His Pay Day

The Pay Package

In 2018, Tesla decided to give Elon Musk a huge pay package worth $56 billion. This money wasn't just handed to him; he had to meet certain goals for Tesla, like increasing the company's value and profits.

Detailed Breakdown of the Pay Package

1. Pay Package Value: The pay package valued at up to $56 billion, is contingent on meeting specific performance milestones.
2. Performance Milestones: The package was structured to reward Musk with stock options that would vest only if Tesla achieved certain milestones.

These milestones included:

1. Market Capitalization: Tesla had to reach a market capitalization of $100 billion, with additional tranches vesting for every $50 billion increase in market capitalization up to $650 billion.
2. Operational Milestones: Tesla also had to achieve either $20 billion in revenue or $1.5 billion in EBITDA for each tranche to vest.
3. Conditions and Vesting: The stock options would vest in 12 tranches, each tied to the achievement of both market capitalization and operational milestones. This means Musk would not receive the full $56 billion unless all milestones were met

The Legal Fight

A judge in Delaware later canceled this pay package because there were concerns that the decision wasn't made fairly and that the board of directors wasn't independent enough from Musk.

The lawyers who convinced the judge to cancel Musk's pay package are now asking for a big reward:

$6 billion in Tesla stock.

These lawyers were hired by a Tesla shareholder named Richard Tornetta, who argued that Musk's pay package was unfair and excessive.

Tesla, on the other hand, thinks this amount is way too high and suggests a much lower fee of $13.6 million.

Proportion of CEO Compensation to Legal Fees

To compare:

1. Musk's Total Compensation: $56 billion
2. Legal Fees Requested: $6 billion

The legal fees requested are approximately

10.71% of Musk's total pay package ($6B / $56B = 0.1071 or 10.71%)

Typical Hourly Rates for Top Law Firms

The average hourly rate for top U.S. law firms is around $961, with partners at the top 25 firms charging an average of $1,433 per hour.

This is significantly lower than the hourly rate implied by the legal team's fee request in the Musk case.

Argument

Tesla argues that the lawyers' request for $6 billion is excessive and not in line with past legal cases. They point out that this fee would be 17 times larger than any other legal fee in Delaware's history and would make the lawyers some of the biggest shareholders in Tesla.

Tesla also mentions that the requested fee is equivalent to $288,888 per hour, which they believe is unreasonable.

Shareholder Votes

Tesla's board is asking shareholders to vote on two important issues:

Whether to approve Musk's original pay package again.

Whether to move Tesla's legal base from Delaware to Texas.

They hope that if shareholders approve these, it might help overturn or lessen the judge's decision.

Potential Appeal

Elon Musk plans to appeal the judge's decision to a higher court if the current judge doesn't rule in his favor.

The judge, Kathaleen McCormick, will decide on the fee award after a hearing in July.

Impact on Tesla

• If shareholders approve the pay package, Musk's ownership stake in Tesla could increase from 13% to over 20%.
• If shareholders do not approve, Musk has suggested he might focus on developing future AI products outside of Tesla.
• Musk's brother, Kimbal Musk, who also owns shares in Tesla, could be indirectly affected by the outcome of the votes and legal decisions.

Challenges and Risks

• Influential advisory firms Institutional Shareholder Services (ISS) and Glass Lewis have advised investors to vote against Musk's pay package, calling it excessive.
• Many international shareholders find it difficult to vote due to logistical issues and different voting processes, which can affect the outcome.
• Moving Tesla's legal base to Texas poses risks because it's uncertain whether Texas laws would be as favorable as Delaware's, which has a well-established body of corporate law.

Who is Richard Tornetta?

Richard Tornetta is a Pennsylvania resident and a former drummer for the heavy metal band "Dawn of Correction."

He is also a Tesla shareholder who owned just nine shares of the company when he filed a lawsuit against Elon Musk in 2018.

Tornetta's background is quite diverse; apart from his musical career, he has worked in the marketing department at an online real estate marketing service called Homecast.

He describes himself as a "marketer, inventor, custom fabricator, car guy, family man, and drummer".

Tornetta's Investments

As far as public records show, Tornetta's known investment in Tesla was minimal at the time he filed the lawsuit—just nine shares. There is no clear information on whether he has sold or acquired more Tesla shares since filing the complaint.

Why Did Tornetta Go After Musk?

Despite his small stake in Tesla, Tornetta's lawsuit had significant implications. He challenged Musk's $56 billion pay package on the grounds that it was unfair to Tesla shareholders.

Key reasons:

1. Concerns About Fairness and Independence:

Tornetta argued the pay package was excessive and the board didn't act independently when approving it, as members were too closely tied to Musk, compromising their ability to make unbiased decisions in shareholders' best interests.

1. Lack of Proper Disclosure:

Tornetta's lawsuit also contended shareholders weren't fully informed about how achievable performance targets were when voting on the package. This lack of transparency was a significant point of contention.

1. Potential for Excessive Control:

The lawsuit highlighted concerns the package would give Musk too much control over Tesla, potentially diluting other shareholders' influence and concentrating power in Musk's hands.

Why Did the Law Firm Take the Case?

The law firm Bernstein Litowitz Berger & Grossmann LLP (BLB&G) took on Tornetta's case for several reasons:

1. Contingency Basis: BLB&G often takes cases on a contingency fee basis, meaning they only get paid if they win. This allows them to take on high-stakes litigation without requiring upfront payment from clients.
2. Potential for Significant Impact: The case had potential to set a significant legal precedent and bring about substantial changes in corporate governance practices. Winning such a high-profile case would enhance the firm's reputation and demonstrate their ability to hold powerful executives accountable.
3. Track Record of Success: BLB&G has a history of taking on complex, high-stakes cases, often achieving significant recoveries for clients.

Are They a Fair Law Firm?

BLB&G is widely recognized as one of the leading law firms in securities litigation and corporate governance. They have a reputation for achieving significant recoveries and setting legal precedents that improve market transparency and corporate practices. While some may view their contingency fee model as driven by financial incentives, their track record suggests a commitment to holding corporations accountable and protecting shareholder interests.

Other High-Profile Cases Handled by BLB&G:

• Citigroup, Inc.: $730 million recovery in bond action litigation.
• Lehman Brothers: $735 million recovery in equity/debt securities litigation.
• Worldcom, Inc.: $6.19 billion recovery in securities litigation.
• Merck & Co., Inc.: $1.06 billion settlement related to Vioxx painkiller scandal.

Tornetta's Potential Upside

Apparently the lawsuit was not primarily about personal financial gain for Tornetta, but rather about addressing what he saw as an unfair and excessive compensation package for Musk.

Baillie Gifford's Support

• Baillie Gifford's flagship Scottish Mortgage Investment Trust, a long-standing Tesla shareholder, plans to back Musk's $56 billion pay award. They believe the pay package introduced challenging targets that have significantly benefited shareholders if met.
• Tom Slater, the manager of the trust, stated that having agreed to the remuneration package, it should be paid out as Musk has delivered remarkable performance leading to huge value creation for shareholders.

Scottish Mortgage's Decision on Texas Move:

• Scottish Mortgage is yet to decide whether to support the proposed move to Texas. Slater mentioned this decision is "complicated", highlighting uncertainties and potential risks involved.

Market and Competitive Context:

• The shareholder vote comes during a challenging period for Tesla, as it faces a slowdown in the electric vehicle market and tough competition from Chinese companies. Tesla is balancing its advancements in autonomous driving with the threat of low-cost competition from China.
• Despite challenges, the latest version of Tesla's full self-driving tech shows significant breakthroughs, potentially marking a pivotal moment in autonomous driving capabilities.

Questions:

Should the lawyers who helped void Elon Musk's pay package be paid $6 billion in Tesla stock, considering their contribution to protecting shareholder interests, or is the much lower amount of $13.6 million proposed by Tesla more appropriate?

Regarding the Move to Texas:

Is relocating Tesla's legal base from Delaware to Texas a wise decision, given the potential risks and uncertainties in corporate governance and legal protections, or should Tesla remain in Delaware, known for its well-established corporate law system?

Regarding the Pay Package:

Do you support the approval of Elon Musk's $56 billion pay package, given its potential to significantly increase his stake and influence over Tesla, or do the concerns about board independence and fairness make it too risky and unjustified?