package was developed.

"I thought it was extremely unlikely," he said in response to a question of whether he thought at the time if Tesla would succeed.

Plaintiff’s attorney Greg Varallo spent much of his early cross-examination trying to draw Musk into admitting that he controls Tesla to such an extent that he can sway the board to do his bidding. Among other things, Varallo questioned Musk about his title of “Technoking,” a role that Musk has previously noted comes with “panache” and “great dance moves.”

“I think comedy is legal,” Musk told Varallo, who had questioned whether Musk was “stone-cold sober” when he came up with the title.

Varallo also suggested that one of the reasons that Musk developed a “master plan” for Tesla was to let people know he was in charge. He also noted that Musk makes recommendations regarding compensation for senior executives, and that he unilaterally made the decision to pause Tesla’s policy of accepting bitcoin from vehicle purchasers.

“You’re asking complex questions that can’t be answered ‘yes’ or ‘no’,” Musk said when Varallo asked whether he came up with the vision for Tesla.

Musk said he not would accept a pay plan that required him to punch a clock or commit certain hours to Tesla. "I pretty much work all the time," he said. "I don’t know what a punch clock would achieve."

Investors are growing concerned about Musk's focus on Twitter, and on the stand the billionaire said he focuses his attention where it is needed most, which in 2017 was Tesla.

"So in times of crisis, allocation changes to where the crisis is," said Musk, who wore a dark suit and tie.

Musk tweeted this week that he was remaining at Twitter's San Francisco headquarters around the clock until he fixed that company's problems.

Tornetta has asked the court to rescind the 2018 package, which his attorney Greg Varallo said was $20 billion larger than the annual gross domestic product of the state of Delaware.

The legal team for Musk and the Tesla directors, who are also defendants, have cast the pay package as a set of audacious goals that worked by driving 10-fold growth in Tesla's stock value, to more than $600 billion from around $50 billion.

They have argued the plan was developed by independent board members, advised by outside professionals and with input from large shareholders.

On Monday and Tuesday, the court got a taste of Musk's testimony through short clips from his 2021 deposition in the litigation. In one clip, Musk dismissed the idea that the board should have discussed requiring that he spend more time with Tesla.

"That would have been silly," said Musk, who is also the chief executive of rocket company SpaceX and founded tunneling venture The Boring Co.

Musk has a history of combative testimony and often appears disdainful of lawyers who ask probing questions. He has called opposing attorneys "reprehensible," questioned their happiness and accused them of "extortion."

Last year, Musk told a lawyer for a shareholder suing him over the 2016 acquisition of SolarCity that he was "a bad human being."

Musk can also show his charm in court. He apologized from the stand to a British diver whom he called "pedo guy" in a tweet and who sued Musk for defamation. The jury in the case found Musk did not defame the diver.

The disputed Tesla package allows Musk to buy 1% of Tesla's stock at a deep discount each time escalating performance and financial targets are met. Otherwise, Musk gets nothing.

Tesla has hit 11 of the 12 targets, according to court papers.

Shareholders generally cannot challenge executive compensation because courts typically defer to the judgment of directors. The Musk case survived a motion to dismiss because it was determined he might be considered a controlling shareholder, which means stricter rules apply.

"There is no case in which a 21.9% shareholder who is also the chief executive has received a structured payout plan of this magnitude," Lawrence Cunningham, a corporate law professor at George Washington University, said of the lack of precedent.

The lawsuit alleges that the performance-based stock option grant was negotiated by the compensation committee and approved by Tesla board members who had conflicts interest due to personal and professional ties to Musk, including investments in his companies. It also alleges the shareholder vote approving the compensation plan was based on a misleading proxy statement.

The shareholder plaintiff alleges that the proxy wrongly described members of the compensation committee as “independent,” and characterized all of the milestones that triggered vesting in the stock options as “stretch” goals meant to be difficult to achieve, even though internal projections indicated that three operational milestones were likely to be achieved within 18 months of the stockholder vote.

Attorneys for the defendants have noted that two institutional proxy advising firms that urged shareholders to reject the plan nevertheless noted that it would require “significant and perhaps historic achievements” and require growth that “appear stretching by any benchmark.”

Attorneys for the plaintiff have suggested that incentivizing Musk to remain at Tesla’s helm by offering a huge compensation package was unnecessary, because he’s never suggested that he might leave. They’ve also suggested that Musk’s true motive in negotiating the package was to fund his dream to colonize Mars.

In a November 2017 email to former Tesla General Counsel Todd Maron, Musk expressed optimism that the compensation package would be seen in a favorable light.

“Given that this will all go to causes that at least aspirationally maximize the probability of a good future for humanity, plus all Tesla shareholders will be super happy, I think this will be received well,” he wrote, adding that “it should come across as an ultra bullish view of the future.”

Includes Associated Press

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