SILICON VALLEY, California – A Silicon Valley venture capitalist who served on Tesla’s board testified that the largest executive pay package in US corporate history was necessary to keep billionaire Elon Musk “engaged” in the electric carmaker he founded.

Taking the stand on Monday as the first witness in a trial over the propriety of paying Mr Musk some US$55 billion (S$75.5 billion), Mr Ira Ehrenpreis said the Tesla board recognised in 2017 that the chief executive officer was a “serial entrepreneur” and wanted to make sure he did not leave the company to pursue other interests.

“We wanted Elon to be at the head of Tesla for a long time,” Mr Ehrenpreis testified.

Mr Ehrenpreis’ testimony aimed to establish that it was the board rather than Mr Musk that determined the compensation deal.

It underscored a continuing concern about the Tesla CEO.

Since he recently completed his controversial US$44 billion acquisition of Twitter, Mr Musk has plunged the social media platform into chaos and a threat of bankruptcy with a series of policy, product and personnel upheavals and an exodus of advertisers.

Amid all of that, Mr Musk is expected to take the stand himself this week in Delaware Chancery Court. 

The trial stems from a shareholder’s suit that claims Tesla’s board failed to exercise independence from Mr Musk as it drew up a new pay package for its charismatic CEO.

If Judge Kathaleen McCormick sides with the shareholder – a long shot – she could order Mr Musk to pay back some or all of the stock awards to Tesla.

Judge McCormick is the same judge who presided over a showdown between Mr Musk and Twitter in recent months when he was trying to back out of the buyout – before he capitulated and agreed to honour his original offer.

‘All for Elon’

Mr Musk has acknowledged that he had little to fear from the Tesla board’s review of his pay proposal, according to court filings. “Me negotiating against myself” is how he described the process of tweaking the pay package’s details in a pre-trial deposition.

During the cross-examination of Mr Ehrenpreis, a lawyer for the shareholder raised a March 2018 e-mail that Mr Musk had sent to the company’s then chief legal officer Todd Maron in which the CEO warned that if a particular institutional investor voted against the package, it would be told it was not welcome at Tesla any more.

Mr Ehrenpreis, who was copied on the e-mail, testified that he did not think it was a threat against all major shareholders, and said he did not know why Mr Musk got worked up about that one investor. 

It is not clear if Mr Musk ever directly communicated his warning to the investor.

Mr Maron, who took the stand after Mr Ehrenpreis, was not asked about it on Monday.

Mr Ehrenpreis said the board discussed Mr Musk’s compensation with 10 of the company’s largest institutional investors, who all agreed on the need to keep Mr Musk at Tesla.

Representatives of Fidelity Investments said they were “all for Elon making a bunch of money” when Tesla made leaps in value, Mr Ehrenpreis recalled.

Time spent elsewhere 

Mr Musk spends considerable time on his other start-ups, including aeronautics firm Space Exploration Technologies, The Boring Company and Neuralink, and now, Twitter.

Lawsuits targeting executive compensation traditionally face a high bar, partly because the packages are contingent on ambitious share price targets.

Under Delaware law, directors generally get leeway to use their “business judgment” to set pay.

It is true the executive compensation package approved for Mr Elon Musk is remarkably large, but “Delaware courts are usually rather deferential” to directors’ decisions on pay when a majority of shareholders vote to back the plan, said Associate Professor Paul Regan at Widener University’s Delaware Law School. 

Still, the failure of the Tesla directors to disclose to investors that some of the pay package’s “challenging” milestones were likely to be achieved within a little over a year could be problematic, said Mr Joel Fleming, a partner at law firm Block & Leviton, who is not involved in the case.

“This is a strong case,” Mr Fleming said. The board “appears to have misled” Tesla stockholders, who voted to back the package, he said. 

In addition, “the fact that Musk has spent all this time on the Twitter takeover” strengthens the argument that he is spread too thin to focus enough on Tesla.

The case is playing out in Delaware because Tesla is incorporated in the state, the home to 1.8 million United States companies and more than 60 per cent of Fortune 500 firms.

Judges in its Chancery Court are business law experts who hear cases without a jury. 

Heavy metal drummer

The suit was filed by Mr Richard Tornetta, who has owned nine Tesla shares since February 2018, according to court filings.

Mr Tornetta, whose business sells car parts for stereo systems and radar detectors, has been threatened online for bringing the case against Mr Musk, his lawyers said. 

Besides once playing drums for a now-defunct heavy metal band, Mr Tornetta is the lead plaintiff in another securities case in Delaware over Sirius XM’s 2018 buyout of Internet radio service Pandora. Mr Tornetta did not respond to a request for comment.

Mr Musk’s Tesla equity awards helped the CEO become the world’s richest person last year.

At his peak, Mr Musk was worth US$340 billion last November, according to the Bloomberg Billionaires Index. His net worth dropped below US$200 billion this month as Tesla shares hit a 52-week low.

Tesla directors justify Mr Musk’s compensation in court filings by pointing to the company’s 12-fold increase in value over four years to US$690 billion as at last month – including a brief period starting in October 2021 when it exceeded more than US$1 trillion. 

Most US companies have adopted a similar pay-for-performance model, they say.

Mr Tornetta also contends that Tesla’s board is loaded with Mr Musk’s friends and confidantes, making it so rife with conflicts of interest that it was incapable of making an independent decision on the billionaire’s pay. 

He points to Mr Musk’s long ties to Mr Ehrenpreis, who headed the board committee responsible for reviewing the CEO’s pay, as an example of the conflicts.

Mr Ehrenpreis was one of Tesla’s early investors and served as one of Mr Musk’s advisers on the Twitter buyout. 

Mr Musk also had the help of Mr Maron in finalising the compensation plan, Mr Tornetta said. Mr Maron left Tesla in 2018. 

Tesla directors denied in court filings that they were beholden to Mr Musk or that their judgment about his pay was tainted by conflicting interests.

Mr Tornetta wants Judge McCormick to tag Mr Musk as Tesla’s controlling shareholder even though he owned only about 22 per cent of the car company’s shares as of early 2018.

If Mr Musk is deemed Tesla’s effective controller, the company must prove his pay package was “entirely fair”, a higher legal standard to meet rather than just relying on directors’ business judgment. 

Mr Tornetta filed his so-called derivative suit against Mr Musk and other Tesla directors on behalf of the company. This means any money recovered will go back to the electric-car maker and not to Mr Tornetta. BLOOMBERG