Plenty of business — and attendant court cases — flow through Delaware, and it looks like Tesla CEO and Twitter “Chief Tweet” Elon Musk is about to spend some time in the state.
Justin Sullivan at a Tesla event in 2015 Getty Images Elon Musk.
The world’s richest man acquired Twitter in late October, when the company sued in Delaware’s Chancery Court to go through with the deal. Now, the same court — and the same judge who is in the Twitter case, Kathleen St. J. McCormick — will hear a separate case related to Musk on Nov. 14.
The lawsuit, filed by Tesla shareholder Richard Torneta, claims that Musk’s board-approved compensation package from 2018 was excessive and violated the board’s duties to shareholders. Furthermore, the suit claims that Musk has too much on his plate to pull off a compensation package that could go up to a value of more than $50 billion, according to TechCrunch.
The outlet noted that legal documents call it “the largest compensation grant in human history.”
Because of state tax benefits, both Tesla and Twitter are incorporated in Delaware, as are most very large businesses. This is the reason that both the cases will be in the Chancery Court of the state. It has a “unique capability” in the specifics of business law.
What is the Tesla lawsuit about?
Musk’s compensation (stock options, salary and bonuses) as Tesla CEO (going back to 2009) was judged for performance, as in a 2019 pre-test opinion by Joseph R. Slites III, formerly the Patriarch of the Court. Why Chancery? (McCormick handled the matter with the lightsabers.)
After Tesla met the goals outlined in the previous compensation package, the board created a new one for Musk and voted to approve it in January 2018.
The new package set out a series of 12 performance targets and related groups of stocks, related to Tesla’s ability to grow its market capitalization, as well as revenue and earnings. Upon meeting those goals “corresponding to each tranche of the prize, Musk will have vested options representing 1% of Tesla’s current total outstanding shares,” Slights wrote.
This means that Musk will earn the equivalent of 1% of the company’s total outstanding shares. If it meets all of those goals, Slights said, the maximum value of the total stock grant is $55.8 billion. According to TechCrunch, the company has met 11 out of 12 so far.
Torneta sued in 2019 saying the package was too large and did not prompt Musk to focus on Tesla versus his other ventures. Musk, of course, is a busy man. He is the listed CEO of Tesla and SpaceX and now Twitter, at least in the interim.
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Musk’s legal team has said that the unique, highly empowered CEO deserves a high-impact compensation package.
“The plan designed and approved by the board was not a specific pay package to compensate a general executive for overseeing the day-to-day operations of a mature company,” Musk’s attorney Evan Chesler wrote in a filing, according to Bloomberg. law. “That’s because Musk isn’t the typical CEO.”
In addition, the lawsuit claimed that because Musk is friends with board members Ira Ehrenpreis and James Murdoch, he generally exerts a lot of influence over it—despite separating himself and his brother Kimble from the compensation discussion. — and the decision was not justified, according to TechCrunch.
The question of whether there was a conflict of interest is part of why Slights initially denied Musk’s attempt to quash the lawsuit.
Ordinarily, the court waives executive compensation for a company, and “this court’s sincere respect for the Board’s determination relating to executive compensation is not accompanied by our reversible doubts when a Board transacts with a controlling stockholder.” ,” Slights wrote in its 2019 opinion.
An expert told Bloomberg Law whether Musk was not acting as a controlling stakeholder (Musk owns the largest stake in Tesla, but not the majority, leaving it up for debate) would resurface.
Generally speaking, “this is likely to be a very important matter from an executive compensation standpoint,” Jill Fish, a professor of business law at the University of Pennsylvania, told the outlet.
“This Musk-Twitter matter will not go unnoticed by the general public, but it is still important,” she said.