Elon Musk’s takeover of Twitter is already having trouble, and his choice to hire Tesla personnel may end up costing him dearly.
The same Delaware court that ordered the multitasking CEO to abide by the terms of his agreement with the board of Twitter to acquire the social media company will hear yet another trial for him. But this time, it involves something much more intimate: his own pay.
Elon Musk, current and past directors, and others must appear before Kathaleen McCormick of the state’s Court of Chancery beginning on November 14 to defend a massive remuneration package granted to him in 2018 that gave him the right to up to $55.8 billion in stock options.
This case is not expected to result in a prior settlement, unlike the Twitter case.
In a 96-page legal brief, plaintiff Richard Tornetta claims that the board violated its fiduciary obligation to minority investors by approving “the greatest compensation award in human history” despite the fact that the grant had already been submitted to a shareholder vote and won.
Whether Elon Musk may be regarded as a controlling shareholder on both sides of the transaction—as chairman of the board with a 22% ownership at the time, as well as the recipient of the package—is at the center of the debate. If so, the transaction would be regarded as a conflicting transaction and be subject to separate governance guidelines.
Strong ties
Musk’s issue is that he is connected to several directors, according to Ann Lipton, a law professor at Tulane University. “Conflicted transactions cannot be cleared with a shareholder vote alone if you are considered to be a controller. You also need a more defined approach, which wasn’t used here, as well as an impartial, independent board committee.
Toretta contends that because the milestone payments specified also happened to line up with objectives that were previously incorporated into the company’s expected business strategy, Musk was not actually motivated.
A ruling may be based on decisions made four years ago, but more current Twitter events may also be relevant. In order to restructure Twitter’s operations, Musk has commandeered a team of allegedly 50 Tesla employees, including senior managers like Ashok Elluswamy.
According to CNBC, employees at the electric car manufacturer are under pressure to assist with initiatives at Musk’s other businesses without receiving additional compensation because it is thought to be beneficial for their careers or because the effort would aid in a linked transaction or project.
It may also develop a pattern of conduct in which Musk can simply redirect Tesla resources at will and no one on Tesla’s “supine” board, as Tornetta calls it, will stand up to it. This is indicative of a complete lack of trust in Twitter’s employees.
It will, according to Lipton. It only demonstrates how conflicted he is.
Nevertheless, the Tulane professor said Musk had a much greater chance of winning this case than when Twitter sued him for failing to uphold his obligation to buy the firm for $44 billion.
The Tornetta trial began after the vice chancellor of the court, Joseph Slights, rejected Tesla’s motion to dismiss the case in September 2019 and ordered that it proceed.
He noted the enormous pay package as well as the possibility that minority investors would be railroaded by a compliant business board that feared Musk, an aggressive “800-pound gorilla,” might take action if it did not get its way.
From the perspective of CEO remuneration, this case “has the potential to be quite momentous,” said University of Pennsylvania law professor Jill Fisch to Bloomberg.
