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Full Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
RICHARD J. TORNETTA, Individually )
and on Behalf of All Others Similarly )
Situated and Derivatively on Behalf of )
Nominal Defendant TESLA, INC., )
)
Plaintiff, )
)
v. ) C.A. No. 2018-0408-KSJM
)
ELON MUSK, ROBYN M. DENHOLM, )
ANTONIO J. GRACIAS, JAMES )
MURDOCH, LINDA JOHNSON RICE, )
BRAD W. BUSS, and IRA )
EHRENPREIS, )
)
Defendants, and )
)
TESLA, INC., a Delaware Corporation, )
)
Nominal Defendant. )
POST-TRIAL OPINION
Date Submitted: April 25, 2023
Date Decided: January 30, 2024
Gregory V. Varallo, Glenn R. McGillivray, BERNSTEIN LITOWITZ BERGER &
GROSSMANN LLP, Wilmington, Delaware; Jeroen van Kwawegen, Margaret
Sanborn-Lowing, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New
York, New York; Peter B. Andrews, Craig J. Springer, David M. Sborz, Andrew J.
Peach, Jackson E. Warren, ANDREWS & SPRINGER LLC, Wilmington, Delaware;
Jeremy S. Friedman, Spencer M. Oster, David F.E. Tejtel, FRIEDMAN OSTER &
TEJTEL PLLC; Bedford Hills, New York; Counsel for Plaintiff Richard J. Tornetta.
David E. Ross, Garrett B. Moritz, Thomas C. Mandracchia, ROSS ARONSTAM &
MORITZ LLP, Wilmington, Delaware; Evan R. Chesler, Daniel Slifkin, Vanessa A.
Lavely, CRAVATH, SWAINE & MOORE LLP, New York, New York; Counsel for
Defendants Elon Musk, Robyn M. Denholm, Antonio J. Gracias, James Murdoch,
Linda Johnson Rice, Brad W. Buss, and Ira Ehrenpreis.
Catherine A. Gaul, Randall J. Teti, ASHBY & GEDDES, P.A., Wilmington, Delaware;
Counsel for Nominal Defendant Tesla, Inc.
McCORMICK, C.
Was the richest person in the world overpaid? The stockholder plaintiff in this
derivative lawsuit says so. He claims that Tesla, Inc.’s directors breached their
fiduciary duties by awarding Elon Musk a performance-based equity-compensation
plan. The plan offers Musk the opportunity to secure 12 total tranches of options,
each representing 1% of Tesla’s total outstanding shares as of January 21, 2018. For
a tranche to vest, Tesla’s market capitalization must increase by $50 billion and Tesla
must achieve either an adjusted EBITDA target or a revenue target in four
consecutive fiscal quarters. With a $55.8 billion maximum value and $2.6 billion
grant date fair value, the plan is the largest potential compensation opportunity ever
observed in public markets by multiple orders of magnitude—250 times larger than
the contemporaneous median peer compensation plan and over 33 times larger than
the plan’s closest comparison, which was Musk’s prior compensation plan. This post-
trial decision enters judgment for the plaintiff, finding that the compensation plan is
subject to review under the entire fairness standard, the defendants bore the burden
of proving that the compensation plan was fair, and they failed to meet their burden.
A board of director’s decision on how much to pay a company’s chief executive
officer is the quintessential business determination subject to great judicial
deference. But Delaware law recognizes unique risks inherent in a corporation’s
transactions with its controlling stockholder. Given those risks, under Delaware law,
the presumptive standard of review for conflicted-controller transactions is entire
fairness. To invoke the entire fairness standard, the plaintiff argues that Musk’s
compensation plan was a conflicted-controller transaction. The plaintiff thus forces
the question: Does Musk control Tesla?
Delaware courts have been presented with this question thrice before, when
more adroit judges found ways to avoid definitively resolving it. 1 This decision dares
to “boldly go where no man has gone before,” 2 or at least where no Delaware court
has tread. The collection of features characterizing Musk’s relationship with Tesla
and its directors gave him enormous influence over Tesla. In addition to his 21.9%
equity stake, Musk was the paradigmatic “Superstar CEO,” 3 who held some of the
most influential corporate positions (CEO, Chair, and founder), enjoyed thick ties
with the directors tasked with negotiating on behalf of Tesla, and dominated the
process that led to board approval of his compensation plan. At least as to this
transaction, Musk controlled Tesla.
The primary consequence of this finding is that the defendants bore the burden
of proving at trial that the compensation plan was entirely fair. Delaware law allows
defendants to shift the burden of proof under the entire fairness standard where the
transaction was approved by a fully informed vote of the majority of the minority
stockholders. And here, Tesla conditioned the compensation plan on a majority-of-
1 In re Tesla Motors, Inc. S’holder Litig., 2018 WL 1560293 (Del. Ch. Mar. 28, 2018)
[hereinafter “SolarCity I”]; In re Tesla Motors, Inc. S’holder Litig., 2022 WL 1237185
(Del. Ch. Apr. 27, 2022) [hereinafter “SolarCity II”], aff’d, 298 A.3d 667 (Del. 2023)
[hereinafter “SolarCity III”].
2 Star Trek: The Original Series (Paramount Pictures 1968).
3 Assaf Hamdani & Kobi Kastiel, Superstar CEOs and Corporate Law, 100 Wash. U.
L. Rev. 1353 (2023) [hereinafter “Superstar CEOs”].
2
the-minority vote. But the defendants were unable to prove that the stockholder vote
was fully informed because the proxy statement inaccurately described key directors
as independent and misleadingly omitted details about the process.
The defendants were thus left with the unenviable task of proving the fairness
of the largest potential compensation plan in the history of public markets. If any set
of attorneys could have achieved victory in these unlikely circumstances, it was the
talented defense attorneys here. But the task proved too tall an order.
The concept of fairness calls for a holistic analysis that takes into consideration
two basic issues: process and price. The process leading to the approval of Musk’s
compensation plan was deeply flawed. Musk had extensive ties with the persons
tasked with negotiating on Tesla’s behalf. He had a 15-year relationship with the
compensation committee chair, Ira Ehrenpreis. The other compensation committee
member placed on the working group, Antonio Gracias, had business relationships
with Musk dating back over 20 years, as well as the sort of personal relationship that
had him vacationing with Musk’s family on a regular basis. The working group
included management members who were beholden to Musk, such as General
Counsel Todd Maron who was Musk’s former divorce attorney and whose admiration
for Musk moved him to tears during his deposition. In fact, Maron was a primary go-
between Musk and the committee, and it is unclear on whose side Maron viewed
himself. Yet many of the documents cited by the defendants as proof of a fair process
were drafted by Maron.
3
Given the collection of people tasked with negotiating on Tesla’s behalf, it is
unsurprising that there was no meaningful negotiation over any of the terms of the
plan. Ehrenpreis testified that he did not view the negotiation as an adversarial
process. He said: “We were not on different sides of things.” Maron explained that
he viewed the process as “cooperative” with Musk. Gracias admitted that there was
no “positional negotiation.” This testimony came as close to admitting a controlled
mindset as it gets. And consistent with this specific-to-Musk approach, the committee
avoided using objective benchmarking data that would have revealed the
unprecedented nature of the compensation plan.
In credit to these witnesses, their testimony was truthful. They did not take a
position “on the other side” of Musk. It was a cooperative venture. There were no
positional negotiations. Musk proposed a grant size and structure, and that proposal
supplied the terms considered by the compensation committee and the board until
Musk unilaterally lowered his ask six months later. Musk did not seem to care much
about the other details. They got ironed out.
In this litigation, the defendants touted as concessions certain features of the
compensation plan—a five-year holding period, an M&A adjustment, and a 12-
tranche structure that required Tesla to increase market capitalization by $100
billion more than Musk had initially proposed to maximize compensation under the
plan. But the holding period was adopted in part to increase the discount on the
publicly disclosed grant price, the M&A adjustment was industry standard, and the
12-tranche structure was reached in an effort to translate Musk’s fully-diluted-share
4
proposal to the board’s preferred total-outstanding-shares metric. It is not accurate
to refer to these terms as concessions.
The defendants also point to the duration of the process (nine months) and the
number of board and committee meetings (ten) as evidence that the process was
thorough and extensive. The defendants’ statistics, however, elide the lack of
substantive work. Time spent only matters when well spent. Plus, most of the work
on the compensation plan occurred during small segments of those nine months and
under significant time pressure imposed by Musk. Musk dictated the timing of the
process, making last-minute changes to the timeline or altering substantive terms
immediately prior to six out of the ten board or compensation committee meetings
during which the plan was discussed.
And that is just the process. The price was no better. In defense of the
historically unprecedented compensation plan, the defendants urged the court to
compare what Tesla “gave” against what Tesla “got.” This structure set up the
defendants’ argument that the compensation plan was “all upside” for the
stockholders. The defendants asserted that the board’s primary objective with the
compensation plan was to position Tesla to achieve transformative growth, and that
Tesla accomplished this by securing Musk’s continued leadership. The defendants
offered Musk an opportunity to increase his Tesla ownership by about 6% (from about
21.9% to at most 28.3%) if, and only if, he increased Tesla’s market capitalization
from approximately $50 billion to $650 billion, while also hitting the operational
milestones tied to Tesla’s top-line (revenue) or bottom-line (adjusted EBITDA)
5
growth. According to the defendants, the deal was “6% for $600 billion of growth in
stockholder value.”
At a high level, the “6% for $600 billion” argument has a lot of appeal. But
that appeal quickly fades when one remembers that Musk owned 21.9% of Tesla when
the board approved his compensation plan. This ownership stake gave him every
incentive to push Tesla to levels of transformative growth—Musk stood to gain over
$10 billion for every $50 billion in market capitalization increase. Musk had no
intention of leaving Tesla, and he made that clear at the outset of the process and
throughout this litigation. Moreover, the compensation plan was not conditioned on
Musk devoting any set amount of time to Tesla because the board never proposed
such a term. Swept up by the rhetoric of “all upside,” or perhaps starry eyed by
Musk’s superstar appeal, the board never asked the $55.8 billion question: Was the
plan even necessary for Tesla to retain Musk and achieve its goals?
This question looms large in the price analysis, making each of the defendants’
efforts to prove fair price seem trivial. The defendants proved that Musk was
uniquely motivated by ambitious goals and that Tesla desperately needed Musk to
succeed in its next stage of development, but these facts do not justify the largest
compensation plan in the history of public markets. The defendants argued the
milestones that Musk had to meet to receive equity under the package were ambitious
and difficult to achieve, but they failed to prove this point. The defendants
maintained that the plan is an exceptional deal when compared to private equity
compensation plans, but they did not explain why anyone would compare a public
6
company’s compensation plan with a private-equity compensation plan. The
defendants insisted that the plan worked in that it delivered to stockholders all that
was promised, but they made no effort to prove causation. They also made no effort
to explain the rationale behind giving Musk 1% per tranche, as opposed to some lesser
portion of the increased value. None of these arguments add up to a fair price.
In the final analysis, Musk launched a self-driving process, recalibrating the
speed and direction along the way as he saw fit. The process arrived at an unfair
price. And through this litigation, the plaintiff requests a recall.
The plaintiff asks the court to rescind Musk’s compensation plan. The
plaintiff’s lead argument is that the court must rescind the compensation plan due to
disclosure deficiencies because the plan was conditioned on stockholder approval.
This argument, although elegant in its simplicity, is overly rigid and wrong. The
plaintiff offers no legal authority for why rescission must automatically follow from
an uninformed vote. Generally, a court of equity enjoys broad discretion in fashioning
remedies for fiduciary breach, and that general principle applies here.
Although rescission does not automatically result from the disclosure
deficiencies, it is nevertheless an available remedy. The Delaware Supreme Court
has referred to recission as the “preferrable” (but not the exclusive) 4 remedy for
breaches of fiduciary duty when rescission can restore the parties to the position they
4 Lynch v. Vickers Energy Corp., 429 A.2d 497, 501 (Del. 1981) (describing rescission
as the “preferrable” remedy), overruled in part by Weinberger v. UOP, Inc., 457 A.2d
701, 703–04 (Del. 1983) (“We therefore overrule [Vickers] to the extent that it
purports to limit a stockholder’s monetary relief to a specific damage formula.”).
7
occupied before the challenged transaction. Rescission can achieve that result in this
case, where no third-party interests are implicated, and the entire compensation plan
sits unexercised and undisturbed. In these circumstances, the preferred remedy is
the best one. The plaintiff is entitled to rescission.
I. FACTUAL BACKGROUND
Trial took place over five days. The record comprises 1,704 trial exhibits, live
testimony from nine fact and four expert witnesses, video testimony from three fact
witnesses, deposition testimony from 23 fact and five expert witnesses, and 255
stipulations of fact. These are the facts as the court finds them after trial. 5
A. Tesla And Its Visionary Leader
Tesla is a vertically integrated clean-energy company. 6 Tesla and its
employees “design, develop, manufacture, sell and lease high-performance fully
electric vehicles and energy generation and storage systems.” 7 As of December 31,
5 This decision cites to: C.A. No. 2018-0408-KSJM docket entries (by docket “Dkt.”
number); trial exhibits (by “JX” number); trial demonstratives (by “PDX” and “DDX”
number); the trial transcript, Dkts. 245–49 (“Trial Tr.”); and stipulated facts set forth
in the Parties’ Stipulation and Pre-Trial Order, Dkt. 243 (“PTO”). The witnesses in
order of appearance were: Ira Ehrenpreis, Todd Maron, Robyn M. Denholm
(remotely), Deepak Ahuja, Phoung Phillips (through deposition clips), Elon Musk,
Antonio J. Gracias, James Murdoch, Andrew Restaino, Brian Dunn, Jon Burg
(through deposition clips), Kimbal Musk (through deposition clips), Jonathan Chang
(through deposition clips), Paul Gompers, Kevin Murphy, Brad W. Buss, and Thomas
Brown. The transcripts of the witnesses’ respective depositions are cited using the
witnesses’ last names and “Dep. Tr.”
6 PTO ¶ 26.
7 JX-1440 at 5; PTO ¶ 29.
8
2021, Tesla and its subsidiaries had nearly 100,000 full-time employees worldwide, 8
and its market capitalization was over $1 trillion. 9
Tesla’s success came relatively recently and, by all accounts, was made possible
by Musk. In 2004, Musk led Tesla’s Series A financing round, investing $6.5
million. 10 He would invest considerably more before the company went public, take
on the role of chairman of Tesla’s Board of Directors (the “Board”) (from April 2004
to November 2018), and, ultimately, become Tesla’s CEO (since October 2008). 11
Musk possesses the ability to “dr[aw] others into his vision of the possible” and
“inspir[e] . . . his workers to achieve the improbable.” 12 And although Musk was not
at the helm of Tesla at its inception, he became the driving visionary responsible for
Tesla’s growth. He earned the title “founder.” 13
1. The Master Plan
At the time of Musk’s initial investment, Tesla was a small-scale startup
producing small quantities of a single vehicle: the Tesla “Roadster,” a high-end,
8 JX-1440 at 14.
9 JX-1510 at 5. As of the start of trial in November 2022, it was $618 billion. JX-
1510 at 1. After trial, Tesla’s market capitalization dropped to approximately $380
billion. See Dkt. 263 (“Defs.’ Post-Trial Opening Br.”) at 9–10.
10 JX-1386 (“Murphy Opening Expert Rep.”) at 11 (giving background on Tesla’s early
years).
11 Id. at 11–12; PTO ¶¶ 44–45.
12 Richard Waters, Elon Musk, billionaire tech idealist and space entrepreneur, Fin.
Times (Sept. 30, 2016), https://www.ft.com/content/8ca82034-86d0-11e6-bcfc-
debbef66f80e.
13 See, e.g., Trial Tr. at 729:19–730:3 (Gracias) (describing Musk as a “founder CEO”
and the “strategic visionary” of Tesla).
9
battery-powered sports car. 14 By 2006, however, Tesla had broadened its goals. That
year, then-chairman Musk published on Tesla’s blog “The Secret Tesla Motors Master
Plan” 15 (a.k.a., the “Master Plan”), which provided a roadmap for Tesla’s future.
Distilled, Musk’s vision was to start by building the Roadster sports car, to use “that
money to build an affordable car,” to use “that money to build an even more affordable
car,” and to “provide zero emission electric power generation options” while
accomplishing these production milestones. 16 The plan advanced what Musk
described as Tesla’s “overarching purpose”—to move toward a sustainable energy
economy, or, as he wrote at the time, to “expedite the move from a mine-and-burn
hydrocarbon economy towards a solar electric economy.” 17
The Master Plan was bold. Although it might seem difficult to believe now,
back then, the market for electric vehicles was unproven. Electric-vehicle technology
was “described as impossible.” 18 Even traditional automotive startups faced an
“incredibly challenging” environment in which many failed. 19 In fact, no new
domestic car company since Chrysler in the 1920s had achieved financial success. 20
14 Murphy Opening Expert Rep. at 11–12.
15 JX-48. Musk wrote this document. PTO ¶ 47.
16 JX-48 at 4 (emphasis omitted).
17 Id. at 1.
18 Trial Tr. at 15:21–16:18 (Ehrenpreis).
19 Id.
20 Id.
10
Given the risks, Musk himself viewed the probability of Tesla completing the Master
Plan as “extremely unlikely.” 21
To even Musk’s surprise, the Master Plan came to fruition. In abbreviated
form, the events played out like this: In 2006, Tesla announced that it would begin
to sell the Signature 100 Roadster for approximately $100,000. 22 By August 2007,
Tesla had pre-sold 570 Roadsters, 23 which became available in 2008, 24 the same year
that Musk became Tesla’s CEO. 25 Tesla went public in January 2010, raising $226.1
million. 26 In June 2012, Tesla launched the Model S, delivering 2,650 vehicles by
year’s end. 27 Model S sales increased to approximately 22,000 in 2013, 32,000 in
2014, and 50,000 in 2015. 28 Over this period, Tesla developed stationary energy
storage products for commercial and residential use, which it began selling in 2013. 29
In 2014, Tesla announced its intent to build its first battery “Gigafactory” and work
21 Id. at 567:20–23 (Musk).
22 See Murphy Opening Expert Rep. at 12 (citing Google, Paypal founders fund
battery-electric sports car, The Globe and Mail (July 21, 2006),
https://www.theglobeandmail.com/report-on-business/google-paypal-founders-fund-
battery-electric-sports-car/article18168182/).
23 Id. (citing Tesla all-electric Roadster to hit road by year end, Reuters News (August
7, 2007)).
24 PTO ¶ 31; Murphy Opening Expert Rep. at 12.
25 PTO ¶ 45.
26 Murphy Opening Expert Rep. at 13.
27 Id. at 14.
28 Id.
29 JX-178 at 8 (2/26/14 Form 10-K).
11
with suppliers to integrate battery precursor material. 30 The factory went live in
2015. 31 In September 2015, Tesla launched the Model X, a midsize SUV crossover. 32
2. The Master Plan, Part Deux
By 2016, Tesla had reached the final phase of the Master Plan, 33 and Musk
began contemplating the next chapter of Tesla’s development. In July 2016, he
published a new strategic document: “Master Plan, Part Deux” (a.k.a., “Part Deux”). 34
That year, Tesla unveiled a long-range, compact sedan called the “Model 3.” 35
Tesla projected that it would begin mass production of the Model 3 in 2017. That
endeavor proved the crucible for Tesla. As the company disclosed on March 1, 2017:
“Future business depends in large part on our ability to execute on our plans to
develop, manufacture, market and sell the Model 3 vehicle . . . .” 36 Tesla announced
another ambitious deadline, stating that its goal was “to achieve volume production
and deliveries of this vehicle in the second half of 2017.” 37
30 Id. at 13–14.
31 JX-248 at 5 (2/24/16 Form 10-K).
32 PTO ¶ 35; see also JX-248 at 4.
33 See JX-335 at 4–5 (3/1/17 Form 10-K).
34 JX-274.
35 JX-335 at 4.
36 Id. at 17.
37 Id.
12
No one thought Tesla could mass produce the Model 3. 38 Musk stated in Part
Deux that, “[a]s of 2016, the number of American car companies that haven’t gone
bankrupt is a grand total of two: Ford and Tesla.” 39 Tesla had come close to
bankruptcy in its early years. 40 And as of March 2017, approximately 20% of Tesla’s
total outstanding shares were sold short, making it the most shorted company in U.S.
capital markets at that time. 41 Everyone was betting against Tesla and the man at
its helm.
3. Musk’s Backstory And Motivations
Musk is no stranger to a challenge, having led the life of a serial
entrepreneur. 42 He and his brother, Kimbal Musk, 43 launched Musk’s first start-up
in 1995. 44 Musk later co-founded an electronic payment system called X.com, which
would be acquired and renamed PayPal. 45 He also founded: in 2002, a rocket
development and launch company, Space Exploration Technologies Corporation
38 Trial Tr. at 450:17–21 (Ahuja); see, e.g., JX-329 at 1 (2/23/17 Morgan Stanley report
dated February 23, 2017, expecting “no more than a small/modest amount of
customer deliveries” in 2018).
39 JX-274 at 1.
40 Trial Tr. at 17:2–6 (Ehrenpreis).
41 See JX-995.
42 See Murphy Opening Expert Rep. at 10–11, 112; see also Trial Tr. at 495:23–496:11
(Ahuja) (“Elon is a unique individual who is extremely motivated by super-difficult
challenges. . . . [V]ery few people in this world can accept . . . the risk level[] that Elon
can.”).
43 This decision refers to Kimbal Musk as “Kimbal” solely to distinguish him from his
brother. No disrespect is intended.
44 PTO ¶ 49.
45 Id. ¶¶ 50–52.
13
(“SpaceX”); 46 in 2015, an artificial intelligence research organization, OpenAI Inc.; 47
in 2016, a neurotechnology company, Neuralink Corp.; 48 and, in 2017, a private
tunnel-boring company, The Boring Company. 49
In 2017 through 2018, in addition to his positions at Tesla, Musk was the CEO,
CTO, and board chairman of SpaceX and the board co-chair of OpenAI. 50 Musk
divided most of his time between SpaceX and Tesla as of June 2017, 51 but he
increased the amount of time he spent at Tesla by the end of 2017. 52
Musk is motivated by ambitious goals, the loftiest of which is to save humanity.
Musk fears that artificial intelligence could either reduce humanity to “the equivalent
of a house cat” 53 or wipe out the human race entirely. 54 Musk views space
46 Id. ¶¶ 53–55, 62.
47 Id. ¶ 61; Trial Tr. at 21:2–5 (Ehrenpreis).
48 PTO ¶ 59; JX-350; Trial Tr. at 21:6–7 (Ehrenpreis).
49 PTO ¶ 57; Trial Tr. at 21:8–10 (Ehrenpreis).
50 PTO ¶ 62.
51 Trial Tr. at 568:16–569:9, 661:7–15 (Musk); JX-408 at 13. In 2017, Musk typically
spent Monday and Thursday at SpaceX, and Tuesday, Wednesday, and Friday at
Tesla, with additional work for Tesla interspersed throughout the week. Trial Tr. at
661:7–15 (Musk); JX-1256 at 34 (“Mr. Musk estimates he split the bulk (at least 90%)
of his work hours, approximately 80 to 90 hours per week, between Tesla and SpaceX,
with an allocation of 60% to Tesla and 40% to SpaceX. He allocated his remaining
work hours (8–9 hours per week) between Neuralink, The Boring Company and Open
AI.”).
52 Trial Tr. at 569:10–18 (Musk) (testifying that “later in 2017, when things got very
difficult for Tesla, [his] time was almost 100 percent Tesla”).
53 Musk Dep. Tr. at 110:5–111:3.
54 Id. at 108:20–110:4.
14
colonization as a means to save humanity from this existential threat. 55 Musk seeks
to make life “multiplanetary” by colonizing Mars. 56 Reasonable minds can debate the
virtues and consequences of longtermist beliefs like those held by Musk, but they are
not on trial. 57 What is relevant here is that Musk genuinely holds those beliefs.
Colonizing Mars is an expensive endeavor. 58 Musk believes he has a moral
obligation to direct his wealth toward that goal, 59 and Musk views his compensation
from Tesla as a means of bankrolling that mission. 60 Musk sees working at Tesla as
55 See id. at 117:10–16 (stating the mission of SpaceX is “[t]o extend the light of
consciousness beyond Earth in a sustained, permanent manner” by “becoming
multiplanetary”); Trial Tr. at 647:10–20 (Musk) (confirming SpaceX’s mission).
56 Trial Tr. at 647:10–20 (Musk).
57 Compare William MacAskill, What We Owe The Future (2022), with The Good It
Promises, the Harm It Does: Critical Essays on Effective Altruism (Carol J. Adams,
Alice Crary, and Lori Gruen eds., 2023).
58 The court takes judicial notice of this fact.
59 Musk does not dally in the conventional amenities of ordinary billionaires.For
example, he owns only one home. Musk Dep. Tr. at 118:14–21 (“I tried to put it on
Airbnb, but they banned Airbnb in Hillsborough. They’re so uptight.”).
60 Trial Tr. at 77:9–15 (Ehrenpreis) (“Q. Fair for me to understand that your
takeaway from speaking with Mr. Musk about this compensation plan was that he
never wavered on his love for Tesla, that he was trying to determine whether he could
achieve his big aspirations to colonize Mars through Tesla; right? A. Correct.”); id.
at 367:9–18 (Denholm) (“Q. And I think you testified, and I just want to make sure
it’s clear, that one of the things that Mr. Musk told you was that he had a quest to
put a mission on Mars and where he spent his time and energy needed to help him
generate capital to fulfill that quest to put a mission on Mars; right? A. Yes. I mean,
something like that is what I said before. I was talking about -- I mentioned
interplanetary travel, but in the conversation he did mention Mars.”); id. at 420:8–12
(Maron) (affirming that “Elon wanted this new stock grant to make humans an
interplanetary species and to colonize Mars”); id. at 666:22–667:10 (Musk) (“Q. What
you did was you told Robyn and Ira that the benefit you saw in working hard at Tesla
to achieve the plan was that you would have money to go to Mars. Fair to say? A.
Well, not me. To get humanity to Mars. Q. That there would be funds available to
15
worthy of his time only if that work generates “additional economic resources . . . that
could . . . be applied to making life multi-planetary.” 61
B. Musk’s Prior Compensation Plans
Prior to the challenged transaction, Musk received two compensation plans
from Tesla—one in 2009 and one in 2012. Both were equity linked. The first included
a performance-based component. The second was entirely performance based.
1. The 2009 Grant
On December 4, 2009, the Board approved Musk’s first compensation plan (the
“2009 Grant”). 62 The 2009 Grant comprised two parts, each of which offered Musk
stock options to purchase 4% of Tesla’s fully diluted shares as measured at the grant
date. 63
The first part of the 2009 Grant vested automatically in tranches, with 1/4th
vesting immediately and 1/48th vesting each month over the following three years,
assuming that Musk continued to work at Tesla. 64
The second part of the 2009 Grant was performance based, offering Musk an
additional 4% of Tesla’s fully diluted shares prior to the grant date for achieving each
of the following: “successful completion of the Model S Engineering Prototype”;
pursue your long-term goal of making life interplanetary? A. Yes. Q. Saving the
world? A. Well, saving civili -- consciousness, yes.”).
61 Id. at 665:2–667:10 (Musk); see also Musk Dep. Tr. at 115:24–117:16, 163:14–165:5
(discussing space colonization plans and tradeoffs of spending time on Tesla).
62 JX-68 at 2–3 (1/29/10 Form S-1 (Excerpt)).
63 Id.
64 Id.(stating “1/48th of the shares [are] scheduled to vest each month over the
subsequent three years”).
16
“successful completion of the Model S Vehicle Prototype”; “completion of the first
Model S Production Vehicle”; and “completion of the 10,000th Model S Production
Vehicle.” 65 The 2009 Grant required that Musk meet these milestones within four
years; otherwise, he forfeited his right to the unvested portions. 66
Tesla began delivering its next electric car model, the Model S, in June 2012
and Musk achieved all the 2009 Grant’s performance milestones by December 31,
2013. 67
2. The 2012 Grant
Before the 2009 Grant milestones had been achieved, on August 1, 2012, the
Board approved a second compensation plan for Musk (the “2012 Grant”). 68 The 2012
Grant involved ten tranches, each offering options representing 0.5% of Tesla’s
outstanding common stock as of August 2012. 69
For a tranche to vest, Tesla would have to achieve both a market capitalization
milestone and an operational milestone. 70 Each tranche required Musk to increase
Tesla’s market capitalization by $4 billion—an increment greater than Tesla’s $3.2
billion market capitalization 18 trading days before the Board approved the 2012
Grant. 71 The operational milestones required Tesla to accomplish specified product-
65 Id. at 3.
66 Id.
67 PTO ¶¶ 32, 191; JX-178 at 114.
68 PTO ¶ 192; JX-135 at 77 (8/2/12 Form 10-Q for Q2).
69 JX-135 at 77.
70 Id.
71 Id.; JX-154 at 26 (4/17/13 Tesla Schedule 14A Proxy).
17
related goals, such as developing and launching the Model X and the Model 3, and
reaching aggregate production of 300,000 vehicles. 72 The milestones worked in
tandem. For example, one tranche would vest if Tesla achieved one of the operational
milestones and a market capitalization increase of $4 billion, while two tranches
would vest if Tesla achieved two of its operational milestones and a market
capitalization increase of $8 billion. 73 The 2012 Grant had a ten-year term. 74
By the end of 2016, Tesla had achieved seven of the market capitalization
milestones and five of the operational milestones of the 2012 Grant, with another four
operational milestones “considered probable of achievement.” 75 By March 2017,
seven of the 2012 Grant’s ten tranches had vested. 76
From the Board’s perspective, the 2012 Grant was successful. In only five
years, Tesla’s market capitalization grew by over 15x from $3.2 billion to $53 billion. 77
Tesla saw significant operational growth as well, designing and launching the Model
S, Model X, and Model 3, and increasing its total annual vehicle production from
72 JX-135 at 77; JX-154 at 26.
73 JX-135 at 77; JX-154 at 26.
74 JX-137 at 1 (stating the 2012 Grant expired on August 13, 2022); JX-68 at 3.
75 JX-335 at 45.
76 PTO ¶ 206.
77 Tesla’s market capitalization was approximately $59 billion as of the proxy
statement’s publication (February 2018) and $53 billion as of the stockholder
approval (March 2018). JX-154 at 26; JX-878 at 24 (2/8/18 Schedule 14A Proxy
Statement); JX-1510 at 26.
18
approximately 3,000 total vehicles in 2012 78 to more than 250,000 vehicles in 2017. 79
Musk worked hard toward these goals. And he was paid extremely well. In the end,
the value of Musk’s holdings increased from approximately $981 million to $13
billion, meaning that Musk ultimately received approximately 52x the 2012 Grant’s
grant date fair value. 80
C. The Compensation Process Takes Off.
In 2017, Tesla was already nearing completion of the 2012 Grant milestones,
even though the 2012 Grant had a ten-year term. This prompted a discussion that
led to the compensation plan at issue in this litigation (the “2018 Grant” or the
“Grant”). By this time, Musk had accumulated beneficial ownership of 21.9% of the
outstanding shares of Tesla common stock through his early investments and the two
prior grants. 81
78 JX-147 at 4 (3/7/13 Form 10-K).
79 JX-1105 at 45 (2/19/19 Form 10-K).
80 JX-1384 (“Dunn Opening Expert Rep.”) at 103. This is the measure of the
compensation expense for all stock-based compensation awards under the Financial
Accounting Standards Board (FASB) Accounting Standards Codification Topic (ASC)
718. Murphy Opening Expert Rep. at 94–96 “ASC 718 allows companies to use a
variety of methodologies to measure the company’s cost of granting employee stock
options, including Black-Scholes, binomial and lattice models, and Monte Carlo
simulations. . . [T]he value of options can be estimated by computing the expected
value of the option upon exercise assuming that the expected return on the stock is
equal to the risk-free rate, and then discounting the expected value to the grant using
the risk-free grant.” Id.
81 PTO ¶ 64.
19
1. Meet The Decision Makers.
At all relevant times, Tesla had a nine-person Board comprising Musk, Kimbal,
Brad W. Buss, Robyn M. Denholm, Ira Ehrenpreis, Antonio J. Gracias, Steve
Jurvetson, James Murdoch, and Linda Johnson Rice. 82 The Board had a standing
compensation committee (the “Compensation Committee”), which was responsible for
negotiating Musk’s compensation plan. 83 Ehrenpreis, Buss, Denholm, and Gracias
served on the Compensation Committee, with Ehrenpreis as chair. 84 Musk and
Kimbal recused themselves from most of the meetings and all of the votes on the 2018
Grant, and Jurvetson had prolonged leaves of absence during the relevant period. 85
The fiduciaries responsible for Tesla in connection with the 2018 Grant, therefore,
were the Compensation Committee members plus Murdoch and Johnson Rice.
a. The Compensation Committee Members
i. Ehrenpreis
Ehrenpreis is a founder and managing partner of DBL Partners, an impact-
investing venture-capital firm that focuses on driving environmental change through
82 Id. ¶¶ 44, 73, 82, 87, 98, 122, 127, 132, 143.
83 Id. ¶¶ 155, 214, 218, 220, 222, 224, 226, 228, 229.
84 Id. ¶¶ 74, 84, 88, 106.
85 Id. ¶¶ 133, 232; JX-631 at 1; JX-791 at 1; Trial Tr. at 48:5–10 (Ehrenpreis); id. at
837:1–5 (Murdoch); id. at 1438:3–8, 1463:19–22 (Brown).
20
investments. 86 Ehrenpreis and DBL have invested tens of millions of dollars in
Musk-controlled companies. 87
Ehrenpreis had been a member of the Board since 2007 and chair of both the
Compensation Committee and the Nominating and Corporate Governance
Committee since 2009. 88 Between 2011 and 2015, Ehrenpreis was granted 865,790
Tesla options. 89 He exercised less than a quarter of those options in 2021, netting
over $200 million. 90 Being a Tesla director had “been a real benefit in fundraising”
for Ehrenpreis’s funds. 91
Ehrenpreis and the Musk brothers have known each other for over 15 years. 92
As Ehrenpreis acknowledged, his personal and professional relationship with the
Musk brothers has had a “significant influence on his professional career[.]” 93
To argue that Ehrenpreis’s relationship with Musk was weighty in other ways,
the plaintiff points to a July 2017 tweet in which Ehrenpreis professed his love for
86 PTO ¶ 91; Trial Tr. at 11:8–15 (Ehrenpreis).
87 PTO ¶¶ 92–95. These investments included roughly $40 million in SpaceX, $10
million in The Boring Company, and approximately $1 million in Neuralink. Id;
Ehrenpreis Dep. Tr. at 392:24–393:16.
88 PTO ¶¶ 87–89.
89 JX-1701 at 1; Trial Tr. at 202:23–204:1 (Ehrenpreis). He sold only enough of these
shares to cover the exercise price and taxes. Trial Tr. at 207:8–17 (Ehrenpreis).
90 JX-1701 at 1; Trial Tr. at 204:2–207:19 (Ehrenpreis).
91 Trial Tr. at 192:15–18 (Ehrenpreis).
92 Kimbal Dep. Tr. at 59:17–66:4.
93 Trial Tr. at 192:6–10 (Ehrenpreis).
21
Musk. 94 But the exchange does not reveal the deep relationship that the plaintiff
described. It was an irrelevant joke. 95
Ehrenpreis is a close friend to Kimbal. They had known each other since at
least 1999, and Ehrenpreis attended Kimbal’s wedding in Spain. 96 Ehrenpreis also
invested in Kimbal’s company, The Kitchen Group—a family of restaurants based in
Colorado and Chicago. 97
ii. Buss
Buss joined the Board and the Compensation Committee in 2009. 98 He worked
as an accountant and in the semiconductor field until his retirement in 2014, and
94 JX-518 at 1.
95 To dive into the minutia of the tweet, Ehrenpreis had the right to purchase the first
Model 3, but he gifted that right to Musk, tweeting, “[Musk] you deserve it!!! Much
love and respect for everything you do for [Tesla].” JX-518 at 1 (7/8/17 Musk tweet,
https://www.twitter.com/elonmusk/status/883848060119527424); JX-1586 at 1
(7/8/17 Ira Ehrenpreis tweet). Also in that tweet thread, Ehrenpreis jokingly
proposed a “romantic dinner” with Musk on the tenth anniversary of the start of Tesla
Roadster production. JX-967 at 1 (3/17/18 Ehrenpreis tweet). Ehrenpreis testified at
trial that he was not “being literal” and that he “did not have a romantic dinner with
[Musk] or anybody.” Trial Tr. at 199:7–13 (Ehrenpreis). He remarked that “clearly
humor doesn’t translate” and that he and Musk had a “collaborative working
relationship” instead. Id. at 66:11–17, 199:7–13 (Ehrenpreis). In the end, the tweet
was just a bad joke; it does not inform the control analysis. See generally Kimbal Dep
Tr. at 59:9–66:4; Trial Tr. at 193:19–21 (Ehrenpreis).
96 Kimbal Dep. Tr. at 59:9–10; Trial Tr. at 193:19–21 (Ehrenpreis).
97 Trial Tr. at 193:13–15 (Ehrenpreis); Kimbal Dep. Tr at 48:11–18.
98 PTO ¶¶ 73–75. Buss also served on the Nominating and Corporate Governance
Committee and the Audit Committee. Id.
22
then served as CFO of SolarCity Corp. 99 until February 2016. 100 Buss had no
personal relationship with Musk or other members of the Board and has never
invested in any of Musk’s other businesses. 101
From 2014 through 2016, Buss’s held assets valued at between $30 and $60
million, not including his Tesla and SolarCity holdings. 102 He earned about $2 million
in total compensation from his work with SolarCity. 103 Between 2011 and 2018, Buss
reported that compensation as a Tesla director was approximately $17 million. 104 He
realized about $24 million for sales of Tesla shares that he received as compensation
prior to January 21, 2018. 105
99 SolarCity is a solar technology company that Tesla acquired in November 2016.
PTO ¶ 56. Musk served as SolarCity’s board chair from July 2006 until November
2016. Id.
100 Trial Tr. at 1375:7–22, 1377:7–10, 1377:17–1378:15 (Buss); PTO ¶¶ 77–78.
101 Trial Tr. at 1381:6–17 (Buss).
102 Compare JX-1167 ¶ 26 (9/24/19 Declaration of Brad W. Buss in Connection with
the Director Defendants’ Brief in Opposition to Plaintiff’s Motion for Partial
Summary Judgment, filed in In re Tesla Motors, Inc. S’holder Litig., Consol. C.A. No.
12711-VCS) (“during 2014-2016, I had net assets, exclusive of all Tesla and SolarCity
holdings, conservatively estimated at in excess of $30 million”), with, Trial Tr. at
1426:15–1427:13 (Buss) (“my number was bigger than [$30 million]. . . . It wasn’t
double or triple that, but it was substantially higher and has done very well by
itself.”).
103 Trial Tr. at 1384:6–9 (Buss).
Buss stepped down from his committee assignments
while working for SolarCity but returned to these positions in mid-2017, in time to
participate in the development of the 2018 Grant. PTO ¶¶ 74–76; Trial Tr. at
1386:12–18 (Buss). Although the exact date on which Buss rejoined the
Compensation Committee is unclear, he attended the first meeting at which the 2018
Grant was discussed. JX-439 (6/23/17 Compensation Committee meeting minutes
listing Buss as “present”).
104 Trial Tr. at 1409:13–21 (Buss).
105 JX-1587 (Brad Buss Form 4s from June 25, 2010 to May 20, 2019); Trial Tr. at
1410:13–1411:12 (Buss). Buss left the Board in June 2019. PTO ¶ 81.
23
Buss owed roughly 44% of his net worth to Musk entities. 106 Buss lacked any
other personal or business connections to Tesla and left the Board soon after the
Board approved the 2018 Grant. 107
iii. Denholm
Denholm joined the Board and the Compensation Committee in 2014. 108 Her
background is in accounting and telecommunications. 109 She was recruited to the
Board by Buss, who she knew professionally. 110 Musk asked Denholm to be Board
chair in 2018 following a settlement with the SEC (the “SEC Settlement”) that
required Musk to relinquish his chairmanship. 111
Denholm does not appear to have had any personal relationship with Musk
outside of her service on the Board. Denholm derived the vast majority of her wealth
from her compensation as a Tesla director. Denholm’s compensation from Tesla
between 2014 and 2017 was valued at about $17 million when it was issued, an
amount she acknowledged was material to her at the time. 112 Denholm ultimately
received $280 million through sales in 2021 and 2022 of just some of the Tesla options
106 JX-1167 ¶ 26; Trial Tr. at 1409:13–14:11:12, 1413:15–1416:8, 1426:15–1427:13
(Buss); see also SolarCity II, 2022 WL 1237185, at *4 & n.26. Buss was somewhat
evasive when estimating this number at trial, testifying that his net assets exclusive
of all Tesla and SolarCity holdings were higher than a certain amount but not “double
or triple that.” Trial Tr. at 1426:15–1427:13 (Buss).
107 PTO ¶ 81.
108 Id. ¶¶ 82, 84. She is also chair of the Audit Committee. See id. ¶ 85.
109 Trial Tr. at 313:14–314:14 (Denholm).
110 Id. at 312:3–15 (Denholm).
111 Denholm Dep. Tr. at 93:8–95:18; PTO ¶ 83.
112 Trial Tr. at 395:8–23 (Denholm).
24
she received as part of her director compensation. 113 She described this transaction
as “life-changing.” 114 Denholm testified that between 2017 and 2019, she received
approximately $3 million per year in her non-Tesla position. 115 Even assuming
Denholm valued her Tesla compensation at a fraction of its Black-Scholes value, her
Tesla compensation far exceeded the compensation she received from other sources.
iv. Gracias
Gracias joined the Board in 2007 and the Compensation Committee in 2009. 116
He founded and continues to manage Valor Equity Partners (“Valor”), a private-
equity firm with approximately $16 billion under management. 117 For years, Valor
has also been “deeply operationally engaged in” Tesla. 118 Valor actively assisted
management in trying to drive sales for and lower the cost of production of Tesla’s
Roadster model. 119
Gracias has amassed “dynastic or generational wealth” from investing in
Musk’s companies. 120 Gracias invested in PayPal in the 1990s, returning “roughly 3x
to 4x.” 121 Valor began investing in Tesla at Musk’s invitation in 2005. By 2007, Valor
113 Id. at 396:8–397:12 (Denholm).
114 Id. at 397:6–12 (Denholm).
115 Id. at 397:17–398:11 (Denholm); Denholm Dep. Tr. at 10:4–12.
116 PTO ¶¶ 98, 106. He is also on the Nominating and Governance Committee. Id. at
¶ 107.
117 Id. ¶ 100; Trial Tr. at 698:16–699:8 (Gracias).
118 Trial Tr. at 707:16–24 (Gracias).
119 Id. at 708:1–710:2 (Gracias).
120 Id. at 774:22–24 (Gracias).
121 Id. at 767:14–15 (Gracias).
25
had invested $15 million. 122 Valor ultimately distributed some of its Tesla shares to
its investors, including Gracias. 123 As of 2017, Gracias was the third-largest
individual investor in Tesla, with virtually all of his Tesla shares held in trust for his
children. 124 As of 2021, that Tesla stock was worth approximately $1 billion. 125 Valor
and Gracias have invested hundreds of millions of dollars in SpaceX, SolarCity, The
Boring Company, and Neuralink, all of which significantly increased in value. 126
All told, Gracias and his fund have netted billions of dollars by investing in
Musk’s companies, many of which were made only with Musk’s personal invitation. 127
Gracias has touted endorsements from Musk in marketing his own fund. 128
Musk and Kimbal have invested in Gracias’s ventures. At Gracias’s request,
Musk invested $2 million in Valor no later than 2003 and an additional $2 million in
122 Id. at 705:18–707:24, 767:17–768:21 (Gracias); Gracias Dep. Tr. at 38:4–14. At
one point during his trial testimony, Gracias stated that this investment was $50
million. Trial Tr. at 707:16–24 (Gracias). Given the phonological similarity between
“15” and “50” and the more detailed testimony supporting a $15 million total
investment, it is likely that Gracias’s statement that the investment was $50 million
was in error.
123 Trial Tr. at 711:17–712:9 (Gracias).
124 Id. at 712:15–713:7 (Gracias); PTO ¶ 109.
125 Trial Tr. at 769:6–9 (Gracias); PTO ¶ 110.
126 Valor invested between $400 million and $500 million in SpaceX, a stake valued
between $2 billion and $3 billion as of May 2021. Trial Tr. at 769:14–770:19, 771:20–
772:4 (Gracias); PTO ¶ 115. Valor invested approximately $24 million in SolarCity
in 2012, yielding proceeds of approximately $136 million. Trial Tr. at 772:6–11
(Gracias); PTO ¶ 111. Valor invested between approximately $15 million and $20
million in The Boring Company as of May 2021. Trial Tr. at 772:12–16 (Gracias);
PTO ¶ 119. Valor invested between approximately $15 and $20 million in Neuralink
as of May 2021. Trial Tr. at 773:22–774:7 (Gracias); PTO ¶ 118.
127 Trial Tr. at 711:17–712:9, 767:17–774:24 (Gracias).
128 JX-1472 at 2.
26
2007. 129 Musk planned to invest in another Valor fund in 2013, but he ultimately did
not because Gracias was concerned about conflicting fiduciary duties. 130 Kimbal also
invested $1 million to $2 million in Valor, and Valor invested a total of between $15
million and $20 million in two of Kimbal’s ventures. 131 Gracias personally donated
up to $500,000 to Kimbal’s charity and served on its board. 132
Gracias and Musk are “close friends.” 133 Gracias once personally loaned $1
million to Musk and could not recall if he charged Musk interest. 134 They meet
outside of work as frequently as once a month. 135 They have spent the night at each
other’s homes. 136 They have vacationed together with their respective families,
including a trip to illusionist David Copperfield’s Bahamian island, a trip to Africa,
and a ski trip. 137 They have spent Christmas together. 138 They have a long-standing
tradition of spending Presidents’ Day weekend together with their families at
Gracias’s home in Jackson Hole. 139 Gracias attended Musk’s second wedding and was
129 Trial Tr. at 713:11–24, 775:7–22 (Gracias).
130 Id. at 714:1–21 (Gracias).
131 Trial Tr. at 776:5–17 (Gracias); PTO ¶¶ 103–04, 149.
132 Trial Tr. at 776:18–777:2 (Gracias); PTO ¶¶ 101–02.
133 Trial Tr. at 715:2–6 (Gracias).
134 Id. at 755:3–756:17 (Gracias).
135 Id. at 715:16–22 (Gracias).
136 Id. at 757:14–16 (Gracias).
137 Id. at 757:20–759:1 (Gracias); id. at 1080:13–21 (Kimbal).
138 Id. at 760:17–761:3 (Gracias).
139 Id. at 759:2–17 (Gracias).
27
a groomsman at Kimbal’s wedding in 2018. 140 Gracias has attended birthday parties
for both Musk brothers and their children. 141 Gracias is friends with two of Musk’s
cousins and has taken numerous vacations with them. 142 Gracias is also friendly
with Musk’s mother and sister. 143
b. The Other Directors
i. Murdoch
Murdoch’s professional background is in media and entertainment. 144 At the
time he joined the Tesla Board, he was the CEO of 21st Century Fox. 145 Murdoch
met Musk in the late 1990s, but they lost touch until Murdoch purchased a Tesla
Roadster in 2006 or 2007. 146 The two became friends thereafter, meeting when they
happened to be in the same city. 147 Before he joined the Board, Murdoch, and Musk
took family vacations together to Israel, Mexico, and the Bahamas. 148 During one of
these trips, which Gracias and Kimbal also attended, 149 Musk asked Kimbal to help
him decide whether to add Murdoch to the Board. 150 After the trip, Gracias and Musk
140 Id. at 757:17–19, 761:10–20 (Gracias).
141 Id. at 759:18–760:10 (Gracias).
142 Id. at 760:11–16 (Gracias).
143 Id. at 762:15–17 (Gracias). Gracias left the Board in October 2021. PTO ¶ 98.
144 Trial Tr. at 815:1–24 (Murdoch).
145 Id. at 816:4–8 (Murdoch).
146 Id. at 817:21–818:19 (Murdoch).
147 Id. at 819:2–16 (Murdoch).
148 Id. at 820:20–821:2, 847:5–849:15 (Murdoch).
149 Id. at 821:3–13 (Murdoch).
150 Id. at 1080:13–21 (Kimbal).
28
invited Murdoch to join the Board, and he agreed. 151 Murdoch and Kimbal are also
friendly, and Murdoch attended Kimbal’s wedding in 2018. 152
As of December 31, 2017, Murdoch owned 10,485 Tesla shares through a family
trust. 153 He bought these shares on the market before anyone approached him to
become a director. 154 Murdoch now runs a private-investment company, which
invested approximately $50 million in SpaceX in 2019 and 2020. 155 Murdoch also
personally invested approximately $20 million in SpaceX in 2019. 156
151 Id. at 821:21–822:21 (Murdoch). There are some minor conflicting details in the
story of Murdoch’s addition to the Board. Gracias testified that he was the first to
suggest adding Murdoch to the Board during a dinner with Murdoch in New York.
Id. at 780:23–781:1 (Gracias); Gracias Dep. Tr. at 109:25–110:11. Gracias further
testified that he did not speak to Musk about Murdoch joining the Board prior to this
dinner. Gracias Dep. Tr. at 109:25–110:11. It is not clear from Gracias’s testimony
whether this dinner with Murdoch occurred before or after the Bahamas trip.
Murdoch testified that Gracias suggested him joining the Board during a lunch (not
a dinner) in New York that occurred after the Bahamas trip. Trial Tr. at 821:21–
822:17 (Murdoch). Murdoch’s lunch and Gracias’s dinner are presumably the same
event (they ate), which took place after the Bahamas trip. But Kimbal testified that
Musk asked him to help decide whether Murdoch should join the Board while they
were on the Bahamas trip, before the New York meal. Id. at 1080:13–21 (Kimbal).
This suggests two possibilities: one of these three witnesses has confused or
misunderstood a detail, or Musk and Gracias independently decided to consider
adding Murdoch as a Board member (Musk did not testify about this). In either case,
it appears more likely than not that Musk supported Murdoch being added to the
Board early in the process.
152 Id. at 850:19–24 (Murdoch).
153 PTO ¶ 123.
154 Trial Tr. at 827:12–828:17 (Murdoch).
155 PTO ¶¶ 124–25.
156 Id. ¶ 126.
29
Murdoch received total compensation of approximately $35,000 in cash for his
service as a Tesla director in 2017 and 2018. 157
ii. Johnson Rice
Johnson Rice joined the Board on Gracias’s recommendation. 158 She and
Gracias were friends and ran in the same social circle in Chicago. 159 Johnson Rice’s
sole employer before and during her time at Tesla was a family business, Johnson
Publishing Company, which published the magazines Ebony and Jet. 160 She has also
served on a number of other boards. 161 Johnson Rice declined to stand for re-election
in 2019. 162 Although she received Tesla options as compensation for her work as a
director, they expired without being exercised. 163
2. Musk Proposes Terms Of A Compensation Plan.
The first mention in the record of what would become the 2018 Grant is a text
from Ehrenpreis to Musk sent on April 8, 2017—one day after Tesla’s Compensation
Committee certified vesting of the 2012 Grant’s sixth tranche. 164 Ehrenpreis asked
157 JX-1210 at 20 (3/2/20 James Murdoch’s Responses and Objections to Interrogatory
Nos. 2, 3, 4, 8, and 11–39 from Plaintiff’s First Set of Interrogatories).
158 Gracias Dep. Tr. at 123:24–124:3.
159 Id. at 122:23–123:21.
160 Johnson Rice Dep. Tr. at 10:11–20.
161 Id. at 12:4–18.
162 Id. at 45:1–46:5.
163 Id. at 41:14–24.
164 JX-362 at 2; Trial Tr. at 99:3–101:7 (Ehrenpreis); JX-361 at 75.
30
Musk to discuss “a few comp related issues.” 165 They spoke by phone on April 9. 166
Ehrenpreis testified that he had reached out to Musk to see if he was “ready to
recommit” 167 and “to figure out . . . was his head in a place that he wanted to recommit
over a longer duration to Tesla[?]” 168
Musk put forward terms of a new compensation plan during the April 9 call. 169
He envisioned a purely performance-based compensation plan, structured like the
2012 Grant but with more challenging market capitalization milestones 170 and
proposed 15 milestones of $50 billion in market capitalization—a total possible award
of 15% of Tesla’s outstanding shares. 171
To put Musk’s proposal in perspective, each market capitalization milestone
increase of $50 billion required Tesla to grow in size roughly equal to the market
capitalizations of each of Tesla, Ford, and GM as of early 2018. 172 So, Tesla would
165 JX-362 at 2.
166 See Trial Tr. at 98:11–105:24 (Ehrenpreis); see also JX-362 at 2 (4/8/17 text from
Ehrenpreis to Musk asking to “pls chat for a few minutes this weekend re a few comp
related issues”); JX-1598 (1/7/18 email from Maron containing draft proxy language
describing April 9, 2017 call).
167 Trial Tr. at 24:5–19 (Ehrenpreis).
168 Id.
169 See JX-1700 at 12 (1/12/18 Draft Schedule 14A Proxy).
170 Id.
171 Id.; see also Trial Tr. at 269:17–270:8 (Maron) (testifying that “at the beginning of
the process . . . the conception of the plan at a high level was to have $50 billion
market cap increments”).
172 JX-1700 at 12; JX-1510 at 27 (cumulative market capitalization of Tesla was
approximately $56 billion as of January 10, 2018); JX-757 at 2 (12/31/17 Ford Form
10-K) (aggregate market value of common stock was approximately $42.8 billion as
of December 31, 2017); JX-1104 at 1 (2/6/19 GM Form 10-K) (aggregate market value
31
have to grow an amount in market capitalization equal to that of the most significant
domestic car manufacturers for Musk to earn a single tranche of compensation. 173
Musk viewed this proposal as “really crazy.” 174
Musk’s initial proposal is reflected in a draft of the proxy statement issued in
connection with the 2018 Grant. The draft states:
On April 9, 2017, . . . Ira Ehrenpreis, the Chairman of the
Compensation Committee, and Mr. Musk discussed the
possibility of a new performance award that would have an
incentive structure similar to the 2012 Performance Award
but with even more challenging performance hurdles.
Mr. Musk expressed interest in such an arrangement and
suggested a compensation structure that would incentivize
management to grow Tesla into one of the most valuable
companies in the world.
During this meeting, Mr. Musk suggesting performance
milestones that would trigger stock option awards of 1 % of
the Company’s current total outstanding shares based on
incremental $50 billion increases in market capitalization,
such that if Tesla grew by $750 billion, a maximum
of voting stock was approximately $55.5 billion as of June 30, 2018); see Trial Tr. at
1268:2–20 (Murphy) (“You know, with the 2012 plan everybody liked basically we
started off by saying we got to double the market cap for you to get anything. Well,
now the market cap had grown to 50 billion and it was up to 59 billion by the time
they actually approved the plan. But this idea, 50 billion, that’s a nice round number.
I think at the end of 2017, Ford was worth about 49 billion. I think that GM was
worth about 58 billion. So this is: Every time we’ll get another Ford or a GM. I think
that just kind of resonated.”); Trial Tr. at 231:11–16 (Ehrenpreis) (“Q. . . . So these
options, by the way, are worth roughly the value, the market cap of Ford; right? A.
That’s true.”); id. at 1397:1–5 (Buss) (“I mean, again, those market cap goals, you
know, were totally insane. I mean, you literally had to create a Ford, GM, or FedEx
every ten months. Every ten months. And maintain it, right? So, okay, wow, that’s
pretty nuts.”).
173 JX-1700 at 12; JX-1510 at 27; JX-757 at 2; JX-1104 at 1; see Trial Tr. at 1268:2–
20 (Murphy); id. at 231:11–16 (Ehrenpreis); id. at 1397:1–5 (Buss).
174 JX-398.
32
possible award would amount to 15% of the Company’s
current total outstanding shares.
Mr. Musk indicated that such an award structure would
align his incentives with those of stockholders and
incentivize him to continue leading the management of the
Company over the long-term.
Mr. Ehrenpreis indicated that the Compensation
Committee would consider Mr. Musk’s perspectives as part
of its analysis. 175
Language like the above appears in other drafts but not in the final proxy
statement. 176
The draft proxy statement is the most reliable (indeed, the only) evidence of
the substance of the April 9 discussion. Neither Musk nor Ehrenpreis took
contemporaneous notes or otherwise memorialized their April 9 discussion. By the
175 JX-1700 at 12.
176 See JX-1597 at 9 (1/8/17 Draft Schedule 14A Proxy); JX-1598 at 3 (1/7/18 draft
language for Schedule 14A Proxy); JX-1599 at 14 (1/10/18 Draft Schedule 14A Proxy);
see also JX-878 at 9–12 (2/8/18 Schedule 14A Proxy Statement) (background section
of the final proxy omitting any mention of the April 9 conversation). There were
minor changes in language between the proxy drafts. Compare, e.g., JX-1598 at 3
(“Mr. Musk indicated an interest in such a structure, and mentioned the possibility of
setting 15 milestones in which each would require a market capitalization increase
of $50 billion[.]” (emphasis added)), with, JX-1700 at 12 (“Mr. Musk expressed interest
in such an arrangement and suggested a compensation structure that would
incentivize management to grow Tesla into one of the most valuable companies in the
world. During this meeting, Mr. Musk suggesting [sic] performance milestones that
would trigger stock option awards of 1% of the Company’s current total outstanding
shares based on incremental $50 billion increases in market capitalization[.]”
(emphasis added)).
33
time of discovery and then trial in this action, Musk had only vague memories of the
discussion, and Ehrenpreis had no memory of it at all. 177
It is unclear who prepared the draft proxy statement, but Maron, Tesla’s
General Counsel, was responsible for it. Maron testified he spoke to Ehrenpreis
within hours of the April 9 call and reviewed the draft. 178
177 See Trial Tr. at 70:6–72:18, 79:13–20, 97:20–102:7 (Ehrenpreis); id. at 631:3–
632:6, 633:24–635:7, 694:6–695:9 (Musk). Ehrenpreis did not remember the
substance of their April 9, 2017 conversation prior to reviewing documents in
preparation for his deposition. Id. at 70:13–71:13 (Ehrenpreis). Despite his vague
recollection, Musk offered an alternative account of the April 9 discussion during his
deposition and at trial. When asked about the April 9 call, Musk testified that he
might have instead proposed a grant of “10 percent of the company, incrementally
taking into account dilution of [his] own shares.” Musk Dep. Tr. at 144:13–150:3; see
also Trial Tr. at 632:18–633:2 (Musk). Ultimately, when pressed, neither Musk nor
Ehrenpreis disputed the draft proxy statement’s account. Trial Tr. at 633:15–635:7
(Musk) (not disputing the relevant language in JX-1597); id. at 91:2–97:24
(Ehrenpreis) (not disputing “Mr. Musk asked for a 15 percent plan” based in part on
the proxy statement drafts). Musk stated in an interrogatory answer that he did not
“specifically recall the dates or substance” of any discussions of a new stock option
award before June 23, 2017. JX-1256 at 9–10 (8/3/2020 Musk’s Amended Responses
and Objections to Plaintiff’s First Set of Interrogatories Directed to All Defendants
and Nominal Defendant Tesla, Inc.). Musk reaffirmed his interrogatory answer at
trial. Trial Tr. at 631:3–632:6 (Musk). When offering his alternative account, he was
equivocal, stating that the proposal “might have happened[.]” Id. at 632:18–633:2
(Musk) (emphasis added). He also stated, “I think I proposed . . . 10 percent[.]” Musk
Dep. Tr. at 144:13–146:6 (emphasis added).
178 See Trial Tr. at 100:22–102:7 (Ehrenpreis); id. at 239:12–15 (Maron); Maron Dep.
Tr. at 127:13–128:12; JX-1700 at 2 (“Todd will review all of our comments on these
sections of the proxy and press release and give WSGR the final draft. . . . Todd/Phil[ip
Rothenberg] [w]ill work to provide an updated draft Background section”); Trial Tr.
at 239:9–15 (Maron) (stating that he heard about the possibility of a new
compensation plan for Musk from Ehrenpreis in April 2017); see also JX-369 at 2–3
(email thread between Maron and Ahuja dated April 9, 2017 discussing the new
compensation plan for Musk); Trial Tr. at 105:18–24 (Ehrenpreis) (stating that Maron
was cued into discussions of Musk’s new compensation plan on April 9 and 10).
34
Maron was totally beholden to Musk, lending credibility to the accuracy of the
draft proxy statement. But his relationship with Musk raises concerns as to other
aspects of the process during which Maron advised the Board and Compensation
Committee. Maron joined Tesla as Deputy General Counsel in September 2013, and
was promoted to General Counsel in September 2014, reporting directly to Musk. 179
Before joining Tesla, Maron was Musk’s divorce attorney. 180 Maron neither socialized
with Musk nor considered himself a friend of Musk when he worked at Tesla, but he
owed his career to and had genuine affection for Musk. 181 Both in his deposition and
at trial, Maron held back tears when asked about his departure from Tesla in January
2019, describing it as “the most difficult decision[]” he had made to date. 182
179 PTO ¶¶170–71; Maron Dep. Tr. at 23:21–24.
180 Maron Dep. Tr. at 19:23–20:8.
181 Id. at 20:9–18 (stating that he and Musk did not socialize and that he never met
Musk’s family); id. at 199:7–200:5 (Maron) (stating that, although he and Musk were
not “friends,” he “cared about [Musk] a tremendous amount . . . [he’s] always cared
about him and wanted him to have . . . success in life. . . . [he] just want him to be
happy as you would with anyone that you care about”).
182 Id. at 74:10–17 (becoming “emotional” about the decision to leave Tesla); id. at
200:9–15 (“Unfortunately I lost my cool earlier and cried because I love the company
so much, and I loved my teammates and my colleagues and the people on the
executive team.”); Trial Tr. at 275:10–24 (Maron) (confirming he “choked up” at his
deposition about his “incredible experience[]” at Tesla and the “very emotional
decision” to leave Tesla).
35
After speaking to Ehrenpreis on April 9, Maron enlisted other Tesla employees
to help him model Musk’s proposal. All told, 13 in-house Tesla executives worked on
the 2018 Grant. 183 The key executive in addition to Maron was Ahuja, Tesla’s CFO. 184
At the outset of his involvement, Ahuja recommended one substantive change
to the structure—pairing the market capitalization milestones with operational
milestones. 185 He recommended this change for accounting purposes. Maron relayed
the change to Ehrenpreis, who questioned whether operational milestones were
necessary. 186 Maron explained that “there’s an important account[ing] reason” for
having operational milestones. 187
183 Trial Tr. at 110:8–112:14 (Ehrenpreis).
184 Ahuja was Tesla’s CFO from August 2008 to November 2015 and from March 2017
to March 2019. PTO ¶¶ 180–81.
185 JX-369 at 3 (Ahuja explaining that “[i]f the award only has a market condition,
the SBC expense will start on the date of the grant,” but “[i]f the award has both a
market and performance condition, the expense is first recorded when probability of
achievement exceeds 70%[.]”).
186 JX-367 at 1 (Maron explaining to Ehrenpreis the need for operational milestones);
Trial Tr. at 105:5–24 (Ehrenpreis) (confirming that Maron contacted him in response
to Musk asking for market cap milestones and his request that Maron and Ahuja
address the issue); JX-418 at 2 (“[O]ne thing Ira wanted to pressure test is whether
we really do need the operational milestones[.]”).
187 JX-367 at 1. Despite this explanation, Ehrenpreis later advocated for removing
the operational milestones, directing the Tesla team to “pressure test” the feasibility
of that structure in mid-June 2017. Trial Tr. at 112:15 –113:17 (Ehrenpreis); id. at
285:18–286:20 (Maron). He was again informed that operational milestones were
necessary for accounting purposes. JX-423 at 1 (Maron emailing Ehrenpreis that he
“wanted to pressure test . . . whether we really do need operational milestones in
addition to the market cap milestones. If we could only do the latter, that’s what he
would prefer, but I remember you telling me that there were accounting reasons for
why we needed both.”).
36
Maron’s team began analyzing Musk’s initial proposal on April 10, roping in
Tesla’s legal counsel at Wilson Sonsini Goodrich & Rosati (“Wilson Sonsini”) 188 and
lining up compensation consultants. Maron proposed retaining Compensia, Inc., a
compensation consulting firm that Tesla had engaged in connection with the 2009
and 2012 Grants, 189 but he also provided four other options for Ehrenpreis to
consider. 190
3. Musk States That He Is Committed To Tesla For Life.
Little progress was made on Musk’s new compensation plan through May
2017. During a May 3 earnings call, an analyst asked about Musk’s “view of staying
actively in place with Tesla longer into the future[.]” 191 Musk responded that he
should not be “CEO forever.” 192 He further indicated that he was going to reevaluate
his position after Tesla achieved volume production of the Model 3. 193
The plaintiff argues that Musk’s statement about not being “CEO forever” was
intended to pressure Tesla in negotiations over Musk’s compensation plan, but the
188 JX-371.
189 JX-368; PTO ¶¶ 153, 155–56.
190 JX-374 (proposing FW Cook, Pearl Meyer, Semler Brossy, and Radford as
alternative compensation consultants).
191 JX-390 at 20.
192 Id. at 20–21.
193 JX-185 at 12 (“I think I was -- yes, certainly be CEO for like, say, 4 or 5 years and
then it’s sort of TBD after that. Yes, but that’s the commitment I made to people at
Tesla and also to investors is that I’m going to make sure that we execute through
the high-volume, affordable car at a minimum and then we’ll evaluate it at that
point.”); Trial Tr. at 574:14–18 (Musk) (testifying that the “high-volume, affordable
car” Musk was referring to in JX-185 was the Model 3).
37
record does not support that conclusion. Musk clarified his statement later in the
May 3 earnings call, saying:
Well, maybe I wasn’t clear. I intend to be actively involved
with Tesla for the rest of my life. Hopefully, stopping before
I get too old—or too crazy, I don’t know. But essentially for
as long as I can positively contribute to Tesla, I intend to
be—to have a significant involvement with Tesla. 194
In other words, Musk had every intention of remaining “significant[ly]
involved” in some leadership role at Tesla, even though he did not envision himself
being “CEO forever.” Musk repeated this assertion at trial, stating unequivocally
that he would have remained at Tesla even if stockholders had rejected a new
compensation plan because he was “heavily invested in Tesla, both financially and
emotionally, and viewed Tesla as part of his family.” 195 Trial witnesses similarly
testified that they never heard Musk say he had any plans to quit Tesla. 196 And even
though Musk did not intend to stay CEO forever, he had no immediate plans to resign
194 JX-390 at 20.
195 Trial Tr. at 643:24–644:15 (Musk); see also JX-912 at 75 (2/26/18 draft CEO
performance award investor presentation) (“Elon is heavily invested in Tesla, both
financially and emotionally, and views Tesla as part of his family.”).
196 Trial Tr. at 278:3–9 (Maron) (“Q. Now, during the 2017, 2018 time frame, Elon
never really told you that he was planning to leave Tesla, right? A. He never said
that to me. Q. Never expressed to you that he was no longer interested in an
executive role at Tesla? A. No, never said that.”); id. at 526:14–19 (Ahuja) (“Q. And
thinking about Elon, during your time as CFO, Elon never told you that he was
planning to stop his involvement with Tesla? A. He did not, though I would not
expect any CEO to tell that to the CFO or the management team.”); id. at 784:16–18
(Gracias) (“Q. And you never heard Elon Musk say he was going to quit Tesla;
correct? A. I did not.”); id. at 785:8–11 (Gracias) (“Q. And Elon Musk certainly never
said he would quit Tesla if he felt he was inadequately compensated; correct? A.
Correct.”).
38
from that position. Corroborating that fact is lack of any succession plans during the
relevant period. That is, before 2021, neither Musk nor Tesla had identified a
potential successor for the role of Tesla CEO. 197
4. The First (And Forgettable) Board Discussion
By June 5, 2017, Tesla had met all ten CEO market capitalization milestones
for the 2012 Grant and had only three tranches of operational milestones left to
achieve. 198 The Board first discussed the prospect of a new compensation plan for
Musk during a June 6, 2017 Board meeting. Musk chaired the meeting. 199
The Board’s conversation during the June 6 meeting concerning Musk’s
compensation was brief and, apparently, forgettable. During that meeting,
Ehrenpreis updated the Board on the near fulfillment of the 2012 Grant milestones
and stated that “plans were underway to design the next compensation program” for
Musk. 200 The minutes of that meeting are three pages long, and the discussion of a
new compensation plan was limited to a sentence. 201 At least one director who served
on the Compensation Committee, Denholm, did not recall the June 6 Board
197 Id. at 1421:9–13 (Buss) (“Q. Shifting gears, during your board tenure, the Tesla
board had no formal documented succession plan to replace Mr. Musk; correct? A.
Formally documented, no. We had various discussions. But correct, nothing
documented.”); id. at 857:9–858:10 (Murdoch) (confirming Musk had not identified a
successor until the months after his 2021 deposition).
198 JX-404.
199 PTO ¶ 211; JX-407 at 1 (6/6/17 Board meeting minutes).
200 JX-407 at 2.
201 Id.
39
discussion at all. 202 She testified at trial that any discussion of a new compensation
plan during the June 6 Board meeting must not have been substantive. 203
5. Musk Accelerates The Process.
On June 18, 2017, Maron emailed the Compensation Committee stating: “We
would like to . . . discuss Elon’s next stock grant.” 204 This sort of outreach from Maron
was common during the process. Although he was counsel to Tesla, he would reach
out and prompt action by the Compensation Committee to benefit Musk (the “we” in
the prior quote).
A few days prior, on June 15, 2017, Maron’s team had prepared an aggressive
timeline for approving a compensation plan. The timeline scheduled the
Compensation Committee and Board to approve the plan by July 17 or by July 24 at
the latest. 205 The initial June 15 plan contemplated only two Compensation
Committee meetings prior to final approval and allotted the committee just over a
month to do its job. 206 A later June 26 version of the timeline was even more rushed,
proposing only one Compensation Committee meeting (with an additional meeting if
202 Denholm Dep. Tr. at 214:14–19 (“Q. Just so we’re clear, focus on June 18th, the
Todd Maron email, was that the first time you heard or learned about a potential new
compensation plan for Mr. Musk? A. Yes. I believe so, yes.”).
203 Trial Tr. at 357:19–359:14 (Denholm) (stating that the first substantive
discussions regarding the 2018 Plan took place on June 23, 2017).
204 JX-420 at 1.
205 JX-423 (6/19/17 email from Matt Tolland to Maron re “Re: Privileged - Comp
Comm Process”).
206 Id.
40
necessary) and giving the committee less than three weeks to complete its task. 207
That timeline envisioned that on July 7, the Compensation Committee would “[g]ain
agreement on proposed approach, award size and metrics/goals” and “[g]ain
preliminary approval of grant agreement[.]” 208
The timeline reflected a reckless approach to a fiduciary process, given that
the Compensation Committee had not yet discussed any substantive terms nor met
concerning the Grant. Despite the break-neck speed contemplated by the timeline,
Maron reported to counsel on June 18 that Ehrenpreis was “aligned on the plan and
timing.” 209
After Musk asked to discuss his compensation plan, the Maron-led team was
supercharged. They conducted initial calls with five potential compensation
consultants and selected three for Maron and Ehrenpreis to interview. 210 During the
initial calls, the consultants were informed of Musk’s initial proposal and the
207 JX-456 at 2 (6/26/17 email from Phoung Phillips to Ira Ehrenpreis and Todd Maron
re: “Tesla | Executive Compensation Timeline”).
208 Id.
209 JX-423 at 1.
210 JX-424 at 1 (6/19/17 email from Phillips to Maron stating, “[w]e are just doing prep
calls with these other folks (so they are slightly prepared when speaking to Ira). Also,
Yun and I are hoping to take 5 down to 3 teams so we don’t waste Ira’s time. Do you
want to be included in the preliminary meetings - we realized it takes about 30
minutes to explain what we want and we want to see if they even understand what
we are asking before we present them in front of you and Ira.”); see also JX-432 at 1
(noting the three calls with the compensation consultants).
41
aggressive timeline leading to a late-July approval. 211 Maron and Ehrenpreis
updated Musk about the process on June 20, 2017. 212
6. The First Compensation Committee Discussion
The Compensation Committee discussed Musk’s compensation plan for the
first time on June 23, 2017. 213 The committee formally resolved to retain Wilson
Sonsini and Compensia as legal advisor and compensation consultant,
respectively. 214 A few days later, Tesla retained Jon Burg at Aon Hewitt Radford
(“Radford”) to value the 2018 Grant in light of the market-based milestones and to
advise on the accounting treatment of the 2018 Grant in light of the performance-
based milestones. 215
During the meeting, Ehrenpreis stated that the Compensation Committee’s
aim was to create a new compensation plan similar to the 2012 Grant. The committee
211 See, e.g., JX-434 at 4 (Brown’s handwritten notes of June 19 and 20 calls stating
under the heading “Goals . . . Timing . . . 2-3 wks”); Trial Tr. at 1434:7–16 (Brown)
(noting what was to be discussed in the calls).
212 JX-428 (6/20/17 email from Maron to Ahuja stating, “I’m going to be meeting with
Elon in part to update him on this plan, and that meeting is currently scheduled for
4pm[.]”); JX-425 at 2 (6/20/17 Ehrenpreis text message asking, “[c]an we chat about
board and comp. . . . Calling in 5 to 10.”); Maron Dep. Tr. at 183:19–184:20 (confirming
he kept Musk “abreast at a high level” of the process); Ehrenpreis Dep. Tr. at 155:3–
156:18 (confirming “check-ins” with Musk).
213 The topic did not come up during their meeting held on June 5, although that was
the day before the Board was informed that “plans are underway.” JX-405 (6/5/17
Compensation Committee meeting minutes) (no mention of Musk’s package); JX-407
6/6/17 Board meeting minutes) (first mention of plans for the 2018 Grant); see also
JX-420 (6/18/17 email from Maron to Compensation Committee proposing June 23
meeting to discuss Musk compensation).
214 See JX-439 at 2; PTO ¶ 214.
215 PTO ¶151; JX-455 (6/26/17 Radford engagement authorization form).
42
then set out the goals for the compensation plan in broad strokes. The minutes of the
meeting describe that discussion as follows:
The Committee discussed how Mr. Musk had been and
would likely remain a key drive of the Company success
and its prospects for growth, and that, accordingly, it would
be in Tesla’s interest, and in the interest of its stockholders,
to structure a compensation package that would keep Mr.
Musk as the Company’s fully engaged CEO. The
Committee also discussed the fact that unlike most other
Chief Executive Officers Mr. Musk manages multiple
successful large companies. The Committee discussed the
importance of keeping Mr. Musk focused and deeply
involved in the Company’s business, and the corresponding
need to formulate a compensation package that would best
ensure that Mr. Musk focuses his innovation, strategy and
leadership on the Company and its mission. 216
The minutes do not reflect any discussion by the committee concerning the
effect of Musk’s pre-existing 21.9% equity stake on these goals.
The committee was not presented with any proposed terms for a compensation
plan, and it did not consider any. This was the case even though, behind the scenes,
Ehrenpreis and Musk had discussed Musk’s initial proposal, which Musk’s team had
already modeled. 217
216 JX-439 at 1.
217 Specifically, on June 23, Tesla’s Deputy General Counsel Phil Rothenberg sent an
Excel spreadsheet titled “Elon Grant 2017” to Kenneth Moore, another Tesla
employee. JX-445 at 3–4. The spreadsheet models a 15-tranche structure with
operational milestones. The model also includes a “Performance Milestone” column
with each row marked “tbd.” There are some quirks with the terms reflected in the
June 23 spreadsheet, which make it clear that the spreadsheet was an early model
that needed to be refined, but to mention them briefly: Each tranche triggers as
Tesla’s stock price rises from $300 to $4,800 at $300 increments per tranche over 15
tranches, each of which gives Musk the right to purchase 1.6 million shares at $300
per share. The grant value of each tranche is calculated by multiplying 1.6 million
43
Although the committee had no idea what the terms of the plan might be, they
were told to be prepared to approve it in July. 218 Brown thought the timeline was
unwise. 219 Brown called Ehrenpreis to ask for more time to work on the matter, 220
but Ehrenpreis responded that “this is the timeline we are working with.” 221 A
member of Maron’s team would later repeat that message, telling both Brown and
Burg that “we are running up against a short deadline and we have to make sure this
keep [sic] moving.” 222 The message was clear—move at full tilt. Other than Brown,
there is no evidence that anyone questioned the timeline.
by the differential between the market price of Tesla stock and the $300 exercise
price. The result is $480 million for tranche one (at a market price of $600 per share),
$980 million for tranche two (at a market price of $900 per share), and so on. Adding
up all 15 tranches this way yields $57.6 billion. The $57.6 billion figure, however, is
not the total possible award that Musk could reach under this proposal. Triggering
all 15 tranches would result in a total grant value of $108 billion.
218 JX-1592 at 9 (6/23/17 email from Chang to Ehrenpreis) (listing approval date in
July); JX-437 at 7 (same). Trial Tr. at 130:7–13 (Ehrenpreis) (“Q. It’s also true,
though, isn’t it, that at the June 23rd compensation committee meeting, the
committee wasn’t shown any of the specific metrics that had been working -- that the
group had been working on, like 1 percent tranches or $50 billion market caps? A.
No, that was -- no.”); see also JX-439 (7/23/17 Compensation Committee meeting
minutes making no mention of these features or the discussion with Musk); Trial Tr.
at 557:9–559:13 (Phillips) (affirming that the minutes are a fair summary of the
meeting and that they do not reflect discussion of the grant features or the discussion
with Musk, but disclaiming any recollection of the substance of the meeting); Trial
Tr. at 359:15–360:19 (Denholm) (stating that she had no recollection of whether
Ehrenpreis mentioned his conversation with Musk when Ehrenpreis and Denholm
first discussed the 2018 Grant).
219 Trial Tr. at 1487:21–23, 1488:3–21 (Brown).
220 Id.
221 Id. at 1487:21–1488:17 (Brown).
222 JX-472 at 1–2 (6/30/17 email from Phillips to Burg, Brown, and Chang); see also
JX-418 at 2 (Matt Tolland, a Tesla Employee, stating in an internal email to Maron
44
7. The First Working Group Meeting
After the June 23 Compensation Committee meeting, Ehrenpreis formed a
“Working Group.” The group consisted of Maron and at least two in-house attorneys
who reported to him (Phillip Chang and Phuong Phillips), Ahuja, Brown, Burg, and
attorneys from Wilson Sonsini. 223 Ehrenpreis and Gracias were in the Working
Group, but the Compensation Committee decided that the two members with less
extensive ties to Musk—Denholm and Buss—were “optional” attendees. 224
The Working Group first met on June 30. Phillips proposed the agenda, 225 and
Brown prepared a slide deck with a high-level overview of the suggested terms of
Musk’s new equity plan. 226 In relevant part, the presentation included: a few slides
summarizing the 2012 Grant; 227 a slide titled “Preliminary Concept,” reflecting the
15-tranche combined market and operational goals structure; 228 and three slides
titled “Key Program Terms: Alternatives and Considerations,” which identified terms
of the compensation plan under the title “Preliminary Alternatives” and
that the proposed timeline “may be a bit accelerated, and may require pushing the
Comp Consultant to keep up”).
223 JX-475 (6/30/17 email invite to Working Group members); Trial Tr. at 33:4–13
(Ehrenpreis); Burg Dep. Tr. at 141:3–142:7, 174:14–177:1, 179:17–181:7 (Burg
testifying that he attended at the Working Group meetings after he was retained).
224 JX-474 (6/30/17 email from Chang to Denholm and Buss).
225 JX-473.
226 JX-475.
227 Id. at 3, 10.
228 Id. at 4.
45
considerations relevant to each term under the title “Considerations/Decision
Points.” 229
The presentation identified the following question for discussion: “Will both
operational and company valuation goals be used?” 230 By framing the structure as a
question, the presentation suggests that it was an open issue. Brown’s notes on a
June 26 draft version of this presentation, however, reflect that the issue had in fact
been resolved. 231 He wrote that: “there will be 15 goals of each type[,]” referring to
both market capitalization and operational goals, and “the market cap goals are
increments of $50B, for a total of $750B of incremental market cap growth for all 15
tranches (yes, there [sic] numbers are what they are thinking!)[.]” 232 In part,
therefore, the presentation was a vehicle for getting the Compensation Committee
members up to speed on the work done behind the scenes prior to that time.
After the June 30 meeting, the Working Group stood poised to move forward.
Chang emailed members of the group about developing operational milestones,
including a structure in which each market capitalization milestone would also
require an increase of $15 billion in GAAP revenue. 233 Chang stated that Tesla
229 Id. at 5–7.
230 JX-464 at 7.
An earlier June 26 draft version of this presentation included a note
from Brown: “Their starting place is 15 goals of each type.” JX-1703 at 5.
231 JX-1703.
232 Id. at 6.
233 JX-480.
46
should “expect to achieve a milestone roughly once every 12 to 15 months over the
next 3 years.” 234
8. Musk Decelerates The Process.
The Working Group met again on July 6, the day before the next Compensation
Committee meeting. After this meeting, Maron informed Chang, Ahuja, and others
that “we’re now going on a slower track with the CEO grant. We’re now looking to
issue it in August or September instead of within the next couple of weeks.” 235
Maron professed ignorance as to why the timeline decelerated. 236 Chang and
Phillips too lacked any recollection. 237 Ehrenpreis testified that “it was way too
complex to do under what was originally described as a preliminary timeline” but did
not recall additional details. 238 Brown testified that he received pushback when he
asked to extend the timeline, so he was not the impetus for the delay. 239 Maron would
not have made the determination to extend the timeline to August or September
unilaterally. The reality is that Maron answered to and spoke for Musk in this
234 Id.
235 JX-503 at 1.
236 Maron Dep. Tr. at 190:4–192:22.
237 Chang Dep. Tr. at 373:23–375:13; Phillips Dep. Tr. at 237:23–239:7; see also JX-
502 at 1 (7/6/17 email from Chang to Tesla employees saying: “I haven’t gotten the
full details as to why the postponement[.]”).
238 Trial Tr. at 123:21–124:10 (Ehrenpreis).
239 Id. at 1488:3–21 (Brown).
47
context. It was Musk who either asked to slow things down or stopped pushing to get
them done so quickly. 240
Phillips circulated “the proposed new timeline for Elon’s equity grant” to the
Working Group on the evening of July 6. 241 The initial timeline contemplated
preliminary approval by the Compensation Committee on July 7 and final approval
by the committee and Board approval by July 24. The revised timeline pushed final
approval by the committee and Board out to September 8 and September 19,
respectively. 242
9. The First Compensation Committee Discussion Of The
Substantive Terms
The July 7 Compensation Committee went forward as scheduled, but the
agenda was revised given the new timeline. The revised agenda included “a short
presentation re the CEO grant” from Brown. 243 This was the first meeting where the
committee would be presented with terms of a compensation plan.
In addition to the $50 billion market capitalization milestones that Musk had
proposed, Brown’s presentation covered alternatives—a flat $25 billion increase or
graduated milestones beginning at $10 billion and increasing to $50 billion. 244 These
240 Musk denied aspects of this finding. See Musk Dep. Tr. at 172:19–174:1 (denying
that he was “pushing for” the grant to “happen quickly” in early July 2017, and
stating that he was “generally erring on the side of . . . [going] slowly[,]” and did not
“recall the exact reason” why the process slowed down in early July). But his
recollection of relevant events was generally spotty.
241 JX-495.
242 JX-423 at 2–3; JX-456 at 2; JX-495 at 6–7.
243 JX-503 at 1.
244 JX-510 at 1, 12.
48
different market capitalization approaches corresponded to different award sizes,
ranging from 7.5% of total outstanding shares to Musk’s proposed 15%. 245
Although the presentation identified alternatives to Musk’s proposal, the
presentation included a valuation only for Musk’s proposal. 246 The presentation was
therefore biased toward Musk’s proposal, although this was the first meeting at
which the committee had considered any terms.
In addition to the market capitalization and operational milestones, the
presentation identified other potential grant features, including the following:
• A “Clawback Provision.” 247 Around April 2015, the Board adopted new
Corporate Governance Guidelines (the “Guidelines”) providing that
Tesla’s “executive officers [are] subject to a clawback policy relating to
the repayment of certain incentives if there is a restatement of our
financial statements.’” 248 The presentation contained the following
question: “Is the current clawback provision sufficient protection for the
Company?” 249 There is no evidence that the committee discussed this
question or ever demanded a more protective Clawback Provision. The
final version of the Grant included a Clawback Provision based on the
Guidelines. 250
245 Id. at 13.
246 Id. at 24.
247 JX-475 at 7. The Clawback Provision was also discussed at the June 30 Working
Group meeting. JX-464 at 1, 8 (6/27/17 email from Brown to Ehrenpreis attaching
draft slides with Clawback Provision questions for Tesla Working Group meeting on
June 30, 2017).
248 PTO ¶ 252.
249 JX-464 at 8.
250 JX-878 at 64–65 (appendix to the proxy statement attaching performance stock
option agreement) (stating that the Clawback Provision was consistent with Tesla’s
internal guidelines).
49
• An “M&A Adjustment,” which is a provision that accounts for the impact
of financing or acquisitions on the market capitalization milestones
(“M&A Adjustment”). 251 These provisions are standard. 252
• A “Hold Period,” which was a period post-exercise during which Musk
would be prohibited from selling his stock. The presentation noted that
“post-exercise hold periods decrease the grant/accounting value” of the
stock as follows: “2 year = -15%; 3 years = -18%; and 5 years = -22%.” 253
Benchmarking analyses were on the advisors’ minds. Prior to the first
Working Group meeting, Phuong suggested an agenda item addressing “[b]enchmark
companies – risks associated with such grant.” 254 And Brown’s presentation for the
July 7 Compensation Committee meeting contained an appendix listing the “Largest
CEO Pay Packages in 2016”; summaries of other executive compensation plans at
SolarCity, Nike, Avago Technologies, and Apple; Radford’s $3.1 billion valuation of a
grant featuring $50 billion market capitalization milestones and awarding 15% of
total outstanding shares; and Radford’s additional preliminary models based on
different market capitalization approaches. 255 But the appendix data does not
constitute a traditional benchmarking study, 256 and it is unclear whether the
251 JX-464 at 7 (“If market cap/enterprise value used, how to account for the impact
of financing or acquisition activities, where market cap increases may not translate
to stock price increases? Will the use of enterprise value encourage debt financings?”).
252 Trial Tr. at 1010:22–24 (Dunn) (testifying that the M&A adjustment provision was
both “smart” and “pretty standard[]” for the Board to include).
253 JX-510 at 10.
254 JX-473.
255 JX-510 at 18, 19–22, 24–29.
256 Trial Tr. at 1475:20–24 (Brown) (describing traditional benchmarking).
50
committee discussed this information or the “risks associated with such grant” in any
event.
10. Stockholder Outreach
During the July 7 meeting, the Compensation Committee tasked Ehrenpreis
and Maron with contacting Tesla’s largest institutional stockholders to discuss
Musk’s new compensation plan. 257 Maron’s team worked with outside counsel to
prepare talking points to use during the calls. 258 They ultimately spoke to 15
stockholders between July 7, 2017, and August 1, 2017. 259 Maron’s subordinates
joined these calls and took notes. 260
As scripted, Ehrenpreis was to: introduce himself and Maron and identify his
objectives as Compensation Committee chair (to “keep executives engaged and
performing their best”); sing Musk’s praises (“I think we can all agree that he’s an
extraordinary leader and continues to accomplish incredible things for Tesla and its
stockholders”); remind the stockholders of the “[i]ncredible success of the 2012
Grant”; and explain that they are considering a new compensation structure for Musk
257 Id. at 252:23–254:1 (Maron); JX-509 at 2 (7/7/17 Compensation Committee
meeting minutes) (“Ehrenpreis and Maron then reviewed upcoming plans to discuss
CEO compensation generally with the Company’s largest shareholders, and solicit
their feedback and input for any new program.”).
258 See, e.g., JX-517 (7/8/17 email with comments from outside counsel re: SH Talking
Points).
259 JX-878 at 11 (2/8/18 Schedule 14A Proxy Statement); Trial Tr. at 252:23–253:10
(Maron) (verifying accuracy of 2019 proxy).
260 See, e.g., JX-522 (7/11/17 Maron notes from call with Jennison Associates); JX-546
(7/21/17 Maron notes from call with Fidelity); JX-551 at 1(7/24/17 Maron notes from
call with Baillie Gifford).
51
and that “[o]bviously, the goals of the new program will be similar to the 2012
grant[.]” 261
In this litigation, the defendants report that the stockholders to whom
Ehrenpreis and Maron spoke “were pleased with the 2012 Plan’s results and
supported a similar approach for a new compensation plan,” 262 and that stockholders
also provided suggestions for the new compensation plan that the Board ultimately
adopted. 263 It is difficult to credit the defendants’ narrative for two reasons. First,
the script reads like a loaded questionnaire intended to solicit positive stockholder
feedback and not a method for gaining objective stockholder perspectives on a
potential new plan. There is nothing inherently wrong with the script; it simply
undermines the evidentiary weight of the resulting communications. Second, what
the stockholders said in response to these inquiries is hearsay and untested by the
adversarial process, including cross examination. 264
11. The Working Group Develops Operational Milestones.
The Working Group next met on July 17. 265 One of the objectives for the
meeting was to establish a metric for operational milestones. Brown prepared a
261 JX-517 at 5.
262 Defs.’ Post-Trial Opening Br. at 29.
263 Id. at 30.
264 See JX-522 at (notes on Jennison call); JX-546 at 1 (notes on Fidelity call); JX-551
at 1 (notes on Baillie Gifford call); JX-552 at 1 (notes on Baron call); JX-531 at 5 (slide
featuring comments from T. Rowe, PrimeCap, and Jennison); Trial Tr. at 38:9–39:10
(Ehrenpreis) (the plaintiff’s hearsay objection to JX-551 and the court’s overruling of
that objection for the limited purpose of what Ehrenpreis was told); id. at 40:3–10
(Ehrenpreis) (the defendants’ acknowledgement of same limited purpose for JX-546).
265 JX-527 at 3.
52
presentation for the meeting that listed the following potential operational metrics:
“EBITDA; operating income; free cash flow; gross margin; strategic/execution goals”
(such as introducing a new model or producing a certain number of units, as in the
2012 Grant); and “Return Metrics (ROA, ROIC, ROE),” with each option paired with
a handful of “advantages” and “disadvantages.” 266
Ahuja had developed the strategic milestones for the 2012 Grant, and he took
responsibility for developing the operational milestones for the 2018 Grant. 267 On
July 19, Burg sent Ahuja and other members of the Working Group an analysis of the
historical market capitalization-to-revenue ratio of large U.S. companies. 268 Ahuja
used this data to propose starting with a 6.5x revenue-to-market-capitalization-
milestone ratio, which could be used to determine the initial revenue milestones—
$7.5 billion additional revenue for each $50 billion in market capitalization. The
266 Id. at 6; JX-530 at 6.
Of these options, Ahuja and Maron preliminarily expressed
in advance of the meeting that they favored revenue. JX-526 at 1–3 (7/10/17 emails
between Ahuja, Maron, and Chang re: Operational Metrics). Consistent with this
preference, the presentation makes a case for revenue, describing it as “the most
objective financial metric” and noting that the only listed downsides could be
mitigated with other, already-discussed plan features. JX-530 at 5 (“Disadvantages
. . . [1.] Requires adjustments for acquisition activities (e.g., goal increases for
acquired companies)[;] [2.] Ignores profitability and may incentivize price
cutting/lower margins; however, this concern mitigated if paired with long-term
market cap goals[.]”). All of the other metrics are accompanied by multiple
downsides, and none of the downsides for the non-revenue metrics included
explanations of how those downsides could be mitigated or obviated by other plan
features. Id. at 5–6.
267 Trial Tr. at 451:3–5 (Ahuja) (“My role was to provide information to the Board and
Compensation Committee about potential operations milestones that could be
used.”); see generally JX-622 (collection of Ahuja’s emails concerning milestone
development).
268 JX-538.
53
revenue milestones then declined to 4x for the final tranches at increments of $12.5
billion for each $50 billion market capitalization increment. 269
On July 23, Ahuja suggested four EBITDA milestones in addition to the 15
revenue-based milestones: $4 billion, $8 billion, $12 billion, and $16 billion. 270 Ahuja
projected that Tesla “should be able to get to $12B EBITDA in the next 4–5 years
depending on volumes . . . and margin assumptions[.]” 271
The agenda for the July 17 Working Group Meeting included discussion of an
M&A Adjustment and a Hold Period. 272 Brown prepared a detailed slide on the M&A
Adjustment, but there are no contemporaneous communications reflecting discussion
of the adjustment beyond that slide. 273
As to the Hold Period, the presentation noted that the Guidelines required a
six-month post-vesting Hold Period. 274 The next day, Phillips emailed Burg and
Brown a question from Ehrenpreis about “creative options” they could employ to
“solve for getting a bigger discount” on the publicly reported grant date fair value,275
269 JX-622 at 3 (7/19/17 email from Ahuja to Compensia, Radford, and Tesla in-house
attorneys).
270 JX-549.
271 Id.In this litigation, Ahuja testified that by the end of 2017 it became clear that
these assumptions were no longer reasonable. Ahuja Dep. Tr. at 308:8–312:12. As
discussed infra, however, there is a lot of competing testimony on the reliability of
Tesla’s projections.
272 JX-530 at 3 (7/17/17 Working Group discussion document).
273 Id. at 10.
274 Id. at 8.
275 JX-535 at 1–2 (7/18/17 email from Phillips to Radford and Compensia asking them
to compute what the discount would be if “Elon had to hold all exercised shares for 5
years?”).
54
such as extending the Hold Period to five years (the “Five-Year Hold Period”). 276 Burg
provided holding periods ranging from one to ten years and types of options with
corresponding discounts. 277
After the July 17 meeting, the Working Group began planning for an August
1, 2017 Compensation Committee meeting. 278 The agenda for the meeting included
an update for the full Board (excluding Musk and Kimbal) on the structure under
discussion for the compensation plan and on stockholder feedback on the structure. 279
Maron sent an email to the full Board on July 27, summarizing the process to date
and asking everyone to attend upcoming Compensation Committee meetings. 280
12. Musk Hits The Brakes.
Late July 2017 proved a busy time for Tesla, which delivered the first Model 3
on July 29. This triggered the eighth milestone in Musk’s 2012 Grant. 281 It also
prompted Musk to, once again, reset the Compensation Committee’s timeline. In
Maron’s view, given the struggles with the Model 3 launch, Musk’s desired to extend
the timeline either because he was unsure whether to commit to Tesla (which Musk
denied) or simply did not want to focus on compensation during a busy time. 282
276 Id.
277 JX-544 at 1–2 (7/21/17 email from Burg to Compensia, Chang, Ahuja, and other
Tesla team members re: “Update to Slide Per Ira’s Request”).
278 JX-554 at 1.
279 Id.
280 JX-559 (7/27/17 email from Maron to Gracias, et al. re “CEO Comp planning”).
281JX-563 (7/30/17 email from Gracias to Maron re: “Tesla UWC - Milestone
Achievement”).
282 Maron Dep. Tr. at 197:1–199:6; Trial Tr. at 249:16–250:12 (Maron).
55
Whatever the reason, Musk hit the brakes on the process. On June 30, two
days before the planned Compensation Committee meeting, Musk sent Maron a brief
email asking to put the discussion of his compensation “on hold for a few weeks[.]” 283
Maron replied that he would “rather keep cranking on it . . . because there’s a fair
amount to it that we’ve been working on with the board and there’s lead time
involved.” 284 Musk agreed to let Maron proceed, stating that he “[j]ust want[ed] to
make sure Tesla interests come first.” 285 Musk reminded Maron that “[t]he added
comp is just so that I can put as much as possible towards minimizing existential risk
by putting the money towards Mars if I am successful in leading Tesla to be one of
the world’s most valuable companies. This is kinda crazy, but it is true.” 286
D. The Process Goes Off Course.
By August 2017, Musk remained hyper-focused on Model 3 production, which
was proving slow and painful. 287 As Musk described at trial, “[t]he sheer amount of
pain required to achieve that goal, there are no words to express.” 288 This aspect of
Musk’s testimony was totally credible.
283 JX-564 (7/30/17 email from E. Musk to T. Maron re “Re: My comp stuff”).
284 Id.
285 Id.
286 Id.
287 JX-615 at 4 (9/5/17 email from Musk describing “[t]he slow progress” as “extremely
alarming,” demanding production of 1,000 Model 3 vehicles in the final week of
September, stating “[c]ome hell or high water that 1000 unit number is going to
f***ing happen if I have to help build them myself. . . . I’m going to be draconian
because I have to be[,]” and warning that “Tesla’s life is at stake” (asterisks added)).
288 Trial Tr. at 673:13–17 (Musk).
56
Although Musk agreed to allow Maron to “keep cranking,” progress on Musk’s
compensation plan had slowed to a halt. 289 From August through September, there
was some discussion of Musk’s compensation plan but no action, and there were no
meaningful discussions of the 2018 Grant in October. 290 The highlights of this
interregnum are discussed in brief below.
The Compensation Committee held a telephonic meeting on August 1, and
Compensia made a presentation during that meeting that summarized the
committee’s progress to date. 291 The most notable aspect of this meeting concerned
the following “key question” that went undiscussed: “Is additional compensation for
the CEO required given his current ownership and its potential appreciation with
Company performance?” 292 Musk had made his initial proposal in April 2017, and
the original timeline had the process wrapping up by July 2017, but this was the first
time that this “key question” had been posed—did Musk require additional
289 See, e.g., JX-596 at 1 (8/12/17 email from Brown telling another Compensia
employee that there was “no need to spend time on [a presentation relating to the
2018 Grant] for now” and noting that “Elon and the Board are negotiating a little bit,
which may impact where they land on some of the key program points[,]” although
the record does not reflect any such negotiations at that time); JX-599 (8/17/17 email
from Phillips tacitly noting the pause by stating that “[w]e would like to proceed with
Elon’s grant. I am hoping we can get on a call tomorrow with this small group to
discuss next steps, proposed timeline and slides,” although it does not appear that
any call took place); JX-604 at 1 (8/27/17 email from Ahuja to Working Group
members stating “[i]t was decided to defer [] action by a few months”).
290 Materials for the October 5 Compensation Committee meeting, for instance, make
no mention of the 2018 Grant. See JX-650.
291 JX-566 at 10–15 (8/1/17 slide deck for Compensation Committee meeting, with a
slide titled: “For Reference: Preliminary Work to Date”).
292 Id. at 7–8.
57
compensation? The most curious thing about this question is that there is no evidence
that any director deliberated over it, and it did not appear in any other Board or
committee materials. 293
The next event of interest occurred on September 8, when Ehrenpreis and
Denholm spoke to Musk to discuss his compensation plan. 294 Once again, the most
notable aspect of this conversation concerns a question that went undiscussed. The
agenda for the September 8 call identified the following topic for discussion: “Should
some type of commitment be included as part of comp structure?” 295 Trial testimony
revealed that no one raised this issue with Musk. 296 Ehrenpreis recalled discussing
Musk’s dedication to Tesla generally. 297 And Maron’s summary of the call reflects
that the participants discussed the “opportunity costs” of Musk devoting time to
293 The presentation also: reflected Musk’s proposed 15-tranche structure;
described
the operational milestones as “TBD”; and included questions about a Clawback
Provision (“Should there be an expanded clawback provision, or is the current
provision from the Corporate Governance Guidelines adequate?”), an M&A
Adjustment (“How should corporate transactions and potential changes in control be
addressed?”), and a Hold Period (“What limitations should there be on the form of
exercise, and should extended post-exercise holding period(s) for earned shares be
established?”). Id. at 8.
294 PTO ¶ 223; JX-610. Although Maron was invited to the call, he did not attend and
did not have a substantive recollection of what was discussed. Maron Dep. Tr. 221:7–
223:18.
295 JX-612 at 2.
296 JX-617 at 2 (9/8/17 Compensation Committee meeting minutes indicating that a
call occurred but providing no substance); Trial Tr. at 140:4–141:1 (Ehrenpreis)
(testifying that he could not recall if Musk or Denholm had discussed with him
“anything about . . . Musk[] devoting his time and attention to Tesla” as opposed to
his other companies).
297 Ehrenpreis Dep Tr. at 309:11–311:6.
58
Tesla. 298 Although Musk didn’t “have a good recollection of [the September 8] call,” 299
he was confident that they did not discuss a time or attention commitment “vis-à-vis
[Musk’s] other interests.” 300 Musk said “that would be silly.” 301
The Board met on September 19, but the meeting was not terribly interesting.
Ehrenpreis reported on the committee’s progress 302 and the September 8
conversation with Musk. 303 Brown gave a presentation covering much of the same
ground as the August 1 presentation. Brown valued the 15% market capitalization
option at a $2–3 billion grant date fair value. 304 According to the meeting minutes,
“[t]he Board expressed its general support for the overall structure of” the Grant,
298 JX-629 at 2; see also Trial Tr. at 665:2–667:10 (Musk) (discussing opportunity
costs).
299 Musk Dep Tr. at 154:12–22.
300 Id. at 160:11–18.
301 Id.
302 PTO ¶ 225; JX-631 (9/19/17 special Board meeting minutes); JX-629 at 3 (9/18/17
email from Maron to the Board attaching a document stating, “[d]ecisions to be made
at this meeting: 1. With Ira’s assistance, have compensation committee determine
the following: a. Whether to maintain basic 2012 award structure (tranches tied to
paired operational and market cap goals) and determine approach to goals b.
Appropriate award size (e.g., number and size of tranches)”); JX-632 at 3 (9/19/17
email from Maron to the Board attaching a document stating, “[d]ecisions to be Made
-Whether to maintain basic 2012 award structure (tranches tied to paired operational
and market cap goals) - Appropriate award size (e.g., number and size of tranches)”).
303 JX-631 at 1 (9/19/17 special Board meeting minutes stating: “Mr. Ehrenpreis
provided an update on the activity regarding the CEO Compensation Program. Mr.
Ehrenpreis reviewed the continuing work by members of the Compensation
Committee, Company management and outside advisors, including Compensia,
Radford and Wilson Sonsini Goodrich & Rosati. The Compensation Committee had
developed key points and met with Mr. Musk to discuss various aspects of the CEO
Compensation Program. . . . Mr. Ehrenpreis and Ms. Denholm updated the Board
regarding their last meeting with Mr. Musk.”).
304 JX-632 at 7, 21.
59
meaning the 15-tranche structure. 305 The Board favored “a long-term stock option
grant . . . with performance-based vesting, primarily keyed to the market
capitalization of the Company[.]” 306 The Board noted that “Musk was driven by large
goals[,]” and “viewed the discussed targets as achievable given the potential of the
Company and believed that Mr. Musk would as well.” 307
Before this period of inactivity, the only milestones that had been discussed
were the $50 billion market capitalization milestones. Operational milestones
remained “TBD,” 308 but Ahuja gave some thought to them in August and September.
There was a Working Group meeting on August 3, 309 and after that time, discussions
focused on adjusted EBITDA. 310 It is unclear who made the decision to focus on that
metric.
On August 17, Ahuja asked one of his employees for “operational metrics [that]
will line up with 15 increments of $50B in market cap.” 311 Ahuja envisioned 15
adjusted EBITDA milestones “ranging from $2B to $25B” and requested comparisons
to historic EBITDA/market capitalization correlations for Apple, Amazon, and
305 JX-631 at 2.
306 Id.
307 Id.
308 JX-566 at 28.
309 JX-584 (8/3/17 email from Phillips to Maron with Working Group agenda).
310 JX-640 at 3–4 (8/17/17 email from Ahuja to a subordinate stating that “the
thinking now is to focus more on adjusted EBITDA . . . rather than revenue metrics”).
311 Id. at 3.
60
Google. 312 After pulling the data, members of Ahuja’s team responded that they
“didn’t see immediate parallels to where we are.” 313 Ahuja requested more
information on the data they gathered concerning “% Adjusted EBITDA/Revenue and
Market Cap to Adjusted EBITDA multiple.” 314
The day after the September 19 Board meeting, Ahuja reached out to his team
for help developing “10 Adjusted EBITDA based metrics that end at a revenue of
about $150B and market cap of about $800B using % and multiples which start high
and progressively become lower.” 315 He explained that “[t]he thinking is that we will
develop EBITDA based operational metrics rather than [r]evenue based.” 316 It is
unclear who dictated that “thinking” at the time. A Tesla employee responded to
Ahuja’s request on September 21, providing ten potential EBITDA milestones (going
from $2 billion to $20 billion in even increments of $2 billion, similar to Ahuja’s
range). 317 The data reflected adjusted EBITDA/revenue ratios of Tesla and its peers
(e.g., Apple (34%) and Google (42%)). 318 The employee found that Ahuja’s proposed
312 Id.
313 Id. at 2.
314 Id.
315 Id. at 1.
316 Id.
317 JX-641 at 1.
318 Id. at 4; JX-642; JX-643.
61
EBITDA milestones range would necessitate an EBITDA-to-market-capitalization
multiple well above that of Amazon, Apple, or Google. 319
E. The Process Restarts.
By the end of October, Tesla’s production difficulties seemed to be easing. A
“Quarterly Update Letter” signed by Musk and Ahuja for the Board’s audit committee
(the “Audit Committee”) at its October 31, 2017 meeting was generally optimistic. It
stated that the “production rate will soon enter the steep portion of the
manufacturing S-curve,” which would create “non-linear production growth” in the
following weeks. 320 With Tesla’s production stabilizing, Musk turned his attention
back to his compensation plan.
1. Musk Lowers His Ask.
In the early hours of November 9, Musk sent Maron an email stating that he
wanted to “move forward with [his compensation plan] now, but in a reduced manner
from before.” 321 Musk testified that by “reduced,” he meant something less than 15%
of total outstanding shares. 322 It is unclear why Musk decided to lower his ask. It is
possible that he was just trying to single-handedly calibrate the compensation
package to terms that were more reasonable. Later that morning, Musk told Maron
319JX-641 at 1; see also JX-642 (9/21/17 Spreadsheet of Milestones, Sheet Two,
Columns F, N).
320 JX-1540 at 84 (10/31/17 Audit Committee meeting materials).
321 JX-664.
322 Trial Tr. at 676:18–677:1 (Musk).
62
that he would “like to take board action as soon as possible if they feel comfortable
and then it would go to shareholders.” 323 Musk stated:
I think the amount should be reduced to a 10% increment
in my Tesla ownership if I can get us to a $550B valuation,
but that should be a fully diluted 10%, factoring in that it
dilutes me too. So if it hypothetical [sic] was awarded to
me now and I own (probably) ~20% fully diluted, then I
would have ~30%. Of course there will be future dilution
due to employee grants and equity raises, so probably this
is more like 25% or so in 10 years when it has some chance
of being fully awarded. 324
The implication of Musk’s proposal to use a 10% fully diluted figure at 1% per
tranche is that he now sought a ten-tranche structure.
Moments later, Musk sent Maron another email stating:
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. It should come across as
an ultra bullish view of the future, given that this comp
package is worth nothing if ‘all’ I do is almost double Tesla’s
market cap. 325
Ehrenpreis relayed Musk’s revised proposal to the Board at a special meeting
on November 16, 2017. 326 In advance of that meeting, Chang sent Ehrenpreis a list
of talking points, stating the “[n]umbers we are talking about are now lower than
before . . . 10 tranches to $550 billion; 1% per tranche[.]” 327
323 JX-664.
324 Id.
325 Id.
326 JX-669 (11/16/17 special Board meeting minutes).
327 JX-670 (11/15/17 email from Chang to Ehrenpreis in advance of a Board meeting
the following day).
63
2. Some Turbulence
Meanwhile, on November 13, Jurvetson began a leave of absence. 328 At the
time, Jurvetson had been a managing director of Draper Fisher Jurvetson (“DFJ”), a
venture capital firm with investments in Tesla and other Musk-related businesses. 329
Following a scandal, Jurvetson was removed from DFJ. This became a “PR problem”
for Tesla. 330 Jurvetson returned to the Board in April 2019 but left again in
September 2020. 331 On November 14, Musk emailed Maron again, asking to “pause
for a week or two” on his compensation plan as it would be “terrible timing.” 332 At
trial, Musk did not recall the nature of the problem. He is a smart person, though,
and it is possible that he thought it was better to avoid releasing controversial news
on the heels of controversial news. 333
328 PTO ¶ 133. Jurvetson had joined both the Tesla Board and the SpaceX board in
June 2009, and he joined the Audit Committee in January 2010. Id. ¶¶ 132, 134, 136.
329 Id. ¶¶ 130, 135 (6,546,420 shares of SpaceX collectively with affiliated funds); id.
¶¶ 138–39 (stating that DFJ was also SolarCity’s third-largest institutional
stockholder, owning 4,827,000 SolarCity shares (worth $98,229,450.00) as of its
acquisition by Tesla). Jurvetson has other personal and professional ties with Musk.
For instance, he personally beneficially owned 114,576 shares of Tesla common stock
as of December 31, 2017. Id. ¶ 135. Jurvetson is an investor in Musk’s Boring
Company and Kimbal’s The Kitchen Restaurant Group. See id. ¶¶ 140–41.
330 Gracias Dep. Tr. at 96:12–21, 98:3–16. The details of the incident do not appear
in the record.
331 PTO ¶¶ 132–33.
332 JX-668.
333Trial Tr. at 640:8–641:4 (Musk) (“I’d asked to just pause any discussions of
compensation given the crisis level at the company was too high to think about
anything else.”).
64
3. Musk Further “Negotiates Against Himself.”
Musk’s November 9 proposal had the unintended consequence of raising
Musk’s demand. According to Chang, Musk’s demand to increase his current
percentage of fully diluted shares (approximately 18.9%) by ten percentage points (to
approximately 28.9%) would require an award of 28,959,496 shares, which equaled
approximately 17.23% of total outstanding shares as of November 2017. 334 Musk’s
November 9 request, therefore, turned out to be larger than his initial proposal,
contrary to Musk’s desire for a “reduced” amount. 335
Maron sent Chang’s calculations to Musk on November 29. 336 Maron
presented to Musk both (i) the total amount of shares Musk would receive based on
his November 9 request for an additional 10% on a fully diluted basis (28,959,456
shares); and (ii) the total amount of shares Musk would receive based on his March
2017 request for an award of 15% of total outstanding, non-diluted shares (25,217,325
shares). 337
Musk responded on December 1 telling Maron: “That is more than intended.
Let’s go with 10% of the current FDS number, so 20.915M.” 338 Musk arrived at this
number by multiplying Tesla’s FDS (fully diluted share) total as of November 2017
by 10%, or by factoring in dilution on a pre-grant basis.
334 JX-673.
335 JX-664.
336 JX-678.
337 Id. at 1.
338 JX-682 at 1.
65
When asked about his December 1 proposal, Musk volunteered an answer that
the plaintiff’s counsel has gleefully emphasized at every opportunity. He said that
the December 1 proposal “was, I guess, me negotiating against myself.” 339
4. A Surge Of Activity
The parties crammed a lot of work into a few days in December. During a five-
day period that month, the Compensation Committee met twice (on December 8 and
10), 340 and the Board met once (December 12). 341 There was a renewed sense of
urgency after the December 8 meeting, as reflected by email chatter on December 10
and 11 among high-ranking Tesla employees enlisted to work on the Grant. 342
During the December 10 meeting, the Compensation Committee approved a
12-tranche Grant structure and a set of operational milestones. Ehrenpreis reported
that Musk “appeared prepared to accept” the structure, which the minutes described
at the “lower end of the previously contemplated range of 12% of the total outstanding
shares.” 343 The December 12 meeting minutes also identify other terms under
consideration.
339 Musk Dep Tr. at 263:2–4.
340 JX-697 (12/8/17 Compensation Committee meeting minutes); PTO ¶ 229 (noting
the Compensation Committee met on 12/10/17).
341 JX-729 (12/12/17 special Board meeting minutes).
342 JX-717 at 1 (12/10/17 email noting the “importance and the timing on getting” an
analysis of the stock-based compensation effects of the grant “out quickly” because of
a valuation deadline the next day); id. (12/11/17 email marked as “high” importance
stating, “[w]e are back on with a vengeance (apologies in advance). . . . I am just now
digesting myself”); JX-718 at 1 (12/11/17 email stating that “[o]ur CEO grant[] is back
and on a fast track now”).
343 JX-729 at 1.
66
a. The 12%/12-Tranche Structure
All pre-November 9 discussions had assumed 15 tranches, in line with Musk’s
proposals. 344 And on November 9, Musk proposed ten tranches measured by fully
diluted shares. On December 10, however, the Compensation Committee approved a
12-tranche structure, which was presented to the Board two days later. The parties
dispute the evolution of the 12-tranche structure.
According to Ehrenpreis, the 12-tranche structure was intended to counter
Musk’s offer for a fully diluted 10% and its corollary ten-tranche structure. 345 This
may appear counterintuitive, because 12% of total outstanding shares equals
approximately 10% fully diluted—thus, making it seem like there was no real upside
to using the 12% figure. The difference, however, is that adding two more tranches
on top of Musk’s suggested ten tranches required Tesla to hit the $50 billion market
344 See JX-1598 at 3 (15 tranches, 1% of total outstanding shares each); JX-434 at 3
(15 tranches, 1% of total outstanding shares each); JX-445 (15 tranches, 1% of total
outstanding shares each); JX-464 at 5–7; (15 tranches, 1% of total outstanding shares
each); JX-486 at 1 (15 tranches, 1% of total outstanding shares each); JX-510 at 12
(15 tranches, varying total outstanding shares awards each); JX-530 at 9, 13 (15
tranches, varying total outstanding shares awards each); JX-566 at 11, 14 (15
tranches, varying total outstanding shares awards each); JX-640 at 3 (15 tranches);
JX-632 at 4 (15 tranches, varying total outstanding shares awards each). One
Compensia presentation from September 19 provides “5 to 10” tranches as a possible
range, but this is clearly an error as the rest of the presentation, including the slide
where this range appears, assumes an award with 15 tranches. See JX-628 at 6.
Ehrenpreis’s testimony that “5 to 10 . . . was the range of the number of tranches that
was being considered at that time” is not credible, and he acknowledged on redirect
that the rest of the presentation envisioned 15 tranches. Trial Tr. at 51:18–24,
214:20–215:6 (Ehrenpreis).
345 Trial Tr. at 58:15–59:11 (Ehrenpreis) (“And essentially -- and getting him to agree
to the total outstanding share framework, we added two more vesting tranches, which
would have required, for him to achieve the equivalent in number of shares, $100
billion market cap more.”).
67
capitalization target two more times to generate an additional $100 billion in market
capitalization. 346 So, the 12-tranche structure made it harder for Musk to achieve
the maximum payout of the Grant. Musk testified that the shift from fully diluted to
total outstanding shares was one of “two areas . . . where the board pushed
significantly, which I conceded[.]” 347
This testimony, however, finds no support in the contemporaneous record.
Although there are benefits of a 12-tranche structure to minority stockholders, the
move to 12% and 12 tranches was driven by the Board’s preference to base the Grant
on total outstanding shares rather than fully diluted shares.
The issue first arose during the November 16 Board meeting. There, the Board
discussed a move from Musk’s proposed fully diluted shares to the Board’s preferred
total outstanding shares. 348 The Board viewed total outstanding shares as a simpler
metric and had used it when issuing the 2012 Grant. 349
346 Where each tranche is 1%, and there is a $50 billion market capitalization target
per tranche, adding two tranches increases the total market capitalization goal by
$50 billion x 2 = $100 billion.
347 Id. at 584:9–19 (Musk). The other area was the Five-Year Hold Period, discussed
below.
348 JX-669 (noting the Board “expressed a general preference” for a non-diluted award
and a structure of “1% of current total outstanding shares as the award for each
vesting tranche” accompanied by $50 billion market capitalization increases and a
“matching operational milestone”).
349 Maron Dep. Tr. at 407:17–25 (stating that the Board used total outstanding
shares, instead of fully diluted shares, because “it was a simpler approach”); JX-135
at 77 (showing 2012 Grant using total outstanding shares as well). The 2009 Grant
used a diluted approach. JX-68 at 2–3.
68
On December 10, the Compensation Committee held a special meeting to
discuss the Grant. 350 There are no minutes for the December 10 meeting. Chang
attended and took notes, which he circulated by email later that evening. 351 His notes
state:
Todd Introduction/led discussion re review of terms
o We seem to be at the right place as far as size: 10% of
FDS (~12% of TOS)
o #of tranches?
Simplicity of 10
10 means that the end goal is smaller
Agreed to 12 tranches of 1% each. 352
Translating the above, the Board agreed to the size demanded by Musk but preferred
to base it on total outstanding shares, consistent with their discussion during the
November 16 meeting. With his meeting notes, Chang indicated that he would “send
another email shortly with the grant size numbers.” 353 A few minutes later, he sent
an email to the same people attaching a spreadsheet and stating the following:
Contemplated size of grant is here. Details attached.
This is based on 12% of total outstanding shares (TOS as
of 11/8, should update to close to grant, but this should still
get us very close).
Grant size would be 20,173,860 shares.
350 PTO ¶ 229.
351 JX-701.
352 Id. There is some indication that the 12-tranche structure was being considered
prior to this meeting. On December 6, Ahuja circulated a spreadsheet concerning
operational milestones to Chang and Maron. That spreadsheet reflected a 12-tranche
structure, suggesting that Ahuja, Chang, and Maron had discussed this possibility
prior to that time. JX-688.
353 JX-701.
69
• 12% of TOS
• 9.8% of FDS354
On December 11, Ahuja emailed Chang and Tesla’s corporate controller to
confirm that the 2018 Grant would award 20,173,860 shares (12% of total
outstanding or 9.8% of fully diluted) over 12 tranches. 355
On December 12, Ehrenpreis told the Board that Musk was prepared to accept
this Grant size. 356
There is no discussion in any of the minutes or notes of the November 16, or
December 8, 10, or 12 meetings indicating that the Board desired 12 tranches because
it was better for the minority stockholders. To the contrary, the only explanation in
the record for the 12-tranche structure is that the Board preferred to measure the
Grant by total outstanding shares for simplicity’s sake.
There is also no evidence that the Board pushed for the 12%/12-tranche
structure. Maron did not recall the Board pushing or Musk conceding anything. He
testified that although “the size of the overall plan” was one of the features that was
“different than I think were initially thought of by Elon . . . I don’t want to say that it
was necessarily over his objection.” 357 Reinforcing the similarity between Musk’s 10%
354 JX-702.
355 JX-715.
356 JX-729 (12/12/17 special Board meeting minutes).
357 Maron Dep Tr. at 428:20–430:3.
70
fully diluted ask and the Board’s 12% total outstanding offer, Musk confused the two
at trial, mistakenly testifying that the Grant awarded “10 percent.” 358
b. The Operational Milestones
During the November 16 Board meeting, the Board “discussed the structure of
the operational milestones,” came to a consensus to use both sales and profits metrics,
and “directed the Compensation Committee and management to develop operational
milestones” using revenue and EBITDA. 359
Ahuja and his team took up the mantle. On December 7 and 8, Ahuja
developed a number of alternatives using a comparatively low 10% EBITDA/revenue
margin. 360 By December 10, Ahuja had refined the model to three options for six,
eight, or 12 of each of revenue and adjusted EBITDA milestones, all at a 10%
EBITDA/revenue margin. 361
Recall that, in September 2017, Tesla sought to develop achievable operational
milestones and analyzed information regarding the adjusted EBITDA/revenue ratios
358 Trial Tr. at 581:13–582:6 (Musk) (“Q. You think it was half a percent for the 2018
plan as opposed to the 2012 plan? A. Sorry. 2012 -- I think -- I think it was 12 tranches
for normally 10 percent-ish, approximately.”). Musk also testified that during the
first conversation about the 2018 Grant he proposed a 10% incremental increase to
his Tesla holdings. Musk Dep Tr. at 144:13–146:6. In context, this explanation
appears implausible.
359 JX-669 at 2.
360 JX-691 (12/8/17 email from Ahuja to Maron laying out four alternatives for
revenue and EBITDA as operational milestones); JX-694 (Ahuja, Chang, and Maron
planning to discuss milestone approach on December 8); JX-698 at 1 (12/9/17 email
from Ahuja to Maron and Chang re: Revised CEO Comp alternatives, with
attachment).
361 JX-698 at 1.
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certain peers (e.g., Amazon (8%), Apple (34%), and Google (42%)). 362 The 10%
EBITDA/revenue ratio modeled by Ahuja, therefore, was comparatively low and thus
easier to achieve. 363 Tesla ultimately based the Grant’s EBITDA milestones on an
8% EBITDA/revenue margin, 364 making them even easier to achieve. 365
Ahuja explained his methodology at trial. He “started with” the $50 billion
market capitalization milestones and backed into the revenue and EBITDA
targets. 366 Chang similarly explained that the operational and market capitalization
milestones “have to be somewhat aligned. It has to make sense to be able to be
achieved around the same time or what you think is the same time.” 367 So to establish
the operational milestones, the Working Group asked: “at this valuation what would
. . . revenue and EBITDA look like . . . ?” 368
362 JX-641 at 4; JX-643; JX-733 at 6.
363 Trial Tr. at 893:18–894:21 (Restaino).
364 JX-733 at 6.
365 Trial Tr. at 893:18–894:21 (Restaino).
366 Id. at 463:15–464:8 (Ahuja).
367 Id. at 1094:17–1095:14 (Chang); see also, e.g., id. at 1061:23–1064:21 (Burg)
(“Question: And was that work in connection with looking at revenue to market cap
ratio, was that related to some sort of correlation between market cap, on the one
hand, and revenue, on the other, and/or how an increase in one of those inputs might
impact the other one? Answer: Yes. Essentially, it was trying to get a feel for -- trying
to get a feel for market cap to revenue ratios and how those change over time as
companies grow very big.”).
368 See id. at 1093:7–12 (Chang).
72
During the December 12 meeting, the Board also reviewed Tesla’s then-current
operating plan and projections. 369 Ahuja developed, and Musk approved, the
projections in December prior to the meeting (the “December 2017 Projections”). 370
The one-year projections underlying the operating plan forecasted $27.4B in total
revenue and $4.3B in adjusted EBITDA by late 2018, and thus predicted achievement
of three milestones in 2018 alone. 371 The three-year long-run projections (“LRP”)
underlying that plan reflected that, by 2019 and 2020, Tesla would achieve seven and
eleven operational milestones, respectively. 372 The following chart reflects the
corollaries:
Revenue Adjusted EBITDA
2017 3-Yr LRP The Grant 2017 3-Yr LRP
FY2018 $27.5B $20B $1.5B $3.8B
FY2019 $41.9B $35B $3B $8.1B
FY2020 $69.6B $55B $4.5B $14.4B
$75B $6B
$100B $8B
$125B $10B
$150B $12B
$175B $14B
369 JX-740 at 2 (email attaching 2018 operating plan 12/12/17 slide deck); Trial Tr. at
523:12–16 (Ahuja) (confirming the full Board saw the projections before approving
the Grant, including in December 2017).
370 JX-728 at 1–2; JX-372 at 6 (text messages between Maron and Ahuja); Trial Tr. at
515:18–516:7, 517:8–518:11 (Ahuja).
371 JX-749 at 20; Trial Tr. at 518:18–519:5 (Ahuja).
372 JX-529 at 2; JX-543 at 2; JX-555 at 5; JX-573 at 408; JX-582 at 4; JX-587.
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F. The Last Leg
The day after the December 12 Board meeting, Chang provided Burg and
Brown the “near final” term sheet (the “December 13 Term Sheet”), stating that Musk
was “well aligned” on the terms and that he expected Board approval in early January
2018. 373 The key terms concerning structure and milestones had been finalized,
which allowed Burg to complete the grant date fair value. Other terms, such as a
Leadership Requirement (defined below), the Hold Period, and the M&A Adjustment
would fall into place in the weeks ahead.
1. The Leadership Requirement
The December 13 Term Sheet reflected agreement on a “Leadership
Requirement,” conditioning vesting under the Grant on Musk being “CEO or
Executive Chairman and Chief Product Officer[.]” 374
The 2012 Grant contained a stricter Leadership Requirement, which
conditioned vesting on Musk remaining CEO. 375 The Board materials for the
September 19 meeting reflect that the Board considered a Leadership Requirement
similar to that in the 2012 Grant. 376 At some point between September 19 and
December 13, the Board relaxed its request to allow vesting if Musk was not CEO but
was Executive Chairman and Chief Product Officer. 377 There is no indication how or
373 JX-743 at 1.
374 Id. at 4–5.
375 JX-137 at 1 (2012 Grant).
376 Id.; JX-633 at 9 (“Based on the 2012 Award, should the Company continue to
require Mr. Musk to be CEO in order to continue vesting under the new award?”).
377 JX-878 at 52 (2/8/18 Schedule 14A Proxy Statement).
74
when the decision was made, whether it was raised with Musk, or when the term was
finalized, but it appears in the final Grant.
At trial, Gracias explained that the more lenient Leadership Requirement
reflected the Board’s belief that Musk’s “most valuable function[]” was as the “chief
product officer,” not as the CEO. 378 There is no evidence that the Board ever
discussed or negotiated this with Musk.
2. The M&A Adjustment
The December 13 Term Sheet reflected the Board’s intent to include an M&A
Adjustment in the Grant. 379 The 2018 Grant included an M&A Adjustment, which
had been under discussion since at least the June 23 Compensation Committee
meeting. 380 In its final form, the M&A Adjustment excluded from the market
capitalization milestone acquisitions with a purchase price over $1 billion, and the
revenue and adjusted EBITDA milestones excluded amounts attributable to
acquisitions providing more than $500 million or $100 million of each, respectively. 381
At trial, Ehrenpreis described this as a negotiated term, testifying that Musk
wanted “the M&A adjustments just to apply to a single milestone at the point of M&A,
and we ultimately got those adjustments to apply across the entire basis of the -- of
378 Trial Tr. at 726:4–15 (Gracias).
379 JX-743 at 4–5.
380 JX-475 at 6.
381 JX-878 at 19 (2/8/18 Schedule 14A Proxy Statement).
75
all the milestones.” 382 Ehrenpreis was referring to a January 16 demand from Musk
to Maron that the M&A Adjustment threshold be 5% of the then-current market
capitalization rather than a flat $5 billion. 383 Musk also told Maron that adjusting
the revenue and adjusted EBITDA milestones would be too complicated and
unnecessary. 384
Musk, however, would eventually come around to the M&A Adjustment as
proposed by the Board and even suggested stricter terms. After speaking to Ahuja,
on January 16, Maron proposed a threshold that would exclude acquisition-based
market capitalization growth amounting to the lesser of (i) 5% market capitalization
at the time of the acquisition and (ii) a flat number between $5 and $10 billion. 385
Musk countered—again, against himself—with a threshold at the lower of 2% of then-
382 Trial Tr. at 227:9–13 (Ehrenpreis); see id. at 63:5–15 (Ehrenpreis) (“We further
negotiated the idea of creating adjustments to both the revenue and EBITDA and
market cap numbers if there was M&A that caused -- if, through acquisition, either
the market cap or those financial metrics increased. And so there was a negotiation
around the idea that we didn’t want the plan to have the unintended consequence of
Elon being able to buy his way into it through M&A.”); see also JX-783 at 1–2 (1/16/18
email from Maron to Compensation Committee stating that Musk wanted that “[a]ny
M&A in which [Tesla] buy[s] a company for no more than 5% of [Tesla’s] then current
market cap will have no adjustment”).
383 JX-783 at 2.
384 See id. at 1.
385 JX-781 at 2 (1/16/18 email from Maron to Musk stating, “Deepak and I were just
talking and think we should make a slight tweak to what we discussed. Because
setting the threshold at 5% of our then current market cap could result in pretty big
numbers as we grow, and thus one deal that’s under 5% could still be a big chunk of
a $50B market cap increment, we propose setting the threshold at the *lesser* of (a)
5% of our then current market cap or (b) some number between $5B and $10B.”).
76
current market capitalization or $1 billion. 386 He told Maron and Ahuja, “I don’t
think we will be making big acquisitions[]” and “[t]here is no chance I will game the
economics here, so I’m fine with limits that prevent that.” 387 After discussing the
issue with the Compensation Committee, all agreed to the following exclusion
triggers for acquisition-based growth: the lower of 2% of then-current market
capitalization or $1 billion for market capitalization milestones; revenue exceeding
$500 million for the revenue milestones; and adjusted EBITDA exceeding $100
million for the adjusted EBITDA milestones. 388
3. The Hold Period
The December 13 Term Sheet reflected that the duration of the Hold Period
was an open issue. 389 The December 13 Term Sheet stated that the Hold Period was
“likely to be 5 years,” but it was still uncertain. 390 The 2018 Grant included the Five-
Year Hold Period.
At trial, Ehrenpreis described the Five-Year Hold Period as a negotiated
term. 391 Musk similarly testified that the Board “pushed” for this term, which was
386 JX-781 at 1.
387 Id. at 1–2.
388 JX-782 at 1.
389 JX-743 at 4–5.
390 Id. at 5 (12/13/17 term sheet); see also JX-746 at 3 (Liu 12/13/17 email stating “[i]t
seems we’ll likely have 5 years holding period after exercise”).
391 Trial Tr. at 63:20–64:1 (Ehrenpreis) (stating the Board “negotiated an agreement
that [Musk] would hold for five years after both the achievement and vesting and
exercise of the options”); id. at 210:24–211:2 (Ehrenpreis) (“It did. I mean, we didn’t
have one in the beginning, and we ultimately were able to get five years.”); see also
id. at 342:15–21 (Denholm) (“There were also some questions or some comments
77
his “biggest concern, because it would mean that either [he] would need to run the
company for another five years after the stock vested or [he] would need to find
someone who would run the company well enough to not cause the valuation to
subsequently decline significantly. . . . A lot can happen in five years.” 392
But there is nothing in the record reflecting any actual negotiation with Musk
over this term. The only explanation in the record for a five-year period came in July,
when Ehrenpreis raised the possibility as a “creative option[]” for “getting a bigger
discount[]” on the publicly disclosed value of the Grant. 393
4. The Grant Date Fair Value
On December 22, Burg provided a valuation letter based on the December 13
Term Sheet. 394 Burg used Monte Carlo simulations to estimate the probability of
hitting the market capitalization milestones, which is a “generally accepted
statistical technique” that “simulate[s] a range of possible future” outcomes over a
given timeframe using constantly repeating, random potential scenarios. 395
about the retention period after, you know, assuming that the plan was achieved over
a period of time, that he needed to hold the equity for five years. I remember that
coming up as being a virtuous feature of the actual program, because it, again, aligned
shareholder interest.”).
392 Id. at 584:12–585:2 (Musk).
393 JX-535 at 1–2 (7/18/17 email from Phillips to Radford and Compensia asking them
to compute what the discount would be if “Elon had to hold all exercised shares for 5
years?”); see also JX-792 at 7 (1/21/18 Radford report) (stating that five year hold
period would result in an “illiquidity discount”); Trial Tr. at 133:5–134:4 (Ehrenpreis)
(agreeing that imposing a five-year hold period would produce the highest discount).
394 JX-752 (12/22/17 email from Burg to Radford, other Tesla employees, and
PricewaterhouseCoopers attaching a valuation letter).
395See id. at 5, 11 (describing the Monte Carlo simulation method and showing
formula).
78
Burg determined that the first market capitalization goal—described as $100
billion, or $50 billion of growth—would occur 45.55% of the time, after which the
likelihood of achieving subsequent milestones rapidly declined to below 10% from
milestone six onward. 396 The Monte Carlo valuation did not account for the
probability of hitting the operational milestones, nor did it incorporate Tesla’s
internal projections. 397
Based on these estimates, Burg reached an initial grant date fair value for the
2018 Grant of $2,656,430,639. He then applied a 10.52% illiquidity discount based
on the Five-Year Hold Period, arriving at a final value of $2,377,077,626. 398 Burg
and Ahuja’s team continued to refine this valuation in the following weeks by
tweaking assumptions, including the holding period and dilution rate. 399
Burg provided an updated valuation letter on January 19. 400 This letter
included a slightly higher final valuation of $2,575,342,854 (again taking into account
the holding period illiquidity discount) compared to the December 22 valuation of
$2,377,077,626. 401 Another updated letter, dated January 21, provided a still higher
final valuation of $2,615,190,052, resulting from intervening increases in the total
number of shares, a higher stock price, and slight changes to other assumptions. 402
396 Id. at 12.
397 See id. at 4–5.
398 Id. at 6–9.
399 See JX-767 at 1–4; JX-772 at 1–2.
400 JX-785 at 1–2.
401 Compare JX-785 at 10, with, JX-752 at 6–9.
402 JX-792 at 7; JX-799 at 3.
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G. The Board Approves The Grant.
On January 21, 2018, the Board held a special meeting to approve the 2018
Grant. 403 Musk and Kimbal recused themselves and Jurvetson was on leave. 404 The
other six directors—Ehrenpreis, Denholm, Gracias, Buss, Murdoch, and Johnson
Rice—unanimously approved the 2018 Grant. 405
In its final form, the 2018 Grant is divided into 12 vesting tranches. 406 Each
tranche vests upon satisfaction of one market capitalization milestone and
achievement of one operational milestone. 407 The 12 market capitalization
milestones increase in $50 billion increments, beginning at $100 billion and ending
at $650 billion. 408 The 2018 Grant has 16 operational milestones: eight based on
revenue and eight based on adjusted EBITDA. 409 For each tranche to vest, the
403 See PTO ¶¶ 231–33.
404 JX-791 at 1 (1/21/18 special Board meeting minutes).
405 Id. at 1–2.
406 PTO ¶ 238.
407 Id.
408 See id. ¶ 241.Market capitalization was measured by “(i) the sum of Tesla’s daily
market capitalization for each trading day during the six (6) calendar month period
immediately prior to and including the determination date, divided by the number of
trading days during such period and (ii) the sum of Tesla’s daily market capitalization
for each trading day during the thirty (30) calendar day period immediately prior to
and including the determination date, divided by the number of trading days during
such period.” Id. ¶ 242.
409 Id. ¶ 244; see also id. ¶ 245 (defining revenue as “total Tesla revenues, as reported
in Tesla’s financial statements on Forms 10-Q or 10-K filed with the SEC for the
previous four consecutive fiscal quarters”); id. ¶ 246 (defining adjusted EBITDA “as
(i) net income (loss) attributable to common stockholders before (ii) interest expense,
(iii) (benefit) provision for income taxes, (iv) depreciation and amortization, and (v)
stock-based compensation, as each such item is reported in Tesla’s financial
80
achievement of any one of the operational milestones can be paired with achievement
of any one of the market capitalization milestones. 410 The increments of the
operational milestones are shown in the table below. 411
Adjusted
Revenue-Based
EBITDA-Based
Operational
Operational
Milestones
Milestones
(in billions)
(in billions)
1 $20.0 $1.5
2 $35.0 $3.0
3 $55.0 $4.5
4 $75.0 $6.0
5 $100.0 $8.0
6 $125.0 $10.0
7 $150.0 $12.0
8 $175.0 $14.0
To complete each tranche, the Grant requires that Tesla achieve one market
capitalization milestone and one operational milestone. 412 Each completed tranche
earns Musk options to purchase 1% of Tesla’s common stock outstanding as of
January 19, 2018. Before a five-for-one stock split in 2020 and a three-for-one stock
split in 2022, this 1% was equivalent to 1,688,670 shares. 413 If fully vested, the 2018
Grant would therefore grant Musk options to purchase 20,264,042 (pre-split)
shares. 414 The strike price of these options was $350.02, the closing price of Tesla’s
statements on Forms 10-Q or 10-K filed with the SEC for the previous four
consecutive fiscal quarters”).
410 Id. ¶ 243.
411 Id. ¶ 244.
412 Id. ¶ 238.
413 Id. ¶¶ 42–43, 239.
414 Id. ¶ 236.
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common stock on January 19, 2018. 415 Adjusting for Tesla’s two stock splits, the
strike price was $23.33. 416
The Grant also included the Clawback Provision, Leadership Requirement,
M&A Adjustment, and Five-Year Hold Period. Like the 2012 Grant, the 2018 Grant
expired after ten years. 417
H. The Stockholders Approve The Grant.
Board approval was not the finish line, because the Board conditioned the 2018
Grant on approval by a majority vote of disinterested stockholders. 418
1. The Proxy Statement
Tesla announced the 2018 Grant to the public and filed a preliminary proxy
statement on January 23, 2018. 419 Tesla filed its definitive proxy statement (the
“Proxy”) on February 8, which notified stockholders of a vote to approve the 2018
Grant on March 21, 2018. 420
The Proxy included statements at issue in this litigation. It described all
Compensation Committee members as “independent directors,” despite Gracias’s
415 Id. ¶ 237.
416 Calculated as $350.02 divided by (5 x 3).
417 JX-878 at 52 (stating that the Grant expires on January 20, 2028); JX-137 at 1.
418 PTO ¶ 233; JX-791 at 4–5.
419 PTO ¶ 234.
420 Id. ¶ 235; see also JX-878 at 29.
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close relationship with Musk. 421 The Proxy did not disclose the financial or personal
connections between the members of the Compensation Committee and Musk.
The Proxy did not disclose the April 9 conversation between Musk and
Ehrenpreis, during which Musk established the key terms of the 2018 Grant. A
discussion of this conversation appeared in at least four earlier drafts of the Proxy. 422
In its final form, the Proxy states:
With the 2012 Performance Award nearing completion, the
Board engaged in more than six months of active and
ongoing discussions regarding a new compensation
program for Mr. Musk, ultimately concluding in its
decision to grant the CEO Performance Award. These
discussions first took place among the members of the
Compensation Committee of the Board (the ‘Compensation
Committee’), all of whom are independent directors, and
then with the Board’s other independent directors,
including its two newest independent directors, Linda
Johnson Rice and James Murdoch. 423
The Proxy stated that: “each of the requirements underlying the performance
milestones was selected to be very difficult to achieve”; 424 the Board “based this new
award on stretch goals”; 425 the Grant’s milestones were “ambitious” and
“challenging”; 426 “[l]ike the Revenue milestones described above, the Adjusted
421 JX-878 at 10. The Proxy also describes Johnson Rice and Murdoch as independent.
Id.
422 See JX-1597 at 9; JX-1598 at 3; JX-1599 at 14; JX-1700 at 12.
423 JX-878 at 10.
424 Id. at 41.
425 Id. at 4.
426 Id. at 22.
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EBITDA milestones are designed to be challenging”; 427 and “[t]he Board considers the
Market Capitalization Milestones to be challenging hurdles.” 428
The Proxy disclosed that, when setting the milestones, “the Board carefully
considered a variety of factors, including Tesla’s growth trajectory and internal
growth plans and the historical performance of other high-growth and high-multiples
companies in the technology space that have invested in new businesses and tangible
assets.” 429 “Internal growth plans” referred to Tesla’s projections. 430
Tesla prepared three sets of projections during the process. During July 2017,
Tesla updated its internal three-year financial projections (“July 2017
Projections”). 431 The July 2017 Projections reflected that the S-curve’s exponential
growth phase was imminent. 432 Tesla shared the July 2017 Projections, which the
Audit Committee approved, 433 with S&P and Moody’s in connection with a debt
427 Id. at 18.
428 Id. at 17.
429 Id. at 18.
430 Trial Tr. at 481:14–481:24 (Ahuja).
431 JX-529 at 2.JX-529 at 2. The Model 3 was Tesla’s first mass production vehicle.
See Trial Tr. at 574:14–18 (Musk). When mass production is successful, the
production curve resembles the letter S. Id. at 1197:9–13 (Gompers); JX-1539. Musk
explained: “[T]he production starts off slowly and then you gradually eliminate the
constraints and eventually it starts taking off exponentially.” JX-390 at 9; Trial Tr.
at 667:11–16 (Musk).
432 JX-1540 at 84 (10/31/17 Audit Committee meeting materials) (“The production
rate will soon enter the steep portion of the manufacturing S-curve, which should
result in non-linear production growth in the weeks ahead.”).
433 JX-580 at 1; JX-573 at 1; Trial Tr. at 521:16–522:21 (Ahuja) (testifying that he
discussed the projections with the Audit Committee, including Denholm, Gracias, and
Buss).
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offering. 434 The 2017 Projections showed revenue growth of $69.6B and adjusted
EBITDA growth of $14.4B in 2020. 435 Under the July 2017 Projections, Tesla would
achieve three of the revenue milestones and all of the adjusted EBITDA milestones
in 2020. The Proxy did not disclose this.
Ahuja developed and Musk approved a new operating plan and projections in
December—the December 2017 Projections. 436 As discussed above, the Board
reviewed those projections on December 12. 437 The one-year projections underlying
the operating plan forecasted $27.4B in revenue and $4.3B in EBITDA by late 2018,
and thus predicted achievement of three milestones in 2018 alone. 438 The longer
three-year projections underlying that plan reflected that by 2019 and 2020, Tesla
would achieve seven and eleven operational milestones, respectively. 439 The Proxy
did not disclose this.
After Tesla issued the Proxy, but before the stockholder vote, Ahuja presented
the Board with a three-year operating plan (the “March 2018 Projections”), which
Tesla later shared with Moody’s. 440 Musk reviewed and approved the March 2018
434 Trial Tr. at 466:14–469:24 (Ahuja).
435 JX-529 at 2.
436 JX-728 at 1–2; JX-372 at 6 (text messages between Maron and Ahuja); Trial Tr. at
515:18–516:7, 517:8–518:11 (Ahuja).
437 JX-740 at 1–2; Trial Tr. at 523:12–16 (Ahuja) (confirming the full Board saw the
projections before approving the Grant, including in December 2017).
438 JX-740 at 18; Trial Tr. at 518:18–519:5 (Ahuja).
439 JX-529 at 2; JX-543 at 2; JX-555 at 5; JX-573 at 408; JX-582 at 4; JX-587.
440 JX-948 at 2 (3/13/18 Board meeting minutes); JX-973 at 1; JX-974 (March 13
Projections).
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Projections before they were presented to the Board. 441 The March 2018 Projections
were more pessimistic than previous projections but still predicted achievement of
one revenue and two adjusted EBITDA milestones by March 31, 2019, and further
two revenue and four adjusted EBITDA milestones by the end of 2020. 442 As
discussed below, Tesla would issue a supplemental disclosure with this information,
but not until after the stockholder vote.
2. The Public Reaction
Tesla tracked support and opposition to the 2018 Grant among stockholders
and engaged in outreach. 443 The two largest proxy advisors, ISS and Glass Lewis,
both recommended voting against the 2018 Grant. 444
Glass Lewis expressed concern with the size and potential dilutive effect of the
grant, noting that “any relative comparison of the grant’s size would be akin to
stacking nickels against dollars[]”and that “the lower tiers of the goals are relatively
much more attainable given the time periods in question, potentially allowing for
sizable payments without commensurately exceptional achievement.” 445
ISS described the grant value as “staggering” and concluded that even the
“challenging” and “far-reaching performance goals do not justify the extraordinary
441 Trial Tr. at 511:8–19 (Ahuja).
442 JX-974; JX-1023 at 6.
443 See JX-901 at 3–7.
444 JX-987 at 6 (3/21/18 ISS proxy analysis & benchmark policy voting
recommendations); JX-931 at 7 (3/6/18 Glass Lewis proxy paper on Tesla).
445 JX-931 at 5, 7.
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grant magnitude[.]” 446 In an internal email, ISS noted that it “steered clear of getting
too deep into this[]” because “making that argument essentially puts us in the
situation of saying Tesla’s board is not strong enough to stand up to Musk[.]” 447
Also, both recommendations expressed concern with Musk’s non-Tesla
interests, although Glass Lewis stated that “Musk’s extracurricular exploits
undoubtedly contribute to his value to the Company[.]” 448
Stockholders also criticized the Grant, noting that Musk’s Tesla equity
provided sufficient motivation for Musk to perform, 449 the Grant’s size and dilutive
effects were excessive, 450 the EBITDA milestones were too low, 451 and that linear
milestones were inappropriate for an “exponential company” like Tesla. 452
Five days before the stockholder vote, on March 16, Maron informed the Board
that the outcome of the stockholder vote was “not yet clear.” 453 Maron reported that
although initial vote tallies were favorable, many big stockholders had not yet voted
and their intentions remained unclear. 454
446 JX-987 at 3, 6.
An earlier internal ISS email also described the amount as “just
absurd.” JX-841 at 1.
447 JX-940 at 1.
448 JX-931 at 7; JX-987 at 6.
449 JX-547.
450 JX-968 at 3; JX-1541 at 1.
451 JX-838 at 1–2; JX-899.
452 JX-899.
453 JX-964 at 1.
454 Id.
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By March 20, Maron informed Musk that the Grant would likely receive
approval, but that two large Tesla stockholders were voting against the Grant on the
grounds that its size was excessive. 455 In response, Musk asked Maron to tell one of
the large stockholders that he was “very offended by their action if they choose to vote
that way, but but [sic] by all means do so.” 456 Musk also asked Maron to set up a call
with one of the stockholders following the vote, during which Musk would “convince
them to divest from Tesla and any of [his] companies ever. They are not welcome.” 457
It appears that a non-Musk employee at Tesla called that stockholder after the
vote. 458
3. The Stockholder Vote
The stockholders approved the Grant at a special stockholder meeting on
March 21, 2018, with 73% of votes cast at the meeting (excluding Musk’s and Kimbal’s
ownership) in favor. 459
I. Subsequent Events
Events relevant to evaluating the fairness of the Grant occurred after
stockholders approved the Grant. Namely, Tesla disclosed that several Grant
milestones were greater than 70% probable of achievement, nearly all the tranches
455 JX-972 at 1–2 (stating Vanguard found the size was “simply too high[]” and Capital
most likely opposed “the size”).
456 Id. at 1.
457 Id.
458 Trial Tr. at 441:11–24 (Maron); see JX-1017 at 1 (4/11/18 email from Musk to
Maron asking about the call with Capital).
459 JX-979 at 3 (3/21/18 Form 8-K dated March 21, 2018).
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vested, Musk got in trouble with the SEC, named himself Technoking, and acquired
Twitter, Inc.
1. Tesla Discloses That Several Of The Grant’s Milestones
Are Probable Of Achievement.
For accounting purposes, on March 27, Burg provided a final fair value letter
arriving at a grant date fair value of $2,283,988,223. 460 Ahuja and his team then had
to determine when Tesla was likely to hit the performance milestones, which Tesla
needed to disclose to stockholders in its March 31, 2018 Form 10-Q (the “March 31
10-Q”). 461 Tesla determined that three operational milestones were “considered
probable of achievement,” which meant that they were greater than 70% probable of
achievement within approximately one year of the Grant date. 462
Tesla’s methodology to determine the probability of milestone achievement
was to “us[e] the operating plan of record[.]” 463 Tesla’s operating plan was a set of
internal one-year forecasts. 464 Tesla developed and updated one-year and three-year
460 JX-997 at 7. $2,562,885,538 before applying a 10.88% illiquidity discount due to
the Five-Year Hold Period. See id. Changes from previous valuations are primarily
due to an intervening decline in the stock price. See JX-1003 at 1.
461 See JX-990 at 1; JX-1004 at 1; JX-1019 at 2; JX-1011 (3/31/18 Form 10-Q for Q1).
462 JX-1011 at 27.
463 JX-1019 at 2; Trial Tr. at 743:11–23 (Gracias) (“[T]here’s only one plan. . . . We
didn’t show anything else to the banks . . . or to The Street, literally one set of
numbers. That’s it.”); Trial Tr. at 791:13–792:2 (Gracias) (confirming Tesla had one
financial plan as of 2017 and 2018, and during that period everyone—including
Musk—relied on that plan to run Tesla, and “Musk himself was integrally involved
in creating Tesla’s operating plan”); see id. at 498:1–499:2 (Ahuja) (confirming Musk
was “extremely involved” in the three-year financial plan).
464 See JX-953 (2018 operating plan slide deck).
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internal projections on a regular basis. 465 They were not the product of bottom-up
forecasting. They were used to drive and motivate rather than plan, and Tesla
frequently missed its projections. 466 They reflected what Tesla would need to do to
reach aggressive goals set by Musk. 467
Tesla based the March disclosures on the March 2018 Projections. Ahuja
described the March 2018 Projections as “extremely aggressive and challenging”
based on “stretch goals” and “very large . . . risks[.] 468 Yet Tesla disclosed that “the
following performance milestones were considered probable of achievement: total
revenue of $20.0 billion; adjusted EBITDA of $1.5 billion; and adjusted EBITDA of
$3.0 billion.” 469 The March 31 10-Q included the usual disclaimer, stating that “[t]he
probability of meeting an operational milestone is based on a subjective assessment
of our future financial projections.” 470 According to Ahuja, this disclosure meant that
465 Id. at 466:14–19, 467:18–468:2 (Ahuja).
466 Id. at 223:8–224:1 (Ehrenpreis) (testifying that the “projections . . . were mostly
used to drive the company . . . [so he] was absolutely not surprised at the number of
misses and the frequency of new forecasts”); see id. at 746:11–20 (Gracias) (describing
these projections as “a very aggressive stretch plan[] . . . to get people motivated and
incented[] . . . to drive the internal operations”); id. at 333:20–334:18 (Denholm)
(testifying that the projections reflected what “we’re trying to achieve” and the Board
did not view the projections “as being realistic and achievable plans”).
467 Id. at 466:23–467:7 (Ahuja) (testifying that Tesla set “really stretch goals, which
reflected Elon’s general philosophy of really pushing himself and the team to deliver
impossible things”).
468 Id. at 488:12–489:24; 504:24–505:5 (Ahuja).
469 JX-1011 at 27.
470 Id.
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“the three operational milestones . . . are 70 percent probable of achievement in the
late 2018 and 2019 time frame.” 471
Ahuja characterized the probability assessment as an inherently “conservative
approach” from an accounting perspective. 472 Still, it is not clear how Tesla
management reconciled their views that the milestones were both “risky” and a
“stretch” yet simultaneously more than 70% likely to occur.
Regardless, management stuck to its guns. On April 3, Ahuja told his team
that “to be consistent in our methodology of using the operating plan of record, we
should assume that the second EBITDA milestone has greater than 70% chance of
vesting by 6/30/2019.” 473 And an Audit Committee presentation dated April 27, 2018
indicated that, based on the March 2018 Projections, Tesla considered the $20 billion
revenue milestone and the $1.5 billion adjusted EBITDA milestone more than 70%
likely by December 31, 2018, and the $3 billion adjusted EBITDA milestone more
than 70% likely by March 31, 2019. 474 On May 7, 2018, Tesla filed a Form 10-Q
disclosing to stockholders that, as of March 31, 2018, three operational milestones
“were considered probable of achievement[.]” 475
471 Trial Tr. at 493:21–494:5 (Ahuja); id. at 503:18–22 (Ahuja).
472 Id. at 488:1–489:24 (Ahuja).
473 JX-1019 at 2.
474 JX-1023 at 6.
475 JX-1031 at 27 (5/7/18 Form 10-Q for Q1).
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2. Tesla’s Performance
The Grant began vesting in 2020 as Tesla’s business took off. Although Tesla’s
business performance between 2018 and 2020 fell short of the March 2018
Projections, Tesla slightly exceeded its projected adjusted EBITDA for 2018. 476 Four
tranches vested by the end of 2020, and three more vested the following year. 477 As
of April 29, 2022, eleven of the Grant’s 12 tranches had vested. 478 As of June 30,
2022, all market capitalization milestones had been achieved, all adjusted EBITDA
milestones had been achieved, and three revenue milestones had been achieved, with
one more deemed probable of achievement. 479
3. The SEC Settlement
On September 29, 2018, the SEC announced that it had reached a settlement
with Musk over fraud charges stemming from a tweet he sent in August 2018. 480 As
part of the settlement, Musk agreed to pay a penalty of $20 million, resign as Chair
of the Tesla Board, submit communications relating to the company for pre-approval
subject to procedures implemented by Tesla, and not “make . . . any public statement
476 Trial Tr. at 479:6–21 (Ahuja).
477 PTO ¶¶ 265–71.
478 Id. ¶¶ 272–75.
479 Id. ¶ 276.
480 JX-1070 at 1 (9/29/18 SEC Press Release: Elon Musk Settles SEC Fraud Charges;
Tesla Charged With and Resolves Securities Law Charge). On August 7, 2018, Musk
tweeted: “Am considering taking Tesla private at $420. Funding Secured.” JX-1057
(Aug. 7, 2018, 12:48 p.m. Musk tweet). The SEC charged that Musk’s Tweet was
misleading because he had not “discussed specific deal terms, including price, with
any potential financing partners.” JX-1070 at 1.
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denying, directly or indirectly, any allegation in the complaint or creating the
impression that the complaint is without factual basis[.]” 481
Tesla also agreed to add two new independent directors and create a
permanent committee of independent directors charged with overseeing
implementation of the settlement, controls regarding Tesla’s public statements, and
the “review and resolution of human resources issues or conflict of interest issues”
involving Tesla’s management. 482
On April 30, 2019, the final judgment enshrining the SEC Settlement was
amended to clarify that Musk must “obtain the pre-approval of an experienced
securities lawyer employed by the company (‘Securities Counsel’) of any written
communication that contains information regarding” a long list of topics, including
Tesla’s finances, its non-public projections, and “events regarding the Company’s
securities.” 483
As part of the settlement, Musk stepped down as Board chair. 484 Kimbal
proposed that Denholm replace him. 485 Denholm initially declined, but then Musk
481 JX-1075 ¶ 13 (10/16/18 Consent Motion for Entry of Final Judgment, United States
Sec. & Exch. Comm’n v. Musk, C.A. No. 1:18-cv-8865-AJN-GWG (S.D.N.Y.)).
482 JX-1076 at 2 (10/16/18 Form 8-K).
483 JX-1075 at 15–16.
484 Trial Tr. at 1081:23–1082:5 (Kimbal).
485 Id. at 1082:6–10 (Kimbal).
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asked Denholm to reconsider. 486 Denholm agreed, and the Board appointed Denholm
chair on November 7, 2018. 487
To comply with the terms of the SEC Settlement, which required the Board to
establish a new independent committee, the Board created a “Disclosure
Committee.” 488 Denholm’s testimony revealed a lack of understanding concerning
how this committee worked. She testified that she did not know whether the
Disclosure Committee “received reports concerning human resource issues or
conflicts of interest involving senior management” 489 in order to fulfill its mandate.
Denholm testified that “issues of conflict are reviewed by the audit committee, which
is a group of independent board members who are also members of the disclosure
committee.” 490
Musk testified that he complies with the SEC Settlement using the following
process: He “decide[s] a tweet might be one that is required to be reviewed under the
settlement . . . submit[s] it to an in-house lawyer in advance of making it, wait[s] for
some period of time that [he] decide[s] upon, and then tweet[s] if the lawyer hasn’t
given comments[.]” 491
486 Denholm Dep. Tr. at 95:11–18.
487 JX-1083 at 4.
488 Trial Tr. at 372:6–373:22, 375:1–8 (Denholm).
489 Id. at 375:9–22 (Denholm).
490 Id. at 378:11–18 (Denholm).
491 Id. at 616:3–11 (Musk).
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Denholm described this process as “self-regulat[ing]” and was “aware that
[Musk] waits for some unspecified period of time and then just [tweets] if he doesn’t
hear back[.]” 492 After the SEC Settlement was amended, Musk made public
statements about Tesla’s business prospects or plans without clearing them with
anyone first. 493
At trial, Musk stated that the SEC Settlement “was made under duress”
because “lenders put a gun to [his] head.” 494 He also conceded that he had previously
given public interviews where he stated that the SEC was wrong and that he had
actually secured funding to take Tesla private. 495 He did so despite the requirement
as part of the SEC Settlement that Musk not “make . . . any public statement denying,
directly or indirectly, any allegation in the complaint or creating the impression that
the complaint is without factual basis[.]” 496 Musk has also publicly referred to the
SEC’s San Francisco office as “bastards[]” and “shameless puppets of Wall Street
short seller sharks who did nothing to protect actual shareholders[.]” 497
492 Id. at 386:8–12 (Denholm); id. at 382:5–12 (Denholm) (“A. Do you mean does he
self-regulate under the policy? Q. You bet. That’s exactly what I mean. A. So he does
self-regulate under the policy, yes.”).
493 See id. at 619:12–622:3 (Musk).
494 Id. at 624:3–625:21 (Musk).
495 Id. at 625:14–21 (Musk).
496 JX-1075 ¶ 13.
497 Trial Tr. at 623:4–22 (Musk).
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4. The Technoking
On March 15, 2021, Musk changed his title to “Technoking of Tesla.” 498 Musk
testified that this role was distinguishable from a traditional chief technology officer
role by the presence of “panache” and joked that a Technoking had “[g]reat dance
moves and sick beats.” 499 During his deposition, Musk testified that he did not
consult with the Board about this new title, but that it was communicated to at least
Denholm before Tesla filed the 8-K announcing the new title. 500 At trial, Musk
testified he did in fact consult with the Board before giving himself the title. 501
5. Then Came Twitter
On April 25, 2022, Twitter, Inc. and Musk announced the execution of a merger
agreement in which Musk would acquire Twitter. 502 Musk subsequently sought to
terminate the merger agreement, and Twitter sued for specific enforcement. 503
The amount of time Musk spent on the Twitter acquisition was undoubtedly a
concern at Tesla. Also, in the Twitter litigation, Musk filed a pleading affirming that
498 JX-1331 at 2 (3/15/21 Form 8-K).
499 Musk Dep Tr. at 24:11–25:9.
500 Id. at 25:13–22.
501 Trial Tr. at 599:4–10 (Musk); but see id. at 1085:1–7 (Kimbal) (“Question: Have
you heard the word ‘Technoking’ before? Answer: Yes, I have. Question: When did
you first hear that word? Answer: I heard it over Twitter, when Elon changed his
Twitter account.”); id. at 854:21– 855:3 (Murdoch) (“Q. Now, you’re aware that Elon
Musk has added Technoking to his Tesla title. Correct? A. Yes, I am aware of that. Q.
And you believe you likely first learned about that development via a tweet. Is that
correct? A. I might have. I think so. Yeah.”).
502 JX-1457 at 2 (4/25/22 Twitter, Inc. Form 8-K).
503 Twitter, Inc. v. Elon R. Musk, et al., C.A. No. 2022-0613-KSJM.
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no one at Tesla is authorized to view his Tesla email accounts without his consent,
except to the extent legally required. 504 Musk ultimately acquired Twitter and named
himself “chief twit,” a role analogous to CEO. 505 Musk also testified that he asked
approximately 50 Tesla engineers to “volunteer” to help him evaluate Twitter’s
engineering team. 506 No one on the Board called Musk to tell him not to do this.507
In the weeks prior to trial, Musk spent the “lion’s share” of his time at Twitter. 508
J. This Litigation
Plaintiff Richard Tornetta (“Plaintiff”), a Tesla stockholder, filed his complaint
on June 5, 2018. 509 His original complaint asserted four counts: Count I for breach of
fiduciary duty against Musk in his capacity as a then-controlling stockholder;
Count II for breach of fiduciary duty against Musk, Kimbal, Gracias, Jurvetson,
Ehrenpreis, Buss, Denholm, Murdoch, and Johnson Rice as directors (together,
“Defendants”); Count III for unjust enrichment against Musk; and Count IV for
waste. 510 Counts I and II were asserted as both direct and derivative claims. Counts
III and IV were asserted as derivative claims. 511
504 Trial Tr. at 602:2–10 (Musk).
505 Id. at 614:13–23 (Musk).
506 Id. at 656:6–657:20 (Musk).
507 Id. at 657:9–658:2 (Musk).
508 Id. at 662:4–9 (Musk).
509 Dkt. 1 (“Compl.”).
510 See Compl. ¶¶ 106–23.
511 See id.
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Defendants moved to dismiss the complaint, and the court denied the motion
as to Counts I through III, dismissing only the waste claim. 512 For purposes of the
motion to dismiss, Defendants conceded that Musk controlled Tesla. 513 Defendants
argued that the stockholder vote approving the Grant qualified as a ratifying vote
justifying business judgment deference under Section 216 of the Delaware General
Corporation Law (“DGCL”). 514 Vice Chancellor Joseph R. Slights III rejected this
argument, concluding that a fully informed stockholder vote was insufficient to
restore business judgment deference in a conflicted-controller transaction like the
Grant. 515 The Vice Chancellor held that MFW provides the “roadmap” for a controller
seeking to avoid review under the entire fairness standard, even outside of the
squeeze-out context. 516 The Vice Chancellor also rejected Defendants’ alternative
dismissal argument—that the complaint lacked well-pled allegations that the Grant
was unfair. 517
The case proceeded to discovery. On January 25, 2021, the court entered a
stipulated order granting class certification. 518
512 See Dkt. 10.
513 See Tornetta v. Musk, 250 A.3d 793, 805 (Del. Ch. 2019) (“Defendants acknowledge
(for purposes of this motion only) that Musk is a controlling shareholder and that he
dominated the Board and the Compensation Committee during the time the Award
was negotiated and approved.”).
514 Tornetta, 250 A.3d at 806–07 (Del. Ch. 2019).
515 Id. at 807–09.
516 Id. at 810–12.
517 Id. at 812–13.
518 Dkt. 94.
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On September 20, 2021, the Delaware Supreme Court issued Brookfield Asset
Management, Inc. v. Rosson, which overturned Gentile v. Rossette 519 and thus
eliminated the legal basis for the dual-natured Counts I and II. 520 Brookfield
determined that fiduciary duty claims alleging overpayment or dilution of voting
power are categorically derivative, rather than dual-natured, even when asserted
against a controlling stockholder. 521 As a result of Brookfield, Plaintiff filed a motion
for leave to amend his complaint on September 30, 2021. 522 The proposed amended
complaint asserted the same claims as the original complaint, but asserted Counts I
and II as entirely derivative rather than dual-natured. 523
The next day, Plaintiff and Defendants Kimbal and Jurvetson cross-moved for
summary judgment. 524 Plaintiff argued that the 2018 Grant was invalid because it
was conditioned on stockholder approval, but that the Proxy failed to disclose
material information. For instance, Plaintiff argued that Tesla failed to disclose how
achievable Tesla management thought the milestones were, or to fully appraise
stockholders of the close professional and personal relationships Ehrenpreis and
Gracias each had with Musk. 525 Kimbal and Jurvetson moved for summary judgment
519 906 A.2d 91 (Del. 2006).
520 261 A.3d 1251.
521 Id. at 1275.
522 Dkt. 161.
523 Dkt. 161, Ex. A ¶¶ 284–93.
524 Dkts. 162, 163.
525 See Dkt. 163 at 20–26.
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on all Counts on the grounds that they had minimal or non-existent roles in the 2018
Grant process. 526
While these motions were pending, on October 27, 2021, the parties stipulated
to decertify the class, dismiss the direct claim components of Counts I and II, and to
voluntarily dismiss all claims against Kimbal and Jurvetson with prejudice. 527 The
stipulation preserved Plaintiff’s motion for leave to file the amended complaint to
change the action from a direct to a derivative action under Court of Chancery Rule
23.1. 528 Collectively, those moves averted the Gentile issue at the heart of the original
complaint.
The court granted the stipulation on October 27, 2021. 529 The remaining
Defendants sought summary judgment on November 19, 2021, advancing a
ratification theory on the basis that Tesla stockholders received all material
information ahead of the vote. 530
The court substituted jurists on January 12, 2022, in light of Vice Chancellor
Slights’ retirement from the bench. 531 This court held a status conference on
February 7, 2022, 532 and resolved the pending motions to amend and for summary
526 See Dkt. 162 at 6–12.
527 Dkt. 173.
528 See Dkt. 173 ¶ 1; Dkt. 174.
529 Dkt. 175.
530 See Dkt. 184 at 64–65; Dkt. 188.
531 Dkt. 199.
532 Dkt. 206.
100
judgment in a letter decision dated February 24, 2022. 533 The court granted
Plaintiff’s motion for leave to amend but denied the cross-motions for summary
judgment, voicing “skeptic[ism] that this litigation can be resolved based on the
undisputed facts.” 534
Plaintiff filed his amended complaint on March 2, 2022. 535 The court entered
a revised case schedule on August 12, 2022. 536 The parties tried their case from
November 14 through 18, 2022. 537 The court heard post-trial oral argument on
February 21, 2023. 538
533 Dkt. 207.
534 See id. at 2.
535 Dkt. 209.
536 Dkt. 219. There were earlier case schedules that this one amended. But that
fuller history is irrelevant.
537 Dkt. 244.
538 Dkt. 281.See Defs.’ Post-Trial Opening Br.; Dkt. 264 (“Pl.’s Post-Trial Opening
Br.”); Dkt. 274 (“Pl.’s Post-Trial Answering Br.”); Dkt. 275 (“Defs.’ Post-Trial
Answering Br.”); Dkt. 284 (“Post-Trial Oral Arg. Tr.”).
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Post-trial oral argument revealed several topics that warranted further
development. The court requested supplemental briefing in a letter to counsel dated
February 22. 539 The parties completed supplemental briefing on April 11. 540
II. LEGAL ANALYSIS
Plaintiff claims that awarding the Grant constituted a breach of fiduciary
duty. 541 He argues that the entire fairness standard governs for two independent
reasons—because the Grant was a conflicted-controller transaction and, separately,
because the Grant was approved by a majority conflicted Board. He further argues
that Defendants failed to demonstrate that the Grant was fair, and that the court
should invalidate and rescind the Grant either in its entirety or in part. Defendants
539 Dkt. 280. The letter specified the following topics for supplemental briefing: (i)
whether a material omission in the Proxy invalidates the Grant; (ii) whether focusing
on the give-get exchange within an entire fairness fair price analysis is an accurate
framing of the inquiry, as Defendants asserted; (iii) whether disclosures about the
Grant development process are unlikely to be material here because the key economic
terms were fully disclosed; and (iv) any responses to the amicus brief filed by
Professor Charles M. Elson to aid the court in understanding the origin and purpose
of equity-linked compensation and how it relates to the Grant here. See Dkt. 266
(“Elson Amicus Br.”).
540 See Dkt. 285 (“Defs.’ Post-Trial Suppl. Opening Br.”); Dkt. 288 (“Pl.’s Post-Trial
Suppl. Answering Br.”); Dkt. 289 (“Defs.’ Post-Trial Suppl. Reply. Br.”).
541 Plaintiff asserts a derivative claim and, typically, litigation of a derivative claim
would begin with an assessment of whether the plaintiff met the demand
requirement. Demand futility is a gating issue that must be raised (and, in this
jurist’s view, should only be raised) at the pleading stage. See generally In re
McDonald’s Corp. S’holder Deriv. Litig., 291 A.3d 652, 699–700 (Del. Ch. 2023) (“The
defendants generally should expect one bite at the demand-futility apple.”). In this
case, however, Defendants did not argue demand futility at the pleading stage due to
this court’s decision in another action involving Tesla. See SolarCity I, 2018 WL
1560293, at *17–19 (holding that the plaintiffs had adequately alleged that demand
was excused with respect to a majority of the Tesla Board).
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dispute that the entire fairness standard applies and argue that, if entire fairness
applies, Plaintiff bears the burden of proof because the stockholder vote was fully
informed.
This analysis proceeds in four parts. The court first addresses the gating
issue—the standard of review—and concludes that entire fairness applies because
Musk exercised control over the Grant. The court next addresses Defendants’
argument that the stockholder vote shifted the burden under the entire fairness
standard to Plaintiff, concluding that Defendants retain the burden because the
stockholder vote was not fully informed. The court then evaluates the Grant under
the entire fairness standard, concluding that Defendants failed to prove that the
Grant was entirely fair. The court last turns to the remedy, concluding that Plaintiff
is entitled to rescission of the Grant in its entirety.
A. The Entire Fairness Standard Applies Because Musk Is A
Controller.
When determining whether corporate fiduciaries have breached their duties, a
court applying Delaware law evaluates the fiduciaries’ conduct through a standard of
review. 542 Delaware law has three levels of transactional standards of review:
business judgment, enhanced scrutiny, and entire fairness. 543
542 See Chen v. Howard-Anderson, 87 A.3d 648, 666 (Del. Ch. 2014); In re Trados Inc.
S’holder Litig., 73 A.3d 17, 35–36 (Del. Ch. 2013).
543 Chen, 87 A.3d at 666 (quoting Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442,
457 (Del. Ch. 2011)).
103
Plaintiff argues that Delaware’s most onerous standard of review, entire
fairness, applies because the Grant was a conflicted-controller transaction. 544
Alternatively, Plaintiff argues that entire fairness applies because half of the
directors who approved the Grant lacked independence from Musk. 545 Plaintiff wins
on the first argument—Musk is a controller. Because Plaintiff wins on the first
argument, the court does not address the second argument. 546
Delaware law imposes fiduciary duties on those who control a corporation. 547
Why? Because fiduciary duties exist in part to minimize agency costs caused by the
divide between economic ownership and legal control. 548 Delaware law vests control
over a corporation in a board of directors and imposes attendant fiduciary obligations
544 Pl.’s Post-Trial Opening Br. at 82.
545 Id.
546 The factual findings that render Musk a controller, however, support a finding
that the majority of the Board lacked independence.
547 Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1113 (Del. 1994) (“This Court
has held that a shareholder owes a fiduciary duty only if it owns a majority interest
in or exercises control over the business affairs of the corporation.” (cleaned up));
Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53, 70 (Del. 1989) (holding
that a stockholder who dominates and has actual control of the corporation’s activities
has fiduciary status); Ivanhoe P’rs v. Newmont Mining Corp., 535 A.2d 1334, 1344
(Del. 1987) (“A shareholder owes a fiduciary duty . . . if it . . . exercises control over
the business affairs of the corporation.”).
548 See generally Adolf Berle & Gardiner Means, The Modern Corporation and Private
Property (2d ed. 1991).
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on the board as a consequence. 549 When a controller displaces or neutralizes a board’s
power to direct corporate action, then the controller assumes fiduciary obligations. 550
The most straightforward way for a plaintiff to demonstrate control is to show
that a defendant holds a mathematical majority of the corporation’s voting power. 551
This is so because the DGCL requires stockholder approval of transformational
transactions. 552 The DGCL also permits stockholder action by written consent,
through which a majority stockholder can remove directors and fill vacancies. 553 “A
stockholder who owns a mathematical majority of the corporation’s voting power,”
therefore, “has the ability to exercise affirmative control” by directing the outcome of
549 8 Del. C. § 141(a).
550 See, e.g., Harris v. Carter, 582 A.2d 222, 234 (Del. Ch. 1990) (“[W]hen a shareholder
presumes to exercise control over a corporation, to direct its actions, that shareholder
assumes a fiduciary duty of the same kind as that owed by a director to the
corporation.” (citing Sterling v. Mayflower Hotel Corp., 93 A.2d 107, 109–10 (Del.
1952)).
551 Lynch, 638 A.2d at 1113 (noting that a stockholder becomes a fiduciary if he or she
“owns a majority interest in . . . the corporation” (quoting Newmont, 535 A.2d at 1344);
In re PNB Hldg. Co. S’holders Litig., 2006 WL 2403999, at *9 (Del. Ch. Aug. 18, 2006)
(“Under our law, a controlling stockholder exists when a stockholder . . . owns more
than 50% of the voting power of a corporation[.]” (citation omitted)); Williamson v.
Cox Commc’ns, Inc., 2006 WL 1586375, at *4 (Del. Ch. June 5, 2006) (“A shareholder
is a ‘controlling’ one if she owns more than 50% of the voting power in a corporation[.]”
(citation omitted))).
552 Voigt v. Metcalf, 2020 WL 614999, at *17 (Del. Ch. Feb. 10, 2020) (citing 8 Del. C.
§§ 242(b)(1), 251(c), 275(b)).
553 Id. (citing 8 Del. C. §§ 141(k), 211(b), 216(2)).
105
a stockholder vote or acting by written consent. 554 Musk controlled only 21.9% of
Tesla’s voting power, so he lacked mathematical voting control.
Mathematical voting control, however, is only one method of establishing
controller status. 555 “[C]ontrol of the ballot box is not always dispositive of the
controlling stockholder inquiry[.]” 556 A plaintiff can establish controller status by
554 Id. at *17; see also Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34,
42 (Del. 1994) (“In the absence of devices protecting the minority stockholders,
stockholder votes are likely to become mere formalities where there is a majority
stockholder.”).
555 In re Crimson Exploration Inc. S’holder Litig., 2014 WL 5449419, at *10 (Del. Ch.
Oct. 24, 2014).
556 SolarCity I, 2018 WL 1560293, at *14 (citing cases); see, e.g., In re Pattern Energy
Gp. Inc. S’holders Litig., 2021 WL 1812674, at *41–46 (Del. Ch. May 6, 2021) (finding
it reasonably conceivable on a motion to dismiss that a stockholder owning “slightly
more than 10%” was a controller who had consent rights and threatened to use it in
order to control decisions); Skye Mineral Invs., LLC v. DXS Cap. (U.S.) Ltd., 2020 WL
881544, at *24–29 (Del. Ch. Feb. 24, 2020) (finding it reasonably conceivable on a
motion to dismiss that a group of investors collectively owning 28.07% of the
company’s equity was a control group because it had contractual blocking rights that
could restrict capital raises and drive the company into bankruptcy); Reith v.
Lichtenstein, 2019 WL 2714065, at *7–10 (Del. Ch. June 28, 2019) (finding it
reasonably conceivable on a motion to dismiss that a stockholder owning 35.6% of the
company’s stock was a controller where the controller’s affiliates and former
executives took on senior leadership roles, provided key investment banking services,
and significantly “influenced management”); FrontFour Cap. Gp. LLC v. Taube, 2019
WL 1313408, at *21–24 (Del. Ch. Mar. 11, 2019) (finding post-trial that stockholders
who collectively owned “less than 15%” of the company’s stock were controllers where
the stockholders were the founders and officers of the company, managed the day-to-
day operations, and had control of deal structures and information flow); SolarCity I,
2018 WL 1560293, at *19 (finding it reasonably conceivable on a motion to dismiss
that Musk, who owned 22% of company’s common stock, was a controller based on
well-pled allegations related to “Musk’s voting influence, his domination of the Board
during the process leading up to the [challenged acquisition] against the backdrop of
his extraordinary influence within the Company generally, the Board level conflicts
that diminished the Board’s resistance to Musk’s influence, and the Company’s and
Musk’s own acknowledgements of his outsized influence”); Calesa Assocs. v. Am. Cap.,
Ltd., 2016 WL 770251, at *10–12 (Del. Ch. Feb. 29, 2016) (finding it reasonably
106
demonstrating that the defendant “exercises control over the business affairs of the
corporation.” 557 For this purpose, a plaintiff need not argue that the defendant
conceivable on a motion to dismiss that a stockholder owning 26% of the company’s
stock exercised actual control where the plaintiff alleged instances of actual control
beyond the fact that the stockholder “exercised duly obtained contractual rights to its
benefit and to the detriment of the company” (emphasis in original)); In re Zhongpin
Inc. S’holders Litig., 2014 WL 6735457, at *7–8 (Del. Ch. Nov. 26, 2014) (finding it
reasonably conceivable on a motion to dismiss that a stockholder owning 17.3% of the
company’s stock was a controller because the stockholder was CEO and the company’s
10-K stated that the stockholder effectively controlled the company), rev’d on other
grounds sub nom. In re Cornerstone Therapeutics Inc. S’holder Litig., 115 A.3d 1173
(Del. 2015); In re Loral Space & Commc’ns Inc., 2008 WL 4293781, at *21–22 (Del.
Ch. Sept. 19, 2008) (finding post-trial that a stockholder owning 35.9% of the
company’s stock was a controller where the controller had rights to block important
strategic initiatives, was a significant creditor that could unilaterally force
redemption of notes, and maintained publicly that it controlled the board); Cox
Commc’ns, 2006 WL 1586375, at *4–5 (finding it reasonably conceivable on a motion
to dismiss that two stockholders, owning collectively 17.1% of the company’s stock,
jointly controlled the company based on their ability to nominate two of the five
directors, their ability to influence the flow of revenue into the corporation, and their
potential “veto” power over certain corporate decisions); In re Cysive, Inc. S’holders
Litig., 836 A.2d 531, 535, 551–52 (Del. Ch. 2003) (finding post-trial that a stockholder
owning 35% of the company’s stock controlled the company because he was a “hands-
on” “Chairman and CEO of [the company],” and because he had the ability to “elect a
new slate [of independent directors] more to his liking without having to attract
much, if any, support from public stockholders[,]” through his familial ties with the
company’s other stockholders); O’Reilly v. Transworld Healthcare, Inc., 745 A.2d 902,
912–13, 915–16 (Del. Ch. 1999) (finding it reasonably conceivable on a motion to
dismiss that a stockholder owning 49% of the company’s stock exercised actual control
where the plaintiff alleged that the stockholder forced the board to comply with its
terms on the merger through threats). See also Voigt, 2020 WL 61499 at *19 n.20
(noting “that ‘[t]his Court and others have recognized that substantial minority
interests ranging from 20% to 40% often provide the holder with working control’”
(quoting Robbins & Co. v. A.C. Israel Enters., Inc., 1985 WL 149627, at *5 (Del. Ch.
Oct. 2, 1985) (alteration in original))); 8 Del. C. § 203(c)(4) (“[a] person who is the
owner of 20% or more of the outstanding voting stock of any corporation, partnership,
unincorporated association or other entity shall be presumed to have control of such
entity, in the absence of proof by a preponderance of the evidence to the contrary”);
Rosenthal v. Burry Biscuit Corp., 60 A.2d 106, 110–11 (Del. 1948) (finding ten percent
ownership of the outstanding common stock sufficient to infer control).
557 Newmont, 535 A.2d at 1344 (citations omitted).
107
exercised general control over the business and affairs of the corporation. Although
a showing of “general control” is sufficient to establish fiduciary status, a plaintiff can
establish fiduciary status by demonstrating that the defendant controlled the
particular transaction at issue, referred to as “transaction-specific” control. 558
To establish general control, a plaintiff must show “that a defendant or group
of defendants exercised sufficient influence ‘that they, as a practical matter, are no
differently situated than if they had majority voting control.’” 559 “One means of doing
so is to show that the defendant, ‘as a practical matter, possesses a combination of
stock voting power and managerial authority that enables him to control the
corporation, if he so wishes.’” 560 The analysis of effective control looks to a
stockholders’ ability to exert influence as a stockholder, in the boardroom, and outside
of the boardroom through managerial roles. Breaking these categories down to
“indicia of effective control,” the factors include:
• “ownership of a significant equity stake (albeit less than a majority),”
• “the right to designate directors (albeit less than a majority),”
• “decisional rules in governing documents that enhance the power of a
minority stockholder or board-level position,” and
558 Voigt, 2020 WL 614999, at *11–12; Basho Techs. Holdco B, LLC v. Georgetown
Basho Invs., LLC, 2018 WL 3326693, at *25 (Del. Ch. July 6, 2018) (“The requisite
degree of control can be shown to exist generally or with regard to the particular
transaction that is being challenged.” (quoting Carsanaro v. Bloodhound Techs., Inc.,
65 A.3d 618, 659 (Del. Ch. 2013)), aff’d sub nom. Davenport v. Basho Techs. Holdco
B, LLC, 221 A.3d 100 (Del. 2019) (TABLE).
559 Basho, 2018 WL 3326693, at *25 (quoting PNB, 2006 WL 2403999, at *9).
560 Id. (quoting Cysive, 836 A.2d at 553).
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• “the ability to exercise outsized influence in the board room, such as
through high-status roles like CEO, Chairman, or founder.” 561
To establish transaction-specific control, a plaintiff must show that the
stockholder “exercise[d] actual control over the board of directors during the course
of a particular transaction[.]” 562 This analysis often focuses on relationships “with
key managers or advisors who play a critical role in presenting options, providing
information, and making recommendations[.]” 563 It can also address “the exercise of
contractual rights to channel the corporation into a particular outcome by blocking or
restricting other paths,” and “commercial relationships,” although those factors are
less relevant here. 564 Ultimately, “[i]t is impossible to identify or foresee all of the
possible sources of influence that could contribute to a finding of actual control over
a particular decision.” 565
Both general control and transaction-specific control call for a holistic
evaluation of sources of influence. “Rarely (if ever) will any one source of influence
or indication of control, standing alone, be sufficient to make the necessary
561 Id. at *27 (citations omitted).
562 In re W. Nat’l Corp. S’holders Litig., 2000 WL 710192, at *20 (Del. Ch. May 22,
2000) (citation omitted).
563 Basho, 2018 WL 3326693, at *26 (concluding on a motion to dismiss that the
defendant’s relationship with management, including tips received by defendant from
company’s officers that provided negotiating leverage, supported an inference of
control (citing OTK Assocs., LLC v. Friedman, 85 A.3d 696, 704, 706–07, 715, n.1 (Del.
Ch. 2014)).
564 Basho, 2018 WL 3326693, at *26 (citations omitted); see also Skye Mineral, 2020
WL 881544, at *26–27; Cox Commc’ns, 2006 WL 1586375, at *4.
565 Basho, 2018 WL 3326693, at *26.
109
showing.” 566 “Different sources of influence that would not support an inference of
control if held in isolation may, in the aggregate, support an inference of control.” 567
“Sources of influence and authority must be evaluated holistically, because they can
be additive.” 568 “Invariably, the facts and circumstances surrounding the particular
transaction will loom large.” 569
Here, Plaintiff advances theories of both general and transaction-specific
control. To streamline the sprawling set of issues presented, this analysis addresses
whether Musk held transaction-specific control with respect to the Grant. Because
“[b]roader indicia of effective control also play a role in evaluating whether a
defendant exercised actual control over a decision[,]” 570 the sources of influence
identified by Plaintiff in support of a finding of general control factor into the
transaction-specific analysis.
Plaintiff’s argument that Musk controls Tesla might conjure a sense of déjà vu.
That is because Delaware courts have confronted this precise issue before in a prior
lawsuit challenging Tesla’s 2016 acquisition of SolarCity when Musk was SolarCity’s
largest stockholder and board chair. Although the SolarCity case resulted in three
opinions, none of them included a finding concerning Musk’s status as a controller.
In the first, Vice Chancellor Slights denied the defendants’ motion to dismiss where
566 Id. at *28 (citations omitted).
567 Voigt, 2020 WL 614999, at *13.
568 Id.
569 Basho, 2018 WL 3326693, at *28.
570 Id. at *27.
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it was reasonably conceivable that Musk controlled Tesla. 571 On a motion to dismiss,
however, a court must assume the truth of the plaintiff’s factual allegations.
Accordingly, the Vice Chancellor’s dismissal decision did not constitute a finding that
Musk was a controller. Post-trial, the Vice Chancellor held that even if Musk were a
controller so as to trigger entire fairness, the transaction was entirely fair. 572 For
this reason, it was unnecessary to make a post-trial finding on whether Musk
controlled Tesla. The Vice Chancellor’s approach dexterously relieved the Delaware
Supreme Court from the burden of resolving the issue when affirming the post-trial
decision. 573
571 SolarCity I, 2018 WL 1560293, at *13 (finding it reasonably conceivable that Musk
controlled Tesla due to allegations concerning: Musk’s ability to influence the
stockholder vote through his 21.9% ownership; Musk’s influence over the board as
Tesla’s visionary, CEO, and chairman; Musk’s strong connections with members of
the board and the fact that a majority of the board was interested in the transaction;
and Tesla’s acknowledgment of Musk’s control in public filings).
572 SolarCity II, 2022 WL 1237185, at *2. Although the Vice Chancellor found that
there were significant flaws in the process that led to the SolarCity acquisition, the
court held that “any control [Musk] may have attempted to wield in connection with
the Acquisition was effectively neutralized by a board focused on the bona fides of the
Acquisition, with an indisputably independent director leading the way.” Id. at *33
(citation omitted). In reaching this conclusion, the Vice Chancellor emphasized that
the board rebuffed multiple of Musk’s demands during the process, that Denholm
“emerged as an independent, powerful and positive force during the deal process who
doggedly viewed the Acquisition solely through the lens of Tesla and its stockholders,”
and was an “effective buffer between” Musk and the conflicted board. Id. at *37–38.
The Vice Chancellor then credited as evidence of a fair price the fully informed
stockholder vote, SolarCity’s unaffected trading price, SolarCity’s cash flows, the
financial advisor’s fairness opinion, and potential synergies.
573 SolarCity III, 298 A.3d at 699.
111
This question of whether Musk controls Tesla has thus proven evasive. It is
as good a time as any to run it to ground. And so, “[o]nce more unto the breach, dear
friends, once more.” 574
The analysis begins by discussing Musk’s stock ownership, which is a
significant but not dispositive indicium of control. The analysis then turns to the
factors that play a bigger role in the court’s conclusion, which are Musk’s influence
over managerial decisions, decision makers, and the process. Musk wielded the
maximum influence that a manager can wield over a company. His ties to three of
the eight directors (Kimbal, Gracias, and Murdoch) rendered those directors beholden
to him; with Musk, they comprised half of the Board (given Jurvetson’s departure).
The rest of the fiduciaries acted beholden to Musk in the process leading to the Grant,
allowing Musk to dictate the timing of the process and the terms of the Grant.
Ultimately, the key witnesses said it all—they were there to cooperate with Musk,
not negotiate against him. This unique suite of allegations makes it undeniable that,
with respect to the Grant, Musk controlled Tesla.
1. Stock Ownership
“All else equal, a relatively larger block size should make an inference of actual
control more likely[]” for a few reasons discussed at length by Vice Chancellor J.
Travis Laster in Voigt. 575 This is due in part to quorum requirements and stockholder
turnout, which give a 40% block holder the same effective power in most
574 William Shakespeare, Henry V act 3 sc. 1, lns. 1–2.
575 Voigt, 2020 WL 614999, at *17–19 (emphasis omitted).
112
circumstances as the holder of a mathematical majority. 576 Meanwhile, “stockholders
who oppose the blockholder’s position can only prevail by polling votes at
supermajority rates.” 577 Relatedly, compared to a small blockholder, a large
blockholder needs the support of fewer other investors to carry a vote. 578
Musk wields significant influence over Tesla by virtue of his stock holdings.
Just prior to the Board’s approval of the Grant, Musk owned approximately 21.9% of
Tesla’s outstanding common stock. 579 Applying the assumptions used in Voigt, if the
holder of a 21.9% block favors a particular outcome, then the holder will win as long
as holders of approximately one-in-three shares vote the same way. 580 By contrast,
an opponent must garner approximately 71% of the unaffiliated shares to win.
It is thus no surprise that this court has found that holders of similar or lesser
percentages of stock are controlling stockholders. 581 It is also no surprise that under
576 Id. at *18 (“[O]nce a quorum is present, the general standard for taking action is
the affirmative vote of a majority of the shares present and entitled to vote. For the
election of directors, the general standard is a plurality of the shares present and
entitled to vote. Meetings typically attract participation from just under 80% of the
outstanding shares. At that level, the holder of a 40% block can deliver the vote
needed to prevail at a meeting.” (citations omitted)).
577 Id. at *18 (citation omitted). For example, “assuming a meeting where holders
with 80% of the voting power turn out, and the standard is a majority of the shares
present and entitled to vote . . . if the holder of a 35% block favors a particular outcome
at a meeting, then the blockholder will win as long as holders of 1-in-7 shares vote
the same way. The opponents must garner over 90% of the unaffiliated shares to
win.” Id.
578 See generally id. at *18–19 (discussing the mathematics behind this principle in
detail).
579 PTO ¶ 64.
580 Voigt, 2020 WL 614999, at *18.
581 See supra note 556.
113
Section 203 of the DGCL, “[a] person who is the owner of 20% or more of the
outstanding voting stock of any corporation . . . shall be presumed to have control of
such entity, in the absence of proof by a preponderance of the evidence to the
contrary.” 582 Nor is it any surprise that the original stockholder rights plan triggered
at 20% ownership, or that rights plans now routinely cap ownership at 15% or less,
thereby forcing a stockholder to stop short of the 20% figure. 583 At a minimum, a
21.9% holding supplies a powerful “rhetorical card[] to play in the boardroom.” 584
For Musk, his significant block operated in conjunction with a supermajority
voting requirement for any amendment to Tesla’s bylaws governing stockholder
meetings, directors, indemnification rights, and the supermajority voting
requirement itself. 585 Assuming an 80% turn-out, Musk needed the support of less
than 10% of the minority stockholders to block a bylaw amendment at a stockholder
meeting. By contrast, a proponent would have to garner over 93% of the unaffiliated
shares to win. This means that, with the support of insiders or directors, Musk can
582 8 Del. C. § 203(c)(4).
583 See Williams Cos. S’holder Litig., 2021 WL 754593, at *1 (Del. Ch. Feb. 26, 2021)
(citing Marcel Kahan & Edward Rock, Anti-Activist Poison Pills, 99 B.U. L. Rev. 915,
922 (2019)).
584 Voigt, 2020 WL 614999 at *19.
585 JX-323 at 33 (2/1/17 Form 8-K) (stating that Article X requires a supermajority of
outstanding shares vote to amend Articles II, VIII, and X, and certain provisions of
Article III).
114
easily block bylaw amendments that require a supermajority vote. Indeed, Musk has
been able to do so two separate times. 586
Musk’s 21.9% block, therefore, gives him a sizable leg-up for stockholder votes
generally and the ability to block specific categories of bylaw amendments. The block
also gives him great influence in the boardroom. This undoubtedly contributes to his
clout and sway.
If this case involved a failed bylaw amendment subject to a supermajority vote,
then Musk’s stock holdings would likely prove dispositive to the control analysis. But
that is not the situation, so Musk’s stock holdings must be considered in connection
with the other indicia of control.
2. Boardroom And Managerial Supremacy
“[T]he ability to exercise outsized influence in the board room[]”can contribute
to a finding of control. 587 Boardroom influence can come in a variety of forms. An
individual might hold “high-status roles like CEO, Chairman, or founder.” 588 Or an
586 JX-1234 at 25–26 (5/28/20 Schedule 14A) (noting Tesla’s successful opposition to
the 2014 and 2016 proposals to move to simple majority voting).
587 Basho, 2018 WL 3326693, at *27, n.322 (“[T]he explicit or implicit threat of
retaliation will carry much more weight if it comes from a . . . defendant who controls
25% of the voting power of the company, . . . and serves as Chairman of the Board
with the power to call board meetings and set the agenda.”); see also Cysive, 836 A.2d
at 551–53 (incorporating defendants’ status as CEO and chairman into the control
analysis).
588 Basho, 2018 WL 3326683, at *27 (citations omitted); SolarCity I, 2018 WL
1560293, at *13 (considering for purposes of the control analysis “Musk’s influence
over the Board as Tesla’s visionary, CEO and Chairman of the Board”); Zhongpin,
2014 WL 6735457, at *9 (denying a motion to dismiss where it was reasonably
conceivable that the defendant was a controller, in part because “[t]he Company
relied so heavily on him to manage its business and operations that his departure
115
individual might have other key executive or managerial roles. An individual can
wield influence if he can interfere with or kibosh management decisions. 589 An
individual will have substantial influence if he can replace management. 590
Musk wields considerable power in the boardroom by virtue of his high-status
roles and managerial supremacy. Indeed, describing Musk’s role at Tesla as “high-
status” 591 would be a dramatic understatement. At relevant times, Musk occupied
the most powerful trifecta of roles within a corporation—CEO, chair, and founder.
He also exercised managerial authority over all aspects of Tesla and often without
from [the Company] would have had a material adverse impact on the Company”),
rev’d on other grounds sub nom., Cornerstone, 115 A.3d 1173; Cysive, 836 A.2d at 551–
53 (finding post-trial that a minority stockholder had controller status where the
stockholder was the chairman and CEO “and a hands-on one, to boot[,]” was “by
admission, involved in all aspects of the company’s business, was the company’s
creator” and “inspirational force”). Although this court has held that high-status
roles contribute to a finding of control, this court has declined to find that a defendant
held controller status based solely on those roles. See In re GGP, Inc. S’holder Litig.,
2021 WL 2102326, at *23–24 (Del. Ch. May 25, 2021) (granting motion to dismiss
where the alleged controller was the chairman and no other factors were present),
aff’d in part, rev’d in part and remanded, 282 A.3d 37 (Del. 2022); In re Rouse Props.,
Inc., 2018 WL 1226015, at *19–20 (Del. Ch. Mar. 9, 2018) (same, where no facts of
actual control alleged); Larkin v. Shah, 2016 WL 4485447, at *13–15 (Del. Ch. Aug.
25, 2016) (same); In re Morton’s Rest. Gp., Inc. S’holders Litig., 74 A.3d 656, 664 (Del.
Ch. 2013) (same, where alleged controller previously owned the company but did not
exert actual control).
589 See,e.g., Basho, 2018 WL 3326693, at *32 (finding post-trial that a minority
stockholder had controller status, in part because the stockholder “exerted control
over management” who would “subvert . . . , threaten . . . or get rid of” any “member
of management [who] did not support” the stockholder’s interests).
590 See, e.g., Reith, 2019 WL 2714065, at *8 (denying a motion to dismiss where it was
reasonably conceivable that the defendant was a controller, in part because the
defendant had “replaced the company’s management with alleged affiliates . . . and
the Company paid an affiliated entity significant funds every month under the
Management Services Agreement”).
591 Voigt, 2020 WL 614999, at *12.
116
regard to Board authority, rendering Tesla highly dependent on him. Truly, the
avalanche of evidence on this point is so overwhelming that it is burdensome to set
out in prose, hence these blunt bullet points:
• Tesla and Musk are intertwined, almost in a Mary Shelley (“You are my
creator . . .”) sort of way. 592 As Kimbal explained, “Tesla created Elon
Musk’s persona and Elon Musk’s persona is attached to Tesla.” 593 Musk
is Tesla’s public face, and he describes Tesla as “my company.” 594
• Tesla’s entire corporate strategy is Musk’s brainchild—he conceived
both the “Master Plan” and “Master Plan, Part Deux.” 595
• Tesla is highly dependent on Musk, as it has made clear in public
disclosures. 596 Musk did not dispute this characterization or that his
departure would “likely” cause such disruptions. 597
• Musk has admitted that he has “the power to direct operational
decisions at Tesla[.]” 598
592 See generally Mary Shelley, Frankenstein; or, The Modern Prometheus
(Lackington, Hughes, Harding, Mavor & Jones, 1st ed. 1818).
593 Trial Tr. at 1085:11–24 (Kimbal); see also id. at 644:11–15 (Musk) (Musk agreeing
that, as of May 2017, he was “heavily invested in Tesla, both financially and
emotionally and . . . viewed Tesla as part of [his] family”).
594 Id. at 625:22–626:21 (Musk); see also JX-1031 at 52 (Tesla disclosing that “[w]e
are highly dependent on the services of Elon Musk, our Chief Executive Officer,
Chairman of our Board of Directors and largest stockholder.”).
595 Trial Tr. at 566:11–18, 610:24–611:2 (Musk) (Musk agreeing at trial that Part
Deux is “still guiding Tesla’s strategy”); PTO ¶¶ 47–48.
596 JX-335 at 25–26 (“The loss of the services of any of our key employees could disrupt
our operations, delay the development and introduction of our vehicles and services,
and negatively impact our business, prospects and operating results. In particular,
we are highly dependent on the services of Elon Musk, our Chief Executive Officer,
and Jeffrey B. Straubel, our Chief Technical Officer.”); JX-1031 at 52 (“We are highly
dependent on the services of Elon Musk, our Chief Executive Officer, Chairman of
our Board of Directors and largest stockholder.”).
597 Trial Tr. at 603:12–20 (Musk).
598 Id. at 601:6–10 (Musk).
117
• Gracias testified that Musk “could have sold the entire company if he
wanted to.” 599
• Musk is extremely involved in financial planning and supplies inputs
for models and plans. 600 All financial plans must be approved by
Musk. 601
• Musk makes the hiring, compensation, and firing decisions for high-
level positions. 602 Tesla employees described Musk as having a
reputation among employees as a “tyrant” who fires people “on a
whim.” 603
• Musk operates under his own set of rules at Tesla. For example, due to
his “special position of trust” at Tesla, no one at Tesla could review his
email account without permission except when legally required. 604
• Musk has made up positions and titles for himself. In 2021, without
first consulting with the Board, 605 Musk appointed himself
“Technoking”—a position he compared to being a monarch. 606
599 Id. at 782:5–22 (Gracias).
600 Id. at 498:22–499:7 (Ahuja).
601 Id. at 511:8–19 (Ahuja).
602 Id. at 851:6–852:5 (Murdoch); id. at 612:23–613:6 (Musk).
603 JX-924 at 6 (Tesla employee survey); see also JX-857 at 1 (Tesla’s former chief
people officer, in a January 2018 email, stating: “Elon will fire me Tuesday anyway
for sending market rate compensation to him”).
604 Trial Tr. at 601:11–602:10 (Musk).
605 Id. at 1085:1–7 (Kimbal) (“Question: Have you heard the word ‘Technoking’ before?
Answer: Yes, I have. Question: When did you first hear that word? Answer: I heard
it over Twitter, when Elon changed his Twitter account.”); id. at 854:21–855:3
(Murdoch) (“Q. Now, you’re aware that Elon Musk has added Technoking to his Tesla
title. Correct? A. Yes, I am aware of that. Q. And you believe you likely first learned
about that development via a tweet. Is that correct? A. I might have. I think so.
Yeah.”); Musk Dep. Tr. at 25:13–25 (“Q . . . Did you consult with the board about the
new title before -- before filing it on 8-K? A. No, but it was communicated to the
board.”); but see Trial Tr. at 599:4–10 (Musk) (stating that he was “wrong” in his
deposition when he stated he did not consult the Board before giving himself the title
of Technoking); see also JX-1331 at 2 (3/15/21 Form 8-K announcing the name
change).
606 Musk Dep. Tr. at 22:24–23:1.
118
Ehrenpreis described that decision as “Elon being Elon[,]” 607 which
suggests that the behavior is not unusual for Musk. Musk testified that
the title was intended as a joke, 608 but that is a problem in itself.
Organizational structures, including titles, promote accountability by
clarifying responsibilities. They are not a joke.
• Musk operates as if free of Board oversight, as shown by his treatment
of the SEC Settlement. 609 Musk’s “self-regulat[ory] 610 process for
compliance and the Board’s desultory enforcement paint a vivid picture
of their inability or unwillingness to rein in Musk. 611 Even after the
settlement, the Disclosure Committee did not review his tweets. 612 At
trial, Denholm was not sure whether the Disclosure Committee was
fulfilling its obligations under the SEC Settlement. 613
• Musk has ignored specific Board directives, such as unilaterally pausing
Tesla’s acceptance of Bitcoin after the Board approved it. 614 Other
surprise announcements include Musk discussing the idea of Tesla
repurchasing billions of dollars of stock during an earnings call and
without Board knowledge. 615
• Musk regularly uses Tesla resources to address projects at other
companies he owns. For example, after Musk acquired Twitter, he
asked approximately 50 Tesla engineers to “volunteer” to help him
evaluate Twitter’s engineering team. 616 No one on the Board challenged
607 Trial Tr. at 189:19–24 (Ehrenpreis).
608 See id. at 599:16–22 (Musk).
609 See JX-1070 at 1 (9/29/18 SEC Press Release: Elon Musk Settles SEC Fraud
Charges; Tesla Charged With and Resolves Securities Law Charge).
610 Trial Tr. at 382:5–12 (Denholm).
611 See id. at 616:3–11, 619:12–622:3 (Musk); id. at 382:5–12, 386:8–12 (Denholm).
612 Id. at 615:8–616:2 (Musk); JX-1550 at 3–4 (12/9/18 60 Minutes interview
transcript).
613 Trial Tr. at 379:7–380:7 (Denholm).
614 Id. at 613:19–614:10 (Musk).
615 Id. at 619:13–24 (Musk). Musk’s general aversion to oversight extends to the SEC.
See generally id. at 623:4–22, 624:3–625:21 (Musk); JX-1555 (7/2/20 tweet from Musk
stating: “SEC, three letter acronym, middle word is Elon’s”).
616 Trial Tr. at 656:6–657:20 (Musk).
119
this decision. 617 Murdoch testified that this was “being monitored by
the [Audit Committee] and being paid for.” 618 But Murdoch was not able
to even “ballpark” the number of Tesla engineers involved, even though
the monitoring he described had taken place at most “a few weeks” prior
to his testimony. 619 Murdoch’s testimony also showed that any
monitoring by the Audit Committee, such as it was, took place after the
fact. 620 Similarly, in 2020, Musk directed Tesla management to send
Tesla’s “smartest micro grid designer [] with a bunch of Powerpacks to
[SpaceX][.]” 621
This evidence, though not exhaustive, demonstrates the scope of Musk’s
influence as a member of management and in the Boardroom. Based on this list
alone, it could be said that Musk wields unusually expansive managerial authority,
equaling or even exceeding the imperial CEOs of the 1960s. 622
One set of scholars have created a term for this sort of person—a “Superstar
CEO,” defined as an “individual[] who directors, investors, and markets believe make
a unique contribution to company value.” 623 As the authors explain, the reasons for
believing that a CEO is uniquely valuable to the corporation might vary, and those
617 Id. at 657:9–658:2 (Musk).
618 Id. at 870:18–871:2 (Murdoch).
619 Id. at 869:14–870:17 (Murdoch).
620 Id. at 870:18–871:2 (Murdoch).
621 JX-1195 at 1.
622 See generally Myles L. Mace, Directors: Myth and Reality 77–85 (1971).
623 Superstar CEOs at 1367.
120
beliefs could be wrongly held. 624 But the reasons and their accuracy are irrelevant. 625
“[W]hat matters is only that such a belief does exist.” 626
CEO superstardom is relevant to controller status because the belief in the
CEO’s singular importance shifts the balance of power between management, the
board, and the stockholders. When directors believe a CEO is uniquely critical to the
corporation’s mission, even independent actors are likely to be unduly deferential.
They believe that “letting the CEO go would be harmful to the company and that
alienating the CEO might have a similar effect.” 627 They “doubt their own judgment
and hesitate to question the decisions of their superstar CEO.” 628 They view CEO
self-dealing as the trade-off for the CEO’s value. 629 In essence, Superstar CEO status
624 Id. at 1367–68 (“Markets may believe, for example, that only the CEO possesses
the idiosyncratic vision that is essential to make the company outperform the
competition. Or that only she possesses exceptional skills or other rare qualities that
are crucial for implementing the company’s strategy. Another explanation is that the
CEO possesses the charisma and ability to sell their vision that is crucial for
attracting investors, employees, or other constituencies. . . . [T]hese are CEOs who
directors, investors, and markets believe have charismatic power or other
extraordinary qualities that set them apart from other ordinary CEOs . . . .” (emphasis
in original)); id. at 1368 (“Moreover, the perception that a CEO is uniquely valuable
could be wrong as a matter of principle or in the case of certain individuals.”).
625 Id.
626 Id. (emphasis omitted).
627 Id. at 1379.
628 Id.
629 See, e.g., id. at 1392 (“As long as the CEO is perceived as a star and the company
depends on her vision and leadership, investors are less likely to challenge the CEO.
Regardless of their financial savvy, investors might even approve self-dealing and
other value reducing transactions. They will not rush to discipline CEOs with star
qualities even when they engage in misconduct. They will challenge the CEO only
when they believe that [s]he has lost h[er] magic touch or that the harm from h[er]
misconduct exceeds her singular contribution to company value.”).
121
creates a “distortion field” 630 that interferes with board oversight. As discussed later
in this analysis, the distortion field can weaken mechanisms by which stockholders
hold fiduciaries accountable, a risk that becomes more severe when the Superstar
CEO owns a large block of shares. 631
Faith in a Superstar CEO changes the dynamics of corporate decision making.
That is true for all corporate decisions, but the risk becomes more acute for issues
where the Superstar CEO’s interests are directly concerned. Nowhere is that truer
than the Superstar CEO’s compensation. In the face of a Superstar CEO, it is even
more imperative than usual for a company to employ robust protections for minority
stockholders, such as staunchly independent directors. In this case, Tesla’s
fiduciaries were not staunchly independent—quite the opposite, as discussed next. 632
630 This phrase, first used to describe Steve Jobs, applies here. See Elson Amicus Br.
at 1 (citing Waters supra note 12).
631 Superstar CEOs at 1400–02.
632 To be sure, the Superstar CEO designation lacks definitional precision.It is hard
to distinguish between an executive who is valuable to a corporation and a Superstar
who is singularly or uniquely valuable to a corporation. As the scholars have
acknowledged, this definitional imprecision could lead to “vague standards” that
“create uncertainty and encourage litigation[,]” thus diminishing the utility of the
Superstar CEO label. Id. at 1400–02; see also Lawrence Hamermesh, Jack B. Jacobs,
and Leo E. Strine, Jr., Optimizing the World’s Leading Corporate Law: A Twenty-
Year Retrospective And Look Ahead, 77 Bus. Law. 321, 346 (2022) (raising concerns
with the theory, noting that a CEO’s value to a company standing alone does not
make the CEO a controlling stockholder). For that reason, the concept should not be
deployed far and wide. When deployed, doubtless there will be close cases. But not
here. Musk is a dead ringer. See generally Superstar CEOs at 1354–56 (identifying
Musk as the paradigmatic Superstar CEO). If nothing else, the Superstar CEO
concept is valuable for its descriptive power, because it explains what took place in
this case.
122
3. Relationships With The Board
A director lacks independence if he or she is “so beholden to an interested
director that his or her discretion would be sterilized.” 633 Both past and future
rewards are relevant to this analysis. 634 The inquiry is “highly fact specific” and there
is “no magic formula to find control.” 635
Nine directors served on the Board at relevant times. Jurvetson can be
excluded given his early departure. Of the remaining eight, Musk was one and his
brother another. 636 That is one fourth of the relevant directors. The other six had
varying degrees of ties to Musk. The analysis begins with the four Compensation
Committee members (Ehrenpreis, Buss, Denholm, and Gracias) and then turns to
Murdoch and Johnson Rice.
Gracias had the most extensive business and personal dealings with Musk and
Kimbal. Prior to approving the Grant, Gracias held interests worth over $1 billion in
Musk-controlled entities, which Gracias admitted provided him “dynastic or
generational wealth.” 637 Gracias and Musk had a decades-long relationship, which
included joint family vacations and attendance at family birthday parties. Gracias
633 Highland Legacy Ltd. v. Singer, 2006 WL 741939, at *5 (Del. Ch. Mar. 17, 2006)
(citing cases).
634 See generally Da Lin, Beyond Beholden, 44 J. Corp. L. 515, 550 (2019). Prospective
rewards might be more difficult to prove than past relationships, but that does not
mean they do not exist.
635 Calesa, 2016 WL 770251, at *11 (citing Crimson, 2014 WL 5449419, at *10).
636 Defendants do not dispute this; nor could they. Kimbal is Musk’s brother and
business partner, and he recused himself from discussion of or voting on the 2018
Grant due to this conflict. PTO ¶ 232; see JX-791 at 1.
637 Trial Tr. at 774:22–24 (Gracias).
123
had a 20-year friendship with Kimbal and was an investor in Kimbal’s business
ventures. Gracias also received millions in Valor investments from Musk and
Kimbal, and was a director of SpaceX and SolarCity, the latter until its acquisition
by Tesla.
Gracias’s business ties to Musk, standing alone, support a finding that Gracias
lacked independence from Musk. 638 Similarly, Gracias’s personal relationship with
Musk, standing alone, support a finding that Gracias lacked independence from
Musk. 639 The combination of business and personal ties make it undeniable that
Gracias lacked independence from Musk.
638 See generally Sandys v. Pincus, 152 A.3d 124, 134 (Del. 2016) (finding it reasonably
conceivable on appeal from a dismissal decision that two directors were not
independent of a controller for purposes of Rule 23.1 where they had “a mutually
beneficial network of ongoing business relations” based on past investments and
service on company boards); SolarCity I, 2018 WL 1560293, at *18 (finding it
reasonably conceivable on a motion to dismiss that a director lacked independence
where the controller was a “frequent investing partner” in the director’s venture);
Cumming v. Edens, 2018 WL 992877, at *15 (Del. Ch. Feb. 20, 2018) (finding it
reasonably conceivable on a motion to dismiss that a director was not independent
for demand futility purposes because the director and the controller owned a
professional sports team together and worked together to build a new stadium);
Trados, 73 A.3d at 54–55 (finding post-trial that a director lacked independence
where, among other allegations, the director “had a long history with” the controller,
had served previously as an executive at one of the controller’s portfolio companies,
was asked “to work with [the controller] on other companies,” and invested “about
$300,000 in three [controller] funds”); In re New Valley Corp. Deriv. Litig., 2001 WL
50212, at *7 (Del. Ch. Jan. 11, 2001) (finding it reasonably conceivable on a motion to
dismiss that directors were not disinterested and independent based on intertwined,
long-standing business relationships such as being paid to be a director nominee in a
separate proxy bid); Loral, 2008 WL 5293781, at *20–22 (finding post-trial that a
director lacked independence where, among other things, the director had
successfully solicited investments from the controller’s companies).
639 See generally Marchand v. Barnhill, 212 A.3d 805, 819 (Del. 2019) (finding it
reasonably conceivable on appeal that a director’s long-standing personal ties to the
124
Ehrenpreis also had extensive business and personal relationships with Musk.
Prior to the Grant, Ehrenpreis held interests worth at least $75 million in Musk-
controlled companies other than Tesla and had invested in Kimbal’s business
ventures. Ehrenpreis also had longstanding personal and professional relationships
with Musk and Kimbal that Ehrenpreis admitted had a “significant influence” on his
professional career. 640 Although Ehrenpreis’s relationship with Musk was not as
thick as that enjoyed by Gracias, it was weighty. Given the critical role he played as
chair of the Compensation Committee, it was too weighty. Even if one could debate
whether these ties rendered Ehrenpreis beholden to Musk in general, his actions in
connection with the Grant demonstrate that he was beholden for that purpose.
The same is true of Denholm and Buss. Their most significant, potentially
comprising factor is the compensation each received as a Tesla director. For
Denholm, it was “life-changing.” 641 For Buss, it was a large portion of his wealth. 642
Ordinary, market-rate compensation does not compromise a director’s
controller compromised independence); Del. Cty. Emps. Ret. Fund v. Sanchez, 124
A.3d 1017, 1022 (Del. 2015) (finding it reasonably conceivable on appeal from a
dismissal decision that a director lacked independence because the director had a
friendship of over 50 years with an interested party); Sandys, 152 A.3d at 130 (finding
it reasonably conceivable on appeal from a dismissal decision that co-owning a private
plane with a close friend indicates a lack of independence because it is unusual and
would require close cooperation in use and a continuing, close personal friendship);
In re BGC P’rs, Inc. Deriv. Litig., 2019 WL 4745121, at *11–12 (Del. Ch. Sept. 30,
2019) (finding it reasonably conceivable on a motion to dismiss that a director lacked
independence where the director and the controller attended exclusive events
together and had a close relationship for 20 years).
640 Trial Tr. at 192:6–10 (Ehrenpreis).
641 Id. at 397:6–12 (Denholm).
642 See supra § I.C.1.a.ii.
125
independence. 643 Outsized director compensation can. 644 But Plaintiff does not argue
that Musk established Buss and Denholm’s compensation so as to render them
beholden. 645 Instead, it is a factor that must be considered when evaluating how
Denholm and Buss acted when negotiating the Grant.
The remaining directors present clearer calls. Murdoch lacked independence
due to personal connection with Musk. He was a long-time friend of Musk before he
joined the Board and they repeatedly vacationed together with their respective
643 See generally In re Kraft Heinz Co. Deriv. Litig., 2021 WL 6012632, at *11 (Del.
Ch. Dec. 15, 2021) (finding standard director compensation “alone cannot create a
reasonable basis to doubt a director’s impartiality[]” (quoting Robotti & Co., LLC v.
Liddell, 2010 WL 157474, at *15 (Del. Ch. Jan. 14, 2010))).
644 See, e.g., Kahn v. Tremont Corp., 694 A.2d 422, 430 (Del. 1997) (finding that a
director was beholden to majority stockholder where, three years previously, the
company had retained his consulting services for $10,000 per month and awarded
more than $325,000 in bonuses); Kahn v. Portnoy, 2008 WL 5197164, at *8–9 (Del.
Ch. Dec. 11, 2008) (finding it reasonably conceivable that directors’ fees derived from
controller’s companies, which exceeded compensation from other employment,
rendered the director beholden to the controller); see also Cumming, 2018 WL 992877,
at *17 (finding it reasonably conceivable on a motion to dismiss that a director lacked
independence from a controller where the director was alleged to have derived 60%
of his publicly reported income from service on a board to which the controller
appointed him).
645 As to Denholm, this court previously held that Denholm was “an independent,
powerful and positive force during the deal process” that led to the SolarCity
acquisition. SolarCity II, 2022 WL 1237185, at *37–38. And that was surely true at
the time. But it was not a factual finding that carries forward for all time. Moreover,
Denholm’s approach to enforcement of the SEC Settlement, including unawareness
of one of its key requirements, suggests a new lackadaisical approach to her oversight
obligations. See supra § I.I.3.
126
families. 646 It was during one such trip that Musk, Kimbal, and Gracias recruited
Murdoch to the Board. 647
Johnson Rice, by contrast, had no compromising personal or business ties to
Musk. Plaintiff concedes as much.
Summing it up, it is easy to conclude based on the nature of their relationships
with Musk that Kimbal, Gracias, and Murdoch lacked independence from Musk.
After Jurvetson’s departure, and along with Musk, that was half the Board. The rest
of the Director Defendants fall along a spectrum ranging from Ehrenpreis’s extensive
relationships with Musk to Johnson Rice’s lack thereof.
4. The Process
When assessing independence, Delaware courts consider not only the directors’
relationships with the party to whom they are allegedly beholden, but also how they
acted with respect to that party. 648 Directors with strong ties to a controller may
demonstrate their independence. 649 And directors without strong individual ties to a
646 Trial Tr. at 819:2–16, 820:20–821:2, 847:5–849:15 (Murdoch).
647 Id. at 780:23–781:2 (Gracias); id. at 821:3–822:21 (Murdoch); id. at 1080:13–21
(Kimbal).
648 In re Viacom Inc. S’holders Litig., 2020 WL 7711128, at *24 (noting that analysis
of controller’s influence on special committee focuses on how the committee actually
negotiated the deal rather than just how the committee was set up); In re S. Peru
Copper Corp. S’holder Deriv. Litig., 52 A.3d 761, 789 (Del. Ch. 2011) (same) (citations
omitted), aff’d sub nom., Ams. Mining Corp. v. Theriault, 51 A.3d 1213 (Del. 2012).
649 See In re Dole Food Co., Inc., S’holder Litig., 2015 WL 5052214, at *16 (Del. Ch.
Aug. 27, 2015) (“Before trial, Conrad’s role as Chair was not a reassuring fact. It was
reasonable to infer from Conrad’s ties to Murdock, the events surrounding Weinberg’s
resignation, and the insiders’ desire to have Conrad as Chair that Conrad would be
cooperative, if not malleable, when facing Murdock. But after hearing Conrad testify
127
controller may fall victim to a “controlled mindset.” 650 A controlled mindset can be
evidenced by the directors approaching negotiations seeming “less intent on
negotiating with [the controller] and more interested in achieving the result that [the
controller] wanted[.]” 651
When evaluating control allegations in the context of a challenge to a merger,
Chief Justice (then-Vice Chancellor) Strine once observed:
[T]he question of whether the large block holder has
“control” may be relevant, and intertwined with, the
question of whether the merger was approved by
uncoerced, independent directors seeking solely to advance
the interests of the corporation and its disinterested
stockholders rather than by supine servants of an
overweening master. 652
The references to “supine servants” and “an overweening master” is hyperbolic, and
no doubt deliberately so to give emphasis to the difficulty of the standard. But it hits
home here. There is no greater evidence of Musk’s status as a transaction-specific
controller than the Board’s posture toward Musk during the process that led to the
Grant. Put simply, neither the Compensation Committee nor the Board acted in the
best interests of the Company when negotiating Musk’s compensation plan. In fact,
there is barely any evidence of negotiations at all. Rather than negotiate against
and interacting with him in person at trial, I am convinced that he was independent
in fact.”).
650 S. Peru, 52 A.3d at 798 (finding that, “from inception, the Special Committee fell
victim to a controlled mindset and allowed [the controlling stockholder] to dictate the
terms and structure of the Merger”).
651 Frederick Hsu Living Tr. v. Oak Hill Cap. P’rs III, L.P., 2020 WL 2111476, at *35
(Del. Ch. May 4, 2020).
652 Cysive, 836 A.2d at 550–51.
128
Musk with the mindset of a third party, the Compensation Committee worked
alongside him, almost as an advisory body.
Multiple aspects of the process reveal Musk’s control over it, including the
timeline, the absence of negotiations over the magnitude of the Grant or its other
terms, and the committee’s failure to conduct a benchmarking analysis. In the end,
the key witnesses said it all by effectively admitting that they did not view the process
as an arm’s length negotiation.
a. Musk Controlled The Timing.
Defendants emphasize that nine months passed after the initial April 9 call
between Musk and Ehrenpreis until the Board approved the Grant. In reality,
however, most of the work on the Grant occurred during small segments of that nine-
month timeline and under significant time pressure imposed by Musk.
Before the Board or Compensation Committee had any substantive discussion
concerning the Grant, Musk’s team proposed a highly accelerated schedule that
contemplated approval of the Grant within less than two months. 653 A later version
of the timeline was even more rushed, proposing only one Compensation Committee
meeting (with an additional meeting if necessary) and giving the committee less than
three weeks to complete its task. 654 This was a recklessly fast approach, yet
653 JX-423 at 2–3 (6/19/17 email from Matt Tolland to Maron re “Re: Privileged - Comp
Comm Process”).
654 JX-456 at 2 (6/26/17 email from Phillips to Ehrenpreis and Maron re: “Tesla |
Executive Compensation Timeline”). This timeline envisioned that on July 7, the
Compensation Committee would “[g]ain agreement on proposed approach, award size
and metrics/goals” and “[g]ain preliminary approval of grant agreement.” JX-456
at 2.
129
Ehrenpreis did not question it. 655 In fact, not one but Brown questioned it. And
Brown’s concerns were ignored.
The process decelerated to a reasonable pace only because Musk made it so.
On July 6, a day before the first Compensation Committee meeting, Maron
announced that the new goal was to issue a grant in August or September. 656 On
July 30, a day before another Compensation Committee meeting, Musk emailed
Maron to put the process on hold. 657 Although Musk agreed by email to let Maron
“keep cranking[,]” 658 the wheels ground to a halt for several months. By August 12,
Brown was telling his team there was “no need to spend any time” on a presentation
relating to the 2018 Grant due to negotiations between Musk and the Board. 659
Similarly, on August 27, Ahuja told members of his team “[i]t was decided to defer
this action by a few months.” 660 And Ahuja’s statement on September 17 that “[w]e
are back on track to finalize a CEO comp package[]” turned out to be a false start. 661
There was no meaningful activity through the end of October.
655 Trial Tr. at 124:11–125:11 (Ehrenpreis).
656 JX-503 at 1.
657 JX-564 at 1.
658 Id. at 1.
659 JX-596 at 1.
660 JX-604 at 1.
661 JX-640 at 3; id. at 1 (Ahuja stating on September 20 that “the priority on this effort
has again been lowered[,] [s]o not critical at this point”).
130
Defendants exaggerate how much work occurred in August and September. 662
Although the Compensation Committee did meet on August 14, there is no indication
that this meeting involved a substantive discussion of the Grant. 663 The committee
also met on September 8, but the minutes of that meeting describe the discussion of
the Grant as featuring only a “brief update” and an agreement to “provide additional
details to the broader Board group at the next Committee meeting.” 664
Musk restarted discussions on the Grant on the morning of November 9, just
before a scheduled Compensation Committee meeting, telling Maron that he would
“like to take board action as soon as possible if they feel comfortable and then it would
go to shareholders.” 665 This message was not relayed during the November 9
meeting. 666 But Maron conveyed the urgency three days later, emailing the full
Board and members of the Working Group with a request for “another meeting on
the issue of CEO compensation at everyone’s first available opportunity.” 667
662 See Defs.’ Post-Trial Answering Br. at 17 (“[I]n August and September 2017, there
were three Compensation Committee meetings, a Working Group call, and a Board
meeting discussing the Plan.” (citing DDX-1 at 2)).
663 JX-597 at 2 (“Mr. Ehrenpreis updated the Committee regarding the continuing
efforts to develop Elon Musk’s next compensation package. Questions were asked and
discussion ensued.”).
664 JX-617 at 2.
665 JX-664 at 1.
666 See JX-663 at 3 (“Ehrenpreis provided an update regarding continued development
of Elon Musk’s next compensation package. Questions were asked and discussion
ensued.”).
667 JX-667 at 1.
131
Musk tried to pause the process again on November 14 with another email to
Maron, stating: “Given recent developments, let’s pause for a week or two. This would
be terrible timing[.]” 668 The Board held a special meeting to discuss the Grant on
November 16, during which Ehrenpreis and Maron proposed approving the plan in
December 2017 and seeking stockholder approval in early 2018. 669 The final timeline,
however, included the delay Musk requested and extended into January 2018.
Although Musk’s November 14 attempt to pause work on the 2018 Grant did not stop
a Board meeting in the following days, it had enough of an effect that those working
on the Grant did not consider the process “back on” until well until December, which
is when another period of urgency commenced. 670
To sum it up, Musk unilaterally set the timeline or made last-minute proposals
to the Board prior to six out of the ten Board or Compensation Committee meetings
during which the Grant was discussed. 671 Musk dictated when the game clock started
668 JX-668 at 1.
669 JX-669 at 2.
670 JX-717 at 1 (12/10/17 email noting the “importance and the timing on getting” an
analysis of the stock-based compensation effects of the Grant “out quickly” because of
a valuation deadline the next day); JX-717 at 1 (12/11/17 email marked as “high”
importance stating, “[w]e are back on with a vengeance (apologies in advance). . . . I
am just now digesting myself”); JX-718 at 1 (12/11/17 email stating that “[o]ur CEO
grant[] is back and on a fast track now”).
671 JX-423 (6/19/17 email circulating, four days before the first Compensation
Committee meeting, an accelerated timeline); JX-503 at 1 (7/6/17 email from Maron
stating, a day before the Compensation Committee was supposed to give preliminary
approval to the Grant, that “we’re now going on a slower track with the CEO grant”);
JX-564 at 1 (7/30/17 email from Musk stating, a day before the first Compensation
Committee meeting, to “put [it] on hold for a few weeks”); JX-596 at 1 (8/12/17 email
from Brown stating, two days before a Compensation Committee meeting, “no need
132
and stopped, thereby artificially compressing the work into short bursts that took
place when he wished to move forward. Musk’s habit of shaking things up just before
meetings also made it tough for the committee and its advisors to be prepared.
Musk’s persistent pattern cannot be chalked up to coincidence. Musk controlled the
timing.
b. There Was No Negotiation Over The Size Of The
Grant.
The most striking omission from the process is the absence of any evidence of
adversarial negotiations between the Board and Musk concerning the size of the
Grant. Musk made an initial proposal, and that proposal was the only one seriously
considered until Musk unilaterally changed it six months later.
Defendants did their best to paint a different picture, but the contemporaneous
evidence betrayed them. They cannot meaningfully deny that Musk made the initial
to spend any time on this for now. Sounds like Elon and the Board are negotiating a
little bit, which may impact where they land on some of the key program points”); JX-
640 at 3 (9/17/17 email from Ahuja stating, two days before the Board meeting, that
“[w]e are back on track to finalize a CEO comp package”); id. at 1 (9/20/17 email from
Ahuja stating, the day after the Board meeting, that “the priority on [the CEO grant]
has again been lowered”); JX-664 at 1 (11/9/17 email from Musk proposing a “reduced”
award only hours before a Compensation Committee meeting); JX-668 (11/14/17
email from Musk stating, two days before another Board meeting at which the Grant
was to be discussed, “let’s pause for a week or two”); JX-717 at 1 (12/11/17 email from
Tesla employee stating, a day before the December 12 special meeting of the Board
to discuss the 2018 Grant, that “[w]e are back on with a vengeance”); JX-718 (12/11/17
email stating that “[o]ur CEO grant[] is back and on a fast track now”). The substance
of the Compensation Committee’s September 8 and December 8 meetings seemed to
escape Musk’s meddling, but neither were particularly substantial. See JX-697 at 3.
The other untouched meetings were the very first meeting on June 6 (where the
Board’s discussion was forgettable) and the last on January 21 where the Board
approve the 2018 Grant. See JX-407; JX-743 at 1; JX-773 at 4.
133
proposal. Although Ehrenpreis initiated the April 9 discussion, 672 Musk proposed the
terms during that call. 673 Musk told Ehrenpreis that he wanted a grant with 15
tranches awarding 1% of Tesla’s total outstanding shares for each market
capitalization increase of $50 billion. 674 This proposal set the size and structure for
the Grant until November 9. 675
Defendants cannot deny that, on November 9, Musk unilaterally lowered his
ask. He proposed what he believed was a “reduced” compensation plan, which would
award him a fully diluted 10% increment in his Tesla ownership if he reached a $550
billion market capitalization. 676 After Musk learned that this proposal would result
in greater compensation than his initial proposal, he changed it again. On December
1, he stated: “That is more than intended. Let’s go with 10% of the current [fully
diluted share] number[.]” 677 Defendants tout the reduced proposal of December 1 as
a “negotiated price,” 678 but Musk was more honest. Unprompted, he described his
“proposal on December 1” as “me negotiating against myself.” 679
672 JX-362 at 2.
673 See JX-1700 at 12 (1/12/18 Draft Schedule 14A Proxy).
674 See id.; see also Trial Tr. at 269:17–270:8 (Maron) (testifying that “at the beginning
of the process . . . the conception of the plan at a high level was to have $50 billion
market cap increments”).
675 See JX-445 at 3–4; JX-464 at 5–7; JX-490 at 5–7; JX-640 at 3.
676 JX-664 at 1.
677 JX-682 at 1.
678 Defs.’ Post-Trial Opening Br. at 64–65; see also Trial Tr. at 584:9–19 (Musk).
679 Trial Tr. at 696:7–697:7 (Musk).
134
To blunt the blow of Musk’s candor, Defendants vigorously argue secondary
points. For example, they contend that the Compensation Committee considered a
variety of award sizes prior to Musk’s new proposal on November 9. 680 They cite to
the August 1 Compensia presentation, which identifies alternative market
capitalization increments and corresponding award sizes of 7.5% and 10%. 681 But the
presentation valued the 15% award only, and there is no record of any actual
discussions concerning the alternative award sizes. 682 The minutes for the November
16, 2017 Board meeting suggest that there was no actual discussion concerning
alternatives. 683 And when Maron received Musk’s new offer, he compared it to
Musk’s original proposal and not any alternatives. 684 By July 2017, Musk’s 15-
tranche was locked-in as the operating assumption. The Compensation Committee
did not consider alternatives.
680 Defs.’ Post-Trial Opening Br. at 60–61 (citing JX-566 at 14–16); id. at 33 (citing
JX-566 at 14–16); Trial Tr. at 213:14–23 (Ehrenpreis).
681 Defs.’ Post-Trial Opening Br. at 60–61 (citing JX-566 at 14–16); id. at 33 (citing
JX-566 at 14–16).
682 JX-566 at 13–16, 23–24; see JX-633 at 17–21 (9/19/17 slide deck assuming 15% of
total outstanding shares and providing 7.5% and 10% chart for comparison). The
August 1 presentation included other possibilities and key questions that were never
discussed. See JX-566 at 8 (8/1/17 slide deck) (asking “Should a new award be stock
option-based? Should it be multi-year and highly performance-based or structured
as a more traditional annual award?”).
683 JX-669 at 2 (“As discussed in previous meetings and again at this meeting, the
Board continued to consider 1% of current total outstanding shares as the award for
each vesting tranche, achievement of which required both an increase of $50 billion
in the Company’s market capitalization and a matching operational milestone.”).
684 JX-678 at 1.
135
As another example, Defendants emphasize that the Grant ultimately
included 12 tranches, each awarding 1% of total outstanding shares and requiring
$50 billion in market capitalization growth. 685 According to Defendants, this
represented “an appreciation in market capitalization that was $100 billion more
than what Musk had proposed in exchange for the same percentage of options.” 686
Although Defendants are correct that, all else equal, requiring more market
capitalization growth for the same number of shares means a better deal for
stockholders, there is simply no credible evidence that the shift from ten tranches to
12 was the result of any actual negotiation with Musk. To the contrary, the record
reflects that the Board preferred the simplicity of total outstanding shares. 687
Toward this end, they backed into 12 tranches when translating Musk’s demand of
10% of fully diluted shares into a round percentage of total outstanding shares while
maintaining the $50 billion/1% per tranche approach that Musk proposed in April. 688
685 Defs.’ Post-Trial Opening Br. at 64–65.
686 Id. at 65 (citing Trial Tr. at 225:21–227:18 (Ehrenpreis)).
687 See JX-669 at 2 (11/16/17 Board meeting minutes) (“the directors expressed a
general preference to measure the size of the grant as a percentage of total
outstanding shares, and not allow for known dilution protection for Mr. Musk”);
Maron Dep. Tr. at 407:17–25 (stating he believed the Board used TOS, instead of
FDS, because “it was a simpler approach”).
688 JX-743 at 4–5; see JX-701 at 1 (12/10/17 email from Chang providing
contemporaneous notes of the 12/10/17 special Compensation Committee meeting)
(“We seem to be at the right place as far as size: 10% of FDS (~12% of TOS)”).
136
The testimony from Ehrenpreis that Defendants cite does not support a finding
that negotiations over the 12%/12-tranches occurred. 689 Ehrenpreis simply confirmed
that he generally recalled “negotiations in the late part of 2017 about the terms of
the” Grant. 690 When asked “[w]hat, if anything happened to the total amount of
market capitalization that would accrue to the shareholders if Mr. Musk hit all of the
targets in the plan as between the time of the negotiation and then the final plan,”
Ehrenpreis responded “[d]uring that period of time, the market cap milestones
increased by $100 billion.” 691 Although this describes what happened, it does not
establish the existence of a negotiation. In a follow-up question, Ehrenpreis avoided
saying that he or anyone else negotiated with Musk about the market capitalization
increase, again merely describing the changes that took place. 692
Maron also stopped short of describing this aspect of the process as a
negotiation. He testified that although the final terms included the “size of the
overall plan . . . were all different than I think were initially thought of by Elon. . . .
I don’t want to say that it was necessarily over his objection. They weren’t things he
thought of. They were things that the Board thought of and that he ultimately agreed
689See Defs.’ Post-Trial Opening Br. at 65 (citing Trial Tr. at 225:21–227:18
(Ehrenpreis)).
690 Trial Tr. at 225:21–24 (Ehrenpreis).
691 Id. at 225:21–226:7 (Ehrenpreis).
692 See id. at 226:17–227:18 (Ehrenpreis).
137
to.” 693 Aspects of this testimony ring true—Musk’s various proposals lacked the
detail necessary to implement them.
In short, the Compensation Committee and the Board failed to negotiate the
overall size or difficulty of the Grant with Musk.
c. There Was No Meaningful Negotiation Over The
Other Terms Of The Grant.
The other key terms of the Grant were: the Clawback Provision, the
Leadership Requirement, the Five-Year Hold Period, and the M&A Adjustment. As
to these terms, the only back-and-forth in the record concerned the M&A Adjustment,
but Musk himself conceded that this was at most a minor feature of his compensation
plan that he did not care about. He stated, at the end of negotiations on this point,
“I don’t think we will be making big acquisitions[]” and “[t]here is no chance I will
game the economics here, so I’m fine with limits that prevent that.” 694 He then
proceeded to propose a stricter M&A Adjustment than was on the table. 695
Defendants argue that the Five-Year Hold Period was a negotiated point and
a major concession. 696 But neither the documentary record nor the witness testimony
corroborates Musk’s recollection of vigorous negotiation. The closest testimony on
point is to the contrary, where Maron stated “[w]hen you talk about holding periods
and the M&A adjustments and the size of the overall plan, these were all different
693 Maron Dep. Tr. at 428:20–430:3.
694 JX-781 at 1–2.
695 JX-874 at 2.
696 Trial Tr. at 584:9–585:2 (Musk) (testifying that the Board “pushed significantly”
on this point).
138
than I think were initially thought of by Elon. But I don’t want to say that it was
necessarily over his objection. They weren’t things that he thought of.” 697
Meanwhile, one of the biggest purported concerns expressed by the Board was
their desire to keep Musk engaged in Tesla despite his significant time commitments
at his other companies, which included SpaceX, The Boring Company, Neuralink, and
later, Twitter. 698 The Grant could have addressed this issue. The most obvious way
would have been a requirement that Musk devote substantially all of his professional
time and attention to Tesla-related matters. Another option could have been a
restriction on the amount of time and attention he could devote to companies other
than Tesla. 699 Still other possibilities might include a forfeiture or clawback provision
if Musk failed to provide the requisite level of time and attention. 700 Yet no one
proposed anything like that to Musk.
697 Maron Dep. Tr. at 429:7–13; see also id. 428:20–430:3.
698 Trial Tr. at 328:9–24 (Denholm) (“Elon had other business interests that competed
for his time.”); JX-612 at 2 (“How can the comp comm/board/shareholders be assured
that [Musk] will devote adequate time to Tesla given his other
commitments/businesses/. Should some type of commitment be included as part of
comp structure?”); Murdoch Dep. Tr. at 292:1–293:20 (“But obviously as [SpaceX]
grew and depending on … where Elon thinks his time is going to be most useful in
terms of both … his own incentives as an executive, apropos of this plan, and also …
where he can make the biggest impact, … we wanted to make sure that … Tesla was
top of mind.”); Ehrenpreis Dep. Tr. at 51:6–13 (“And so my thinking and the goal was
how do we find a way to make sure that Elon still stays in this seat, number one.”).
699 See Dunn Opening Expert Rep. at 14–15.
700 See, e.g., id.
139
Delaware law recognizes that “asking the controlling stockholder to consider
alternative options can change the negotiating dynamic.” 701 Whether Musk should
commit a level of time to Tesla was a planned topic of discussion for a September 8
call with Denholm, Ehrenpreis, and Musk. 702 During the September 8 call, however,
none of the participants raised the issue. 703 According to Musk, the issue “was not
raised in this compensation structure” because the idea was “silly.” 704 Maron testified
that the Board did not ask for such a requirement because “[t]hat would have been
like saying goodbye to Elon[.]” 705 Defendants claim Musk would have rejected such
restrictions, but the court will “never know because the . . . Committee and its
advisors never had the gumption to give it even the weakest of tries.” 706
d. There Was No Benchmarking Analysis.
The Grant process lacked a traditional benchmarking analysis, which
compares a proposed compensation plan to plans at comparable firms. 707
701 S. Peru, 52 A.3d at 800 (“[A]sking the controlling stockholder to consider
alternative options can change the negotiating dynamic . . . . [T]he Special Committee
might discover certain weaknesses of the controlling stockholder, thus creating an
opportunity for the committee to use this new-found negotiating leverage to extract
benefits for the minority.”).
702 JX-612 at 1–2.
703 See JX-629 at 2–3 (summary of call omitting the issue); Trial Tr. at 139:17–141:1
(Ehrenpreis); Denholm Dep. Tr. at 389:15–390:20 (“I don’t recall the specifics of that
other than in general terms we talked mainly about energy, focus, and commitment
as opposed to time.”); Musk Dep. Tr. at 154:12–21, 160:11–161:4.
704 Musk Dep. Tr. at 160:11–161:4.
705 Trial Tr. at 263:11–264:1 (Maron).
706 Loral, 2008 WL 4293781, at *25.
707 Trial Tr. at 1461:10–1462:6 (Brown) (“Q. So did Compensia’s work on the 2018
plan include such traditional benchmarking? A. It did not for a few reasons.”).
140
Benchmarking “provides the compensation committee with a frame of reference with
respect to what other companies are doing with respect to compensation[.]” 708
Benchmarking is the foundation of a compensation advisor’s analysis. 709
The witnesses agreed that benchmarking is typical and critical. Defendants’
expert, Professor Kevin Murphy, previously opined that “the market for similarly
situated executives provides a critical benchmark” the “board must consider in
deciding whether to pursue” an executive and “how much to offer.” 710 Plaintiff’s
expert, Professor Brian D. Dunn, opined that benchmarking is a “critical aspect and
requirement of an effective compensation plan process.” 711 Brown confirmed that
Compensia typically provides benchmarking consisting of an identified peer group
708 Id. at 1475:20–24 (Brown).
709 Id. at 1058:7–1059:18 (Burg) (testifying that compensation advisors provide
benchmarking data to “fulfill their responsibilities”); id. at 1312:8–12 (Murphy)
(agreeing that benchmarking studies are “customary” when setting CEO
compensation), 1313:10–13 (confirming that competitive pay analysis is “industry
standard” in advising clients on executive compensation), 1315:2–16 (prior testimony
stating benchmarking is “absolutely routine” and “what every compensation
consultant will do”), 1317:10–1319:3 (prior testimony that “the market for similarly
situated executives provides a critical benchmark that [the] board must consider in
deciding whether to pursue [the CEO candidate] and in deciding how much to offer”
(emphasis added)); id. at 786:12–21 (Gracias) (confirming it is “wise” for the
Compensation Committee to have benchmarking information); id. at 347:3–10,
350:7–11, 351:2–7 (Denholm) (acknowledging prior use of benchmarking data for
other executives).
710 Trial Tr. at 1317:10–1319:3 (Murphy); see, e.g., id. at 1312:8–12 (Murphy)
(agreeing that benchmarking studies are “customary”), 1313:10–13 (confirming that
competitive pay analysis is “industry standard”), 1315:2–16 (prior testimony stating
benchmarking is “what every compensation consultant will do”).
711 Dunn Opening Expert Rep. at 83; see also Trial Tr. at 983:3–22 (Dunn).
141
and comparable positions at peer companies. 712 Burg too recognized that providing
such information is necessary for the Compensation Committee’s advisors to “fulfill
their responsibilities.” 713 Nevertheless, no traditional benchmarking study was
conducted in connection with the Grant. 714
Defendants proffered reasons for not performing a traditional benchmarking
study, but each rang hollow. For starters, Defendants argued that the Board
considered “a lot of data that all fit within the overall bucket of benchmarking”
throughout the process. 715 The primary evidence is the Compensia presentation from
the July 7, 2017 meeting, which included information about other CEOs. 716 For
example, one of the slides lists the largest CEO pay packages in 2016. But no one
contends that this market data constituted a benchmarking analysis. And none of
the slides involved direct comparisons to the Grant. 717
Brown also testified that it would have been difficult to find comparable
companies for a benchmarking study. 718 At trial, Brown conceded that he could have
developed a peer group after using “some judgment” in a timeframe “similar to
712 Trial Tr. at 1461:10–1462:4 (Brown); id. at 1475:16–1476:24 (Brown).
713 Id. at 1058:7–1059:18 (Burg).
714 Id. at 1477:1–5 (Brown) (affirming that Compensia did not conduct a
benchmarking study for the Grant); id. at 786:12–21, 787:5–10 (Gracias) (same); id.
at 1059:19–1060:5 (Burg) (stating that he had no memory of benchmarks being
presented in connection with the 2018 Grant).
715 Id. at 1293:10–1294:9 (Murphy).
716 JX-512 at 16–20.
717 Id.
718 Trial Tr. at 1462:5–1463:7 (Brown).
142
[developing] any peer group.” 719 Dunn created a benchmarking analysis,
demonstrating it was possible. 720
More telling, Brown took the position that benchmarking was unnecessary
because the award would be too large for useful comparison. Brown testified that he
had a “really good idea” of what would happen if Compensia performed a traditional
benchmarking study, and that “it wasn’t going to be useful information for the
committee” because the Grant was so divorced from the market for comparable
executives. 721 In a similar vein, Defendants argue that benchmarking was not needed
because the 2018 Plan was “unprecedented” in that “no other CEO had been willing
to condition his compensation on such audacious milestones,” especially at a time
when a company was struggling. 722 They contend: “Traditional benchmarking is
inapt if the companies, executives, and plans are not comparable.” 723
That is a hard sell. As CEO, Musk’s job was the same as every other public
company CEO: improve earnings and create value. A benchmarking study would
have shown the committee what other companies paid for executives to perform that
same task. Moreover, the extraordinary nature of the Grant should have made
719 Id. at 1477:19–1478:6 (Brown).
720 Id. at 983:3–985:1, 990:3–992:7 (Dunn); id. at 1477:14–1478:12 (Brown)
(confirming Compensia could have—but did not—benchmark); PDX-2 at 5–6.
721 Trial Tr. at 1462:5–1463:1 (Brown); see also id. at 786:12–21, 787:5–10 (Gracias);
id. at 347:3–10, 350:7–11, 351:2–7, 362:10–13 (Denholm); Denholm Dep. Tr. at
287:12–21 (“[I]t was very difficult to find comparables in terms of the ambitious
nature of this plan.”).
722 Defs.’ Post-Trial Suppl. Reply Br. at 10–11.
723 Id. at 10 n.44.
143
benchmarking more critical, not less. Benchmarking would have informed the
decision makers of the magnitude of difference between the Grant and market
comparables. 724
e. The Key Negotiators Said It All.
In the end, the defense witnesses said it all. Ehrenpreis and Gracias took the
lead on the Grant for the Compensation Committee (recall that attendance at
Working Group meetings was “optional” for Denholm and Buss). 725 Maron was one
of the primary go-betweens. 726 When asked to describe the process, none viewed the
process as an arm’s length negotiation. Each viewed it is as a form of collaboration
with Musk.
724 See Julian v. E. States Const. Serv., Inc., 2008 WL 2673300, at *19 (Del. Ch. July
8, 2008) (holding that the lack of historical precedent does not mean the size of the
compensation plan can just be plucked out of thin air); Trial Tr. 1320:18–1321:16
(Murphy) (confirming that in a prior trial he testified that there should have been
benchmarking for an executive if even he was the only person in the United States
who was believed to be qualified and available to take that position).
725 JX-474 (6/30/17 email from Chang to Denholm and Buss).
726 See, e.g., JX-783 at 1–2 (1/16/18 email from Maron to the Compensation
Committee) (stating Musk wanted that “[a]ny M&A in which [Tesla] buy[s] a
company for no more than 5% of [Tesla’s] current market cap will have no
adjustment”); see JX-664 at 1 (11/9/17 email from Musk to Maron stating Musk would
“like to take board action as soon as possible” on his compensation plan); JX-667 at 1
(11/12/17 email from Maron to Board stating: “We’d like to have another meeting on
the issue of CEO compensation[.]”); JX-668 (11/14/17 email from Musk telling Maron
to “pause for a week or two[,]” his compensation plan discussions); JX-718 (12/11/17
email stating the CEO compensation plan discussions are “back and on a fast track
now”).
144
Ehrenpreis testified that “during the entire process, there were check-ins with
Elon. We were not on different sides of things. We were trying to make sure if we
were going to go through this exercise that he was on board.” 727
Gracias explained his understanding of “fairness” in this context and his
approach to the process as follows:
[W]hat is important is that [CEOs] feel like they’re treated
fairly. These plans are about incenting behavior. Behavior
is a feeling. It comes from inside the mind. And so we focus
on what’s fair and what feels fair to people and what’s fair
to the shareholders, what’s fair to us as investors, what’s
fair to the executives. That’s how we think about it. We
never engage in these positional negotiations, I want 10, you
want 3, let’s yell about it. That’s not how we do things, not
how anyone does things. 728
That is, in lieu of objective market data and arm’s length negotiation, the
Compensation Committee opted for subjective feelings—“what feels fair.” The
committee did not take “positional negotiations” against Musk. 729
727 Ehrenpreis Dep. Tr. at 139:18–140:3 (emphasis added).
728 Trial Tr. at 808:16–809:14 (Gracias) (emphasis added).
729 Id.; see also Gracias Dep Tr. at 244:25–245:20 (“I did not have a positional
negotiation with [Musk] about, hey, we want to give you one [tranche], and you want
two and let’s go negotiate back and forth. . . . I did not have a negotiation starting
lower and going higher with him about the tranches or the size of the award.”); id. at
255:22–256:9 (“Q. Okay. As a Tesla director and compensation committee member,
do you think you have a duty to the company and the stockholders to try to negotiate
for the smallest compensation package for Mr. Musk that would adequately
incentivize him? A. That is not how I think about it, no. Q. Can you explain to me
how you think about it? A. I think about compensation packages generally as what
is fair to the executive and what is fair to the company. I don’t think about it as
trying to get the very smallest thing possible ever. That’s just not my modus operandi
with any company I deal with. I think about fairness.”).
145
Maron described the process similarly: “It was a cooperative, collaborative
process. It wasn’t acrimonious. So when I say there wasn’t a conflict of interest, I
think I’m thinking in my own mind was there an actual active conflict between the
two parties; and I don’t think that there was. I think it was a cooperative
collaborative process.” 730 To deal with a conflict, one must first recognize a conflict.
“Conflict blindness and its lesser cousin, conflict denial, have long afflicted the
financially sophisticated.” 731 Maron could not perceive the conflict, much less help
deal with it.
The testimony from the key witnesses is perhaps as close to an admission of a
controlled mindset as a stockholder-plaintiff will ever get. 732 The Compensation
Committee and Musk were not on different sides. They did not acknowledge the
existence of a conflict. It was a cooperative and collaborative process. 733
730 Maron Dep. Tr. at 100:2–102:11.
731 Trados, 73 A.3d at 64.
732 See S. Peru, 52 A.3d at 798 (“[F]rom inception, the Special Committee fell victim
to a controlled mindset and allowed [the controller] to dictate the terms and structure
of the [transaction].”).
733 Defendants concede that “[t]he Directors worked with Musk ‘in a collaborative,
cooperative way to get to the end point.’” Defs.’ Post-Trial Opening Br. at 66 (quoting
Trial Tr. at 243:15–244:3 (Maron)). They justify that soft approach by reasoning that
“the board has to have an ongoing relationship with the CEO,” and “it would be
atypical for compensation negotiations between a board and a CEO to be adversarial.”
Id. In essence, they argue that, because the Grant was for a sitting CEO, the Board
was justified in conducting a process short of “an effective proxy for arms-length
bargaining, such that a fair outcome equivalent to a market-tested deal resulted.”
Loral, 2008 WL 4293781, at *22 (citations omitted). The court recognizes that
negotiations over CEO compensation give rise to strange dynamics because the
parties need to work collaboratively after the negotiations have ceased, but that is
true in many negotiations and in virtually every salary negotiation. There is a huge
146
B. Defendants Bore The Burden Of Proving That The Grant Was
Entirely Fair.
Because Musk exercised transaction-specific control over the Grant, entire
fairness is the standard of review, and Defendants presumptively bear the burden of
proof. 734 In Kahn v. Lynch Communication Systems, Inc., 735 the Delaware Supreme
Court “held that when the entire fairness standard applies, the defendants may shift
the burden of persuasion by one of two means: first, they may show that the
transaction was approved by a well-functioning committee of independent directors;
or second, they may show that the transaction was approved by an informed vote of
a majority of the minority shareholders.” 736 There was no well-functioning committee
of independent directors here for the reasons discussed above. Thus, Defendants’
only hope for burden shifting is to show that the stockholder vote was fully informed.
For this purpose, Defendants bear the burden of proving that the vote was fully
informed. 737
gap between being respectful and civil versus cooperating with the CEO to give him
exactly what he wants. Even assuming that some level of cooperation and
collaboration is called for, what took place here went beyond it. And this was also not
the place for it. When considering the largest compensation plan in the history of the
public markets, the directors needed to do more than accommodate the CEO.
734 Ams. Mining Corp., 51 A.3d at 1239 (“When a transaction involving self-dealing
by a controlling shareholder is challenged, the applicable standard of judicial review
is entire fairness, with the defendants having the burden of persuasion.”).
735 638 A.2d 1110 (Del. 1994).
736 Ams. Mining, 51 A.3d at 1240 (citing Lynch, 638 A.2d at 1117).
737 Solomon v. Armstrong, 747 A.2d 1098, 1128 (Del. Ch. Mar. 25, 1999) (“[W]hen it
comes to claiming the sufficiency of disclosure and the concomitant legal effect of
shareholder ratification after full disclosure (e.g., . . . shift of the burden of proof of
entire fairness from the defendant to the plaintiff) it is the defendant who bears the
burden.”), aff’d, 746 A.2d 277 (Del. 2000) (TABLE).
147
To show that the stockholder vote was fully informed, Defendants must
establish that “stockholders were apprised of ‘all material information’ related to that
transaction.” 738 An omitted fact is material only where “there is a substantial
likelihood that a reasonable shareholder would consider it important in deciding how
to vote.” 739 In other words, to be material, an omitted fact must have “significantly
altered the ‘total mix’ of information made available.” 740 Further, “once defendants
travel[] down the road of partial disclosure of the history leading up to the
[transaction] and use[d] the vague language described, they ha[ve] an obligation to
provide the stockholders with an accurate, full, and fair characterization of those
historic events.” 741 In assessing materiality, courts must balance “the benefits of
additional disclosures against the risk that insignificant information may dilute
potentially valuable information.” 742
Plaintiff advanced many arguments for why the stockholder vote was not fully
informed. 743 Two are clear winners. The record establishes that the Proxy failed to
738 In re Volcano Corp. S’holder Litig., 143 A.3d 727, 748 (Del. Ch. June 30, 2016)
(quoting Solomon, 747 A.2d at 1127–28).
739 Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985) (quoting TSC Indus.,
Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).
740 Arnold v. Soc’y for Sav. Bancorp, Inc., 650 A.2d 1270, 1277 (Del. 1994) (quoting
TSC Indus., Inc., 426 U.S. at 449).
741 Id. at 1280 (citations omitted).
742 Volcano, 143 A.3d at 749 (citations omitted); see also Solomon, 747 A.2d at 1128
(“The theory goes that there is a risk of information overload such that shareholders’
interests are best served by an economy of words rather than an overflow of adjectives
and adverbs in solicitation statements.”).
743 See Pl.’s Post-Trial Opening Br. at 68–81.
148
disclose the Compensation Committee members’ potential conflicts and omitted
material information concerning the process. Defendants sought to prove otherwise,
and they generally contend that the stockholder vote was fully informed because the
most important facts about the Grant—the economic terms—were disclosed. 744 But
Defendants failed to carry their burden.
1. The Conflict Disclosures
A director’s conflict with a transactional counterparty is material information
that should be disclosed. 745 In fact, a director’s potential conflict with a transactional
counterparty is material information that should be disclosed. 746
744 Defs.’ Post-Trial Opening Br. at 95–105.
745 See, e.g., In re Orchard Enters., Inc. S’holder Litig., 88 A.3d 1, 22 (Del. Ch. 2014)
(“This court has held that special committee members’ ‘prior . . . relationships’ with a
controller ‘should have been disclosed’ because of the committee’s ‘role as negotiators
on behalf of the minority stockholders.’” (quoting cases)); In re Emerging Commc’ns,
Inc. S’holders Litig., 2004 WL 1305745, at *37 (Del. Ch. May 3, 2004) (“[T]he
disclosure documents misled minority stockholders . . . [because] there was no
disclosure of [two committee members’] long-standing financial relationships with
[the transaction counterparty] . . . . The disclosure documents misleadingly
suggested that the Special Committee, and perhaps a majority of the entire board,
were independent.”); Millenco L.P. v. meVC Draper Fisher Jurvetson Fund I, Inc., 824
A.2d 11, 15–19 (Del. Ch. 2002) (finding the disclosures misleading when they failed
to disclose supposedly independent directors’ relationships with the CEO).
746 Millenco, 824 A.2d at 15 (“[W]here, as here, the omitted information goes to the
independence or disinterest of directors who are identified as the company’s
‘independent’ or ‘not interested’ directors, the ‘relevant inquiry is not whether an
actual conflict of interest exists, but rather whether full disclosure of potential
conflicts of interest has been made’” (quoting Wilson v. Great Am. Indus., Inc., 855
F.2d 987, 994 (2d Cir. 1988))); see also Eisenberg v. Chi. Milwaukee Corp., 537 A.2d
1051, 1061 (Del. Ch. 1987) (“The only point made here is that . . . the potential conflict
of half of [the company’s] Board of Directors was a fact that should have been
disclosed. . . . [S]hareholders were entitled to know that certain of their fiduciaries
had a self-interest that was arguably in conflict with their own, and the omission of
the fact was material.” (citation omitted)).
149
The Proxy failed to disclose any of the Compensation Committee members’
actual or potential conflicts with respect to Musk. 747 In fact, the Proxy repeatedly
described the members of the Compensation Committee as independent, stating:
“The[] [Grant] discussions first took place among the members of the Compensation
Committee . . . all of whom are independent directors;” 748 and “[t]he independent
members of the Board, led by the members of the Compensation Committee, spent
more than six months designing [the Grant].” 749 The Proxy’s introductory letter is
“[f]rom the Independent Members of Tesla’s Board of Directors,” and the first four
signatories are Compensation Committee members Gracias, Ehrenpreis, Denholm,
and Buss. 750 Notably, Gracias signed as “Lead Independent Director.” 751
The description of the Compensation Committee members as “independent”
was decidedly untrue as to Gracias and proved untrue as to the remaining committee
members. At a minimum, Musk’s relationships with Ehrenpreis and Gracias gave
rise to potential conflicts that should have been disclosed. 752 Ultimately, all of the
directors acted under a controlled mindset, calling into question the disclosure as to
each of them.
747 See Pl.’s Post-Trial Opening Br. at 69–73.
748 JX-878 at 10 (emphasis added) (2/8/18 Schedule 14A Proxy Statement).
749 Id. at 21 (emphasis added).
750 Id. at 3–4 (emphasis added).
751 Id. at 4.
752 See supra §§ I.C.1.a.i, iv.
150
Defendants sought to prove that they disclosed the information at issue, both
in the Proxy and elsewhere. 753 The Proxy disclosed the Tesla director compensation
policy, which is one potential source of conflict. 754 Defendants also showed that they
disclosed some potential sources of conflict in other public filings, such as Buss’s
tenure at SolarCity and Ehrenpreis’s and Gracias’s investments in SpaceX. 755 But
those disclosures make no mention of important factors affecting independence,
including Gracias’s and Ehrenpreis’s personal and other business relationships with
Musk. 756 And even assuming such disclosures were comprehensive, “our law does not
impose a duty on stockholders to rummage through a company’s prior public filings
to obtain information that might be material to a request for stockholder action.” 757
Defendants also sought to prove that disclosure of the potential conflicts was
unnecessary because it would wrongly “oblige them to characterize their conduct in
such a way as to admit wrongdoing.” 758 That argument is strongest on the controlled-
mindset point. But the Proxy could have discussed the relevant relationships while
stating that the Board did not view them as serious impediments to independence,
thereby allowing stockholders to make their own assessment. This is precisely what
753 Defs.’ Post-Trial Opening Br. at 100–01; Defs.’ Post-Trial Answering Br. at 70–72.
754 JX-878 at 46–47.
755 JX-379 at 24–26.
756 See JX-878 (2/8/18 Schedule 14A Proxy Statement); JX-379.
757 Zalmanoff v. Hardy, 2018 WL 5994762, at *5 (Del. Ch. Nov. 13, 2018) (citation
omitted), aff’d, 211 A.3d 137 (Del. 2019) (TABLE).
758 Loudon v. Archer-Daniels-Midland Co., 700 A.2d 135, 143 (Del. 1997); Defs.’ Post-
Trial Answering Br. at 71.
151
Tesla did in the other disclosure document that Defendants pointed to when seeking
to prove that the total mix of information included information about Musk’s financial
connections with Gracias and Ehrenpreis. 759 “What defendants were not free to do
was to take the position that the stockholders had no right to know this information
because they, the defendants, had determined it was not important.” 760
Overall, Defendants failed to prove that the information about conflicts was
adequately disclosed. The Proxy was materially deficient on this point.
2. The Process Disclosures
When asked to approve a transaction, stockholders are entitled to a full and
accurate description of the material steps in the board or committee process that
resulted in the transaction. 761 The components and effectiveness of a board or
committee’s process, including the parties’ bargaining positions, are of “obvious
importance” to stockholders. 762
759 See JX-379 at 24–26.
760 Millenco, 824 A.2d at 18–19.
761 Bancorp, 650 A.2d at 1280 (“[O]nce defendants traveled down the road of partial
disclosure of the history leading up to the [transaction] and used the vague language
described, they had an obligation to provide the stockholders with an accurate, full,
and fair characterization of those historic events.” (citations omitted)).
762 Clements v. Rogers, 790 A.2d 1222, 1242 (Del. Ch. 2001); accord Morrison v. Berry,
191 A.3d 268, 283–84 (Del. 2018) (holding that information on process is material if
it helps a reasonable stockholder reach a “more accurate assessment of the probative
value of the [transaction’s] process”); In re Trans World Airlines, Inc. S’holders Litig.,
1988 WL 111271, at *12 (Del. Ch. Oct. 21, 1988) (“No disclosure in a case such as this
is presumably of greater importance to a shareholder than a disclosure that
independent directors have actively negotiated on his behalf and have concluded, as
here, that acceptance of the proposal is in his best interests.”), abrogated on other
grounds by Lynch, 638 A.2d 1110; Weinberger, 457 A.2d at 703 (“Material
152
Consequently, “a fiduciary’s duty is best discharged through a broad rather
than a restrictive approach to disclosure.” 763 A board or committee may not create a
false narrative as to the process for how a transaction was completed; partial
disclosures that sterilize the actual events are insufficient. 764 Although a disclosure
document need not give a “play-by-play[,]” 765 “when fiduciaries choose to provide the
history of a transaction, they have an obligation to provide shareholders with ‘an
accurate, full, and fair characterization of those historic events.’” 766 “Even if []
additional information independently would fall short of the traditional materiality
standard, it must be disclosed if necessary to prevent other disclosed information
information, necessary to acquaint those shareholders with the bargaining positions
of [the parties], was withheld under circumstances amounting to a breach of fiduciary
duty.”); see, e.g., McMullin v. Beran, 765 A.2d 910, 925–26 (Del. 2000) (reversing
dismissal where the defendants failed to disclose information regarding the handling
of potential offers).
763 Zirn v. VLI Corp., 621 A.2d 773, 779–80 (Del. 1993).
764 In re Mindbody, Inc. S’holder Litig., 2023 WL 2518149, at *41 (Del. Ch. Mar. 15,
2023); see also FrontFour, 2019 WL 1313408, at *29 (holding that the proxy
statement’s failure to disclose that the special committee did not learn of “enormous
pressure” facing controllers until after the merger agreement was executed was
material).
765 David P. Simonetti Rollover IRA v. Margolis, 2008 WL 5048692, at *12 (Del. Ch.
June 27, 2008) (internal quotation marks and citation omitted).
766 Id. (quoting Globis P’rs, L.P. v. Plumtree Software, Inc., 2007 WL 4292024, at *14
(Del. Ch. Nov. 30, 2007)); In re Tele-Commc’ns, Inc. S’holders Litig., 2005 WL
3642727, at *5–6 (Del. Ch. Dec. 21, 2005) (holding that language in proxy that the
board gave “careful consideration” to premium to be paid to shareholders would be
material if false); Clements, 790 A.2d at 1242–43 (“When a Proxy Statement details
the functioning of [the committee’s] process, it must do so in a fair and balanced
manner that does not create a materially misleading impression of how the
Committee actually operated in fact.” (citation omitted)).
153
from being misleading.” 767 Even an assertion that a committee “carefully considered”
a transaction, when inaccurate, could be falsely “reassuring” to stockholders and
constitute a disclosure violation. 768
Generally, when a plaintiff proves process defects as significant as those in this
case, the defendants will find it difficult to prove that the stockholder vote was fully
informed. 769 That is true here. The Proxy does not disclose the level of control that
Musk exercised over the process—e.g., his control over the timing, the fact that he
made the initial offer, the fact that his initial offer set the terms until he changed
them six months later, the lack of negotiations, and the failure to benchmark, among
other things.
The parties focus on one specific omission. The Proxy does not disclose the
April 9 conversation between Musk and Ehrenpreis during which Musk established
the key terms of the 2018 Grant. A discussion of this conversation appeared in at
least four earlier drafts of the Proxy. 770 The final Proxy instead opens its discussion
of the development of the 2018 Grant with the following passage:
With the 2012 Performance Award nearing completion, the
Board engaged in more than six months of active and
ongoing discussions regarding a new compensation
program for Mr. Musk, ultimately concluding in its
decision to grant the CEO Performance Award. These
767 Chen, 87 A.3d at 689 (citing Johnson v. Shapiro, 2002 WL 31438477, at *4 (Del.
Ch. Oct. 18, 2002)).
768 Gantler v. Stephens, 965 A.2d 695, 711 (Del. 2009) (internal quotation marks
omitted).
769 Cf. In re Mindbody, Inc. S’holder Litig., 2020 WL 5870084, at *27 (Del. Ch. Oct. 2,
2020) (making a similar point as to a well-pled Revlon claim).
770 See JX-1597 at 9; JX-1598 at 3; JX-1599 at 14; JX-1700 at 12.
154
discussions first took place among the members of the
Compensation Committee of the Board (the “Compensation
Committee”), all of whom are independent directors, and
then with the Board’s other independent directors,
including its two newest independent directors, Linda
Johnson Rice and James Murdoch. 771
Plaintiff contends that, in addition to describing the Compensation Committee
members and Murdoch as “independent,” the statement is inaccurate because the
“discussion[] first took place” between Ehrenpreis and Musk, not among the members
of the Compensation Committee. 772 Defendants claim that Plaintiff is misreading
the sentence, which they say means only that discussions among the Compensation
Committee were “first” as compared to subsequent discussions with the full Board,
not the “first” discussions in the process as a whole. 773
Even accepting Defendants’ borderline reading, the April 9 conversation
between Ehrenpreis and Musk was material and should have been disclosed. 774
Musk’s April 9 proposal to Ehrenpreis set the terms of discussion for the first six or
771 JX-878 at 10 (2/8/18 Schedule 14A Proxy Statement).
772 Pl.’s Post-Trial Opening Br. at 73, 78–79 (quoting JX-878 at 10).
773 Defs.’ Post-Trial Opening Br. at 102–03 (quoting JX-878 at 10).
774 Weinberger, 457 A.2d at 703 (“Material information, necessary to acquaint those
shareholders with the bargaining positions of [the parties], was withheld under
circumstances amounting to a breach of fiduciary duty.”); see Plumtree, 2007 WL
4292024, at *14) (“Once defendants travel down the road of partial disclosure of the
history leading up to a merger, they have an obligation to provide the stockholders
with an accurate, full, and fair characterization of those historic events.” (citing
Bancorp, 650 A.2d at 1280)).
155
so months of the Grant’s development, and many of its features persisted in the final
structure. 775 The Proxy was materially deficient on this point.
3. The Key-Terms Argument
During post-trial argument, Defendants argued that the stockholder vote was
fully informed because the most important details of the Grant—the economic
terms—were disclosed. Implicitly, Defendants argue that stockholders only need to
know the economics of a transaction to cast an informed vote.
Defendants’ position finds no support in Delaware law. No case has held that
a corporation needs to disclose only the economic terms of a transaction when
securing a stockholder vote. In fact, then-Vice Chancellor Strine rejected as
“frivolous” the argument that “the only material facts necessary to be disclosed”
regarding a stock incentive plan are the “exact” economic terms of the plan. 776 This
775 See JX-445 at 3–4; JX-464 at 5–7; JX-479; JX-490 at 5–7; JX-640 at 3; JX-631 at
2; see also JX-664 (Musk asking to “move forward” with the 2018 Grant “in a reduced
manner from before”); Trial Tr. at 676:18–677:1 (Musk) (“Q. And the only number
we’ve seen from you so far is 15 percent of total outstanding shares, so I assume that
means something less than 15 percent of total outstanding shares. Right? A. Yes.”);
JX-678 at 1–2 (email from Maron comparing Musk’s “reduced” request with the
original request). Defendants do not appear to deny the materiality of this
information. Instead, they take the factually inaccurate contention that “Ehrenpreis
originated the initial proposal for the 2018 Plan.” Defs.’ Post-Trial Opening Br. at
102 (citation omitted). Plaintiff argues that the Proxy also suffered from disclosure
issues relating to the ability to meet the milestones and Musk’s commitments outside
Tesla. Although likely material, the court defers making a factual finding on this
purported disclosure violation having found Plaintiff already proved the transaction
was not entirely fair.
776 Sample v. Morgan, 914 A.2d 647, 652, 663–67 (Del. Ch. Jan. 23, 2007) (rejecting
the “frivolous” argument because stockholders would also want to know where the
plan originated, the self-interested purpose of the plan by those who conjured it up,
and information regarding the comparative size of the plan to other corporate equity
plans).
156
holding recognizes that materiality extends beyond economics to information
regarding process, conflicts, incentives, and more. 777 Defendants’ authorities do not
support the new rule that they advance. 778
Moreover, “once defendants travel[] down the road of partial disclosure of the
history leading up to the [transaction] . . . , they ha[ve] an obligation to provide the
stockholders with an accurate, full, and fair characterization of those historic
events.” 779 Here, Defendants chose to disclose aspects of the process. Having done
777 See, e.g., Mindbody, 2023 WL 2518149, at *43–44 (finding a disclosure violation
where a party was tipped off as to the timing of a sales process); Atheros Commc’ns,
Inc., 2011 WL 864928, at *11 (Del. Ch. Mar. 4, 2011) (holding that the terms of the
incoming CEO’s employment after a merger were material where the proxy did not
fully describe the negotiating process); van der Fluit v. Yates, 2017 WL 5953514, at
*8–13 (Del. Ch. Nov. 30, 2017) (stating that “vague language regarding the identities
of the negotiators” who received post-transaction employment constituted a material
disclosure that prevented dismissal under Corwin); Lear Corp. S’holder Litig., 926
A.2d 94, 114 (Del. Ch. 2007) (“[A] reasonable stockholder would want to know an
important economic motivation of the negotiator singularly employed by the board to
obtain the best price for the stockholders, when that motivation could rationally lead
that negotiator to favor a deal at a less than optimal price[.]”); see also Maric Cap.
Master Fund, Ltd. v. Plato Learning, Inc., 11 A.3d 1175, 1179 (Del. Ch. 2010)
(imposing an injunction because the proxy failed to disclose a future CEO’s stock
options and future management makeup and other accompanying incentives).
778 Defendants cite to Cambridge Retirement System v. Bosnjak, where the court held
that the “absence of benchmarking information” was not a material omission
“because the proxy statements disclosed all material terms of the precise equity
awards that the stockholders were being asked to approve.” 2014 WL 2930869, at *9
(Del. Ch. June 26, 2014). But no one claims here that the absence of disclosed
benchmarking information rendered the stockholder vote uninformed. Defendants
further cite In re 3COM Corp. for the proposition that Delaware courts do not require
the disclosure of a projected options’ value, and thus Tesla went above and beyond by
disclosing the approximately $55.8 billion maximum theoretical value of the Grant.
1999 WL 1009210, at *6–8 (Del. Ch. Oct. 25, 1999); JX-878 at 24–25 (2/8/18 Schedule
14A Proxy Statement). But the fact that Tesla disclosed some information does not
excuse the Company’s other disclosure deficiencies.
779 Bancorp, 650 A.2d at 1280 (citations omitted).
157
so, they had an obligation to provide accurate, full, and fair information about that
process, which they failed to do. At a minimum, a corporation cannot disclose false
information, such as describing key negotiators as independent. That is what
happened here.
C. Defendants Failed To Prove That The Grant Was Entirely Fair.
Because Defendants failed to show that the stockholder vote was fully
informed, they bore the burden of proving entire fairness. “The requirement of
fairness is unflinching in its demand that where one stands on both sides of a
transaction, he has the burden of establishing its entire fairness, sufficient to pass
the test of careful scrutiny by the courts.” 780
The Delaware Supreme Court provided guidance on the entire fairness review
in SolarCity III. 781 Quoting Weinberger v. UOP, Inc., the high court described the
entire fairness review as follows:
The concept of fairness has two basic aspects: fair dealing
and fair price. The former embraces questions of when the
transaction was timed, how it was initiated, structured,
negotiated, disclosed to the directors, and how the
approvals of the directors and the stockholders were
obtained. The latter aspect of fairness relates to the
economic and financial considerations of the proposed
merger, including all relevant factors: assets, market
value, earnings, future prospects, and any other elements
that affect the intrinsic or inherent value of a company’s
stock. However, the test for fairness is not a bifurcated one
as between fair dealing and price. All aspects of the issue
780 SolarCity III, 298 A.3d at 700 (emphasis omitted) (quoting Weinberger, 457 A.2d
at 710).
781 Id. at 698–734.
158
must be examined as a whole since the question is one of
entire fairness. 782
Entire fairness review calls upon the court to “carefully analyze the factual
circumstances, apply a disciplined balancing test to its findings, and articulate the
bases upon which it decides the ultimate question of entire fairness.” 783 “Given the
unitary nature of the test, findings in one area may seep into the findings of the other.
As a result, ‘a fair process usually results in a fair price.’ The opposite is also true:
‘an unfair process can infect the price.’” 784
Here, Defendants failed to prove that the Grant was the product of fair dealing
or at a fair price.
a. Fair Dealing
“The element of ‘fair dealing’ focuses upon the conduct of the corporate
fiduciaries in effectuating the transaction.” 785 When discussing fair process in
SolarCity III, the Delaware Supreme Court encouraged this court to focus on what it
refers to as the “Weinberger factors.” 786 Those factors are “how the deal was initiated
782 Id. at 700 (quoting Weinberger, 457 A.2d at 711).
783 Id. (quoting Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1179 (Del. 1995)
[hereinafter “Cinerama II”]).
784 Id. at 702 (first quoting Ams. Mining, 51 A.3d at 1244, then quoting Trados, 73
A.3d at 78).
785 Id. at 701 (quoting Tremont, 694 A.2d at 430).
786 Id. at 702.
159
and timed, how it was structured and negotiated, and how it was approved[.]” 787
Those factors “form the core of a court’s fair dealing analysis.” 788
This decision already addressed most of the facts pertinent to the fair dealing
inquiry when discussing how Musk controlled the process and the disclosure
deficiencies. This section largely restates those findings while mapping them onto
the Weinberger factors. They fare no better in their repackaged form. Defendants
have failed to demonstrate that the process leading to the Grant was fair.
i. Initiation And Timing
The first Weinberger factor “examines how the decision under challenge was
initiated.” 789 “The scope of this factor is not limited to the controller’s formal act of
making the proposal; it encompasses actions taken by the controller in the period
leading up to the formal proposal.” 790 The goal of the analysis is to determine whether
the controller timed the proposal opportunistically to take advantage of the minority
stockholders. 791 In SolarCity II, for example, the court asked whether Musk timed
the transaction to “exploit any inherent coercion[.]” 792
787 Id. (citing Weinberger, 457 A.2d at 711).
788 Id.
789 Frederick Hsu, 2020 WL 2111476, at *36.
790 Dole, 2015 WL 5052214, at *26.
791 In re BGC P’rs, Inc. Deriv. Litig., 2022 WL 3581641, at *18 (Del. Ch. Aug. 19, 2022)
(“The . . . initiation of a transaction can evidence a lack of fair dealing where it favors
the controller to the minority’s detriment.”), aff’d, 303 A.3d 337 (Del. 2023) (TABLE).
792 SolarCity III, 298 A.3d at 703–04; see also Dole, 2015 WL 5052214, at *27–28
(finding unfair dealing where the controller planned on taking target private for
eighteen months prior to the formal process, during which time the controller
engaged in a calculated effort to depress the market price of the target’s stock); Sealy
160
As to this factor, Defendants have a handful of facts in their favor. The timing
of the first discussion was dictated by Ehrenpreis, not Musk. Ehrenpreis credibly
testified that he initiated this discussion because Tesla had reached nearly all of the
milestones of Musk’s prior compensation plan. There is no evidence that Musk was
secretly behind the start of negotiations, or that a starting negotiation in April 2017
gave Musk any significant advantage at the expense of the minority stockholders.
Nor is there any evidence that Musk set the table for the negotiations by acting
in a manipulative or duplicitous manner. To show manipulative conduct, Plaintiff
points to Musk’s May 2018 public statement that he would not remain CEO forever.
Plaintiff argues that this statement was intended to pressure the Board. That is not
a far-fetched theory, but it is not supported by the record. The more likely
explanation is that Musk was considering stepping down from CEO to become Chief
Products Officer. Another likely explanation is that Musk lacks a filter, so his public
statement easily could have been a momentary thought that immediately found
expression. In all events, he clarified his intentions at the time and at trial: Musk is
committed, Tesla forever.
Mattress Co. of New Jersey, Inc. v. Sealy, Inc., 532 A.2d 1324, 1336 (Del. Ch. 1987)
(finding unfair dealing in light of “a calculated effort to depress the [market] price” of
a stock “until the minority stockholders [are] eliminated by merger or some other
form of acquisition”); Jedwab v. MGM Grand Hotels, Inc., 509 A.2d 584, 599 (Del. Ch.
1986) (observing that “[t]he prototyp[ical] instance in which the timing of a merger
would itself likely constitute a breach of a controlling shareholder’s duty is when it
could be shown both (1) that the minority was financially injured by the timing (i.e.,
from their point of view it was an especially poor time to be required to liquidate their
investment) and (2) that the controlling shareholder gained from the timing of the
transaction what the minority lost”); Weinberger, 457 A.2d at 711 (citing the “serious
time constraints” as a negative factor in the discussion of process).
161
Although Musk did not manipulate the initial timing of the process, he
repeatedly and unilaterally manipulated the timeline of the process. To summarize
the facts discussed above, before the Board or Compensation Committee had a
substantive discussion concerning the Grant, Musk’s team proposed a highly
accelerated schedule that contemplated approval of the Grant within less than two
months. The committee’s independent advisors asked for more time and were told
no. It was Musk who unilaterally extended the July deadline to August or September.
Musk then unilaterally put the process on hold again at the end of July, causing work
to slow and then stop entirely. Musk restarted discussions on the morning of
November 9. Musk asked to pause the process again on November 14 and was
ultimately successful in delaying work until December. Musk instigated another
period of urgency on December 11, placing the Grant “on a fast track,” 793 and
resetting the target date for Board approval to January. The Board eventually
approved the 2018 Grant on January 21.
As Weinberger teaches, time constraints standing alone are “not necessarily
indicative of any lack of fairness by a majority shareholder. It [is] what occurred, or
more properly did not occur,” that matters. 794 Put differently, one must look to how
the time constraints affected the process.
Here, Musk’s “red light, green light” approach negatively affected the process
in two ways. First, although the process spanned nine months, most of the work
793 JX-718.
794 457 A.2d at 711.
162
occurred during small bursts and under Musk-imposed time pressure. Second, Musk
made determinations at the last minute, compressing the timeline, adjusting the
timeline, or proposing new terms prior to six out of the ten Board or Compensation
Committee meetings during which the Grant was discussed. Musk’s habit of shaking
up the timeline or changing his proposal just before a meeting made it tough for the
directors and their advisors to meaningfully evaluate the Grant and respond. The
time constraints and last-minute adjustments impaired the process.
ii. Negotiations
The next Weinberger factor examines how the transaction was negotiated and
structured. This factor proves pivotal, because arm’s-length negotiations can make
163
up for other flaws. 795 But the opposite is also true. The lack of arm’s-length
negotiations can overshadow positive aspects of a process. 796
Perhaps for this reason, Defendants rely heavily on the negotiations to
demonstrate fair process. They emphasize the number of Board, Compensation
Committee, and Working Group meetings. They tally months spent (both the total
795 See, e.g., SolarCity III, 298 A.3d at 710 (agreeing with the trial court that although
the process had flaws, the process included several “redeeming features that
emulated arms-length bargaining” (citing SolarCity II, 2022 WL 1237185, at *36));
BGC P’rs, 2022 WL 3581641, at *42 (finding that although “[t]here were certainly
flaws,” “[t]he record demonstrates that the Special Committee undertook good faith,
arm’s length negotiations . . . that resulted in a deal with a favorable structure and a
fair price”); S. Muoio & Co. LLC v. Hallmark Ent. Invs. Co., 2011 WL 863007, at *9–
10 & n.73 (Del. Ch. Mar. 9, 2011) (finding process was entirely fair where, among
other things, “the Special Committee was independent, fully informed, and . . .
negotiated . . . at arm’s length”), aff’d, 35 A.3d 419 (Del. 2011) (TABLE); Cinerama II,
663 A.2d at 1144 (concluding that despite the process being “flawed,” the transaction
was fair where “the board was insufficiently informed to make a judgment worthy of
presumptive deference, nevertheless considering the whole course of events,
including the process that was followed, the price that was achieved, and the honest
motivation of the board to achieve the most financially beneficial transaction
available[]”), aff’d, 663 A.2d 1156 (Del. 1995); Van de Walle v. Unimation, Inc., 1991
WL 29303, at *17 (Del. Ch. Mar. 6, 1991) (“The most persuasive evidence of the
fairness of the $21 per share merger price is that it was the result of arm’s-length
negotiations between two independent parties, where the seller . . . was motivated to
seek the highest available price, and a diligent and extensive canvass of the market
had confirmed that no better price was available.”); Rosenblatt, 493 A.2d at 937–38
(observing that controller established separate negotiating terms to recreate arm’s
length bargaining, that negotiations were adversarial, and that the result was “more
than the theoretical concept of what an independent board might do under the
circumstances[]” and “[i]nstead . . . it [was] clear that these contending parties to the
merger in fact exerted their bargaining power against one another at arm’s length”
(citations omitted)).
796 See, e.g., FrontFour, 2019 WL 1313408, at *26 (finding that because the special
committee “was not truly independent and did not negotiate at arm’s length[]” that
the defendants did not prove the proposed transactions were the product of fair
dealing).
164
and those involving “active deliberation”) and even estimate total hours worked. 797
Defendants also tout their advisors’ qualifications and integrity. 798
Although Defendants cast the negotiations as the strongest aspect of the
process, they are actually the most dramatic failure. Defendants elevate form over
substance, proffering what Plaintiff’s counsel aptly described as “a false equivalency
between length of the process and fairness.” 799 Defendants’ tallies of time spent are
merely “superficial indicia”—total hours spent is meaningless if the time was not
used to benefit stockholders. 800
One important dimension of arm’s-length bargaining is the existence of an
independent bargaining agent. As this decision has found, the Compensation
Committee was compromised by conflicts. They could not negotiate at arm’s length
against Musk.
Not surprisingly, there is no evidence of any adversarial negotiation with Musk
concerning the size of the Grant. Rather, Musk made an initial proposal, and that
proposal was the only one seriously considered until Musk unilaterally changed it six
months later. Defendants are correct that, in the final stretch of the process, the
Grant went from a 10%/10-tranche FDS structure to a 12%/12-tranche TOS structure.
797 Defs.’ Post-Trial Opening Br. at 58–59.
798 Id.
799 Pl.’s Post-Trial Answering Br. at 39.
800 Valeant Pharms. Int’l v. Jerney, 921 A.2d 732, 746 (Del. Ch. 2007); see also
Loral, 2008 WL 4293781, at *23 (finding “troubling” that advisors “seemed intent on
making the [transaction] appear more fair rather than providing an objective opinion
to the Special Committee and helping the Special Committee use any leverage it had
to strike a better deal”).
165
Defendants are correct that, all else equal, requiring more growth in market
capitalization for the same number of shares means a better deal for stockholders.
But there is no credible evidence that the shift from ten tranches to 12 and the
associated increase in the difficulty of the market capitalization targets resulted from
any actual negotiation with Musk. To the contrary, as discussed above, the Board
backed into 12 tranches when translating Musk’s demand of 10% of fully diluted
shares into a round percentage of total outstanding shares while maintaining the $50
billion/1% per tranche approach that Musk proposed back in April.
As to the other terms, the purported concessions secured by the Compensation
Committee did not result from negotiations either. The Clawback Provision was the
bare minimum necessary to comport with existing Tesla policy and did not address
other key Board goals, such as the Board’s desire to retain Musk. The Leadership
Requirement was less restrictive than in the prior Grant and not tailored to fit the
retention goal either. The Five-Year Hold Period resulted from Ehrenpreis’s directive
to find “creative options” for reducing the grant date fair value. It does not protect
stockholders because Musk is not restricted from selling or pledging his nearly 21.9%
stake. 801 The industry-standard M&A Adjustment—which merely prohibited Musk
from gaming the Grant’s milestones through inorganic growth—were a non-issue for
801 JX-530 at 8.
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Musk. 802 And his acknowledgement that Tesla would not “be making any big
acquisitions” rendered that provision functionally irrelevant. 803
The Compensation Committee’s independent advisors cannot help the analysis
because they played no role in any negotiations and were not tasked with challenging
the committee’s thinking or presenting alternatives to the Grant. 804 Defendants
agree that benchmarking is standard and essential. They knew benchmarking would
expose the Grant as many multiples larger than any conceivable comparison. But
the Compensation Committee did not ask its advisors to provide a benchmarking
analysis, which would have given them some perspective on how (in Musk’s words)
“really crazy” the Grant was. 805
The Compensation Committee relied more on conflicted management members
than on its outside advisors. Illustrating this point, many of the documents
Defendants cited as proof of a fair process were drafted, pushed out, or endorsed by
802 Trial Tr. at 255:6–13 (Maron).
803 JX-781 at 1–2 (Musk emailing Maron concerning the M&A provision that “I don’t
think we will be making big acquisitions” and “[o]ur only acquisitions have been
relatively small automation companies”).
804 See Trial Tr. at 1481:8–14, 1466:21–1469:4 (Brown) (testifying that “[Compensia
consultants] weren’t retained necessarily to challenge what they were doing,” but
instead “to help them think really carefully about how to do it”).
805 JX-398.
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Musk’s divorce-attorney-turned-general-counsel Maron, 806 whose admiration for
Musk moved Maron to tears during his deposition. 807
Suffice it to say, the Compensation Committee operated under a “controlled
mindset.” 808 Rather than negotiating against Musk, the committee engaged in a
“cooperative [and] collaborative” process 809 antithetical to arm’s-length bargaining. 810
Worse, the committee seemed to actively advance Musk’s interests—doing “what feels
fair” for Musk 811—including by devising ways to understate the Grant’s value on the
806 See Defs.’ Post-Trial Opening Br. at 58–68 (citing JX-878 (Proxy prepared by
Maron); JX-1592 (6/23/17 Compensation Committee Presentation prepared by Maron
and his team); JX-628 (9/18/17 Presentation for CEO compensation discussion sent
out by Maron); JX-566 (7/31/17 Slide Decks for Special Compensation Committee
meeting circulated by Maron); JX-699 (11/16/17 Board minutes drafted by Maron
(secretary)); JX-729 (12/12/17 special Board meeting minutes drafted by Maron
(secretary)); JX-783 (1/17/18 emails from Maron to team); JX-784 (1/17/18 email from
Maron to Musk); JX-678 (11/29/17 email from Maron to Musk on the steps for his
proposal); JX-509 (7/7/17 Compensation Committee meeting minutes drafted by
Maron (secretary)).
807 Maron Dep. Tr. at 74:10–17 (becoming “emotional” about the decision to leave
Tesla); id. at 200:9–15 (“Unfortunately I lost my cool earlier and cried because I love
the company so much, and I loved my teammates and my colleagues and the people
on the executive team.”); Trial Tr. at 275:10–24 (Maron) (confirming he “choked up”
at his deposition about his “incredible experience[]” at Tesla and the “very emotional
decision” to leave).
808 See S. Peru, 52 A.3d at 798 (“[F]rom inception, the Special Committee fell victim
to a controlled mindset and allowed [the controller] to dictate the terms and structure
of the [transaction].”).
809 Trial Tr. at 243:7–244:13 (Maron).
810 See S. Peru, 52 A.3d at 798 (finding the special committee “accepted that only one
type of transaction was on the table . . . [that] took off the table other options that
would have generated a real market check and also deprived the Special Committee
of negotiating leverage to extract better terms”).
811 See Trial Tr. at 809:8–14 (Maron); see also Gracias Dep Tr. at 244:25–245:20 (“I
did not have a positional negotiation with [Musk] about, hey, we want to give you one
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grant date and make the milestones easier to achieve. Those were “exercise[s] in
rationalization.” 812 In the end, Musk dictated the Grant’s terms, and the committee
effected those wishes. 813
iii. Structure And Approval
The last Weinberger factor examines how the transaction was structured and
approved. “Whether a transaction was structured to include procedural protections—
such as requiring the approval of an independent board negotiating committee or a
majority of the minority vote—is another important indicium of fairness.” 814 The
[tranche], and you want two and let’s go negotiate back and forth . . . . I did not have
a negotiation starting lower and going higher with him about the tranches or the size
of the award.”); id. at 255:22–256:9 (“Q. Okay. As a Tesla director and compensation
committee member, do you think you have a duty to the company and the
stockholders to try to negotiate for the smallest compensation package for Mr. Musk
that would adequately incentivize him? A. That is not how I think about it, no. Q.
Can you explain to me how you think about it? A. I think about compensation
packages generally as what is fair to the executive and what is fair to the company.
I don’t think about it as trying to get the very smallest thing possible ever. That’s
just not my modus operandi with any company I deal with. I think about fairness.”).
812 See S. Peru, 52 A.3d at 801; see also id. (“Throughout the negotiation process, the
Special Committee’s and Goldman’s focus was on finding a way to get the [controller’s
proposed] terms to make sense[.]”); Valeant, 921 A.2d at 746 (“[The process was], from
the outset, undertaken to justify a bonus on the order of $30 million to Panic, rather
than determine if bonuses—and in what amounts—might be appropriate.”).
813 See Loral, 2008 WL 4293781, at *26 (“Loral’s CEO, Targoff, was a more aggressive
negotiator than the Special Committee itself or the Committee’s financial advisor,
North Point. By that stage, Harkey, Simon, and North Point seemed willing to sign
off on terms that were more advantageous to MHR than Targoff himself wanted to
accept.”).
814 BGC P’rs, 2022 WL 3581641, at *19 (citing Gesoff v. IIC Indus., Inc., 902 A.2d
1130, 1145 (Del. Ch. 2006) (“The Supreme Court observed as early as Weinberger that
the establishment of an independent special committee can serve as powerful
evidence of fair dealing.”)); Jedwab, 509 A.2d at 599 (“As to the fact that the
transaction was not structured to accord minority shareholders a veto, nor was an
169
Board approved the Grant. Musk and Kimbal recused themselves. Five of the six
directors who voted on the Grant were beholden to Musk or had compromising
conflicts. 815 Tesla voluntarily subjected the Grant to a majority of the minority vote,
but the Board secured stockholder approval through the materially deficient Proxy. 816
independent board committee established to negotiate the apportionment of merger
consideration on behalf of the minority, these are pertinent factors in assessing
whether fairness was accorded to the minority.”); Sealy, 532 A.2d at 1336 (“A second
indicium of fair dealing, or its absence, is whether the process by which the merger
terms were arrived at involved procedural protections that would have tended to
assure a fair result.”)).
815 Gesoff, 902 A.2d at 1150–51 (finding in a post-trial opinion, that the investment
bank’s relationship with the buy-side controlling stockholder “robs [its] fairness
opinion of its value as an indicator of fairness, and is itself an indicator that the
parties did not structure the process in a way that was entirely fair”); see also In re
El Paso Corp. S’holder Litig., 41 A.3d 432, 444 (Del. Ch. 2012) (noting that the
conflicted negotiator has a duty “to squeeze the last drop of the lemon out for . . .
stockholders,” but that the conflict gave the negotiator “a motive to keep juice in the
lemon that he could use to make a financial [deal] for himself”).
816 Accord Weinberger, 457 A.2d at 703 (“Material information . . . was withheld under
circumstances amounting to a breach of fiduciary duty. We therefore conclude that
this merger does not meet the test of fairness . . . .”); Orchard, 88 A.3d at 29
(concluding that a “disclosure issue on which the plaintiffs received summary
judgment provide[d] some evidence of unfairness”); see also Delman v.
GigAcquisitions3, LLC, 288 A.3d 692, 723 (Del. Ch. 2023) (finding entire fairness
standard applied where defendants failed “to disclose the cash per share that Gig3
would invest in the combined company[]” and “the value that Gig3 and its non-
redeeming stockholders could expect to receive in exchange[]” because “[b]oth pieces
of information would be essential to a stockholder deciding whether it was preferable
to redeem her funds from the trust or to invest them in New Lightning”); In re
MultiPlan Corp. S’holders Litig., 268 A.3d 784, 816 (Del. 2022) (stating plaintiff
stated viable claim under the entire fairness standard where the defendants failed to
disclose information necessary for the plaintiff to “knowledgeably exercise their
redemption rights”); Voigt, 2020 WL 614999, at *24 (finding entire fairness standard
applied where the proxy statement failed to disclose the equity of a purchased asset
“because it directly addressed the fairness of the [c]hallenged [t]ransaction[]” (citation
omitted)).
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Neither Board approval nor stockholder approval is a positive factor here for the fair
dealing analysis.
b. Fair Price
“In the fair price analysis, the court looks at the economic and financial
considerations of the transaction to determine if it was substantively fair.” 817 “Fair
price and fair value standards call for equivalent economic inquiries.” 818 “The fair
price aspect of the entire fairness test,” however, “is not in itself a remedial
calculation.” 819 “Instead of picking a single number, the court’s task is ‘to determine
whether the transaction price falls within a range of fairness.’” 820 The fair price
aspect of the entire fairness standard involves consideration of “all relevant factors”
and may encompass “proof of value by any techniques or methods which are generally
considered acceptable in the financial community[.]” 821
There is no absolute limit on the magnitude of a compensation grant that could
be considered fair. 822 But “[p]rocess can infect price.” 823 And “where the pricing terms
of a transaction that is the product of an unfair process cannot be justified by
817 Ravenswood Inv. Co., L.P. v. Est. of Winmill, 2018 WL 1410860, at *13 (Del. Ch.
Mar. 21, 2018) (citation omitted).
818 Id. (cleaned up).
819 Id. (cleaned up).
820 SolarCity II, 2022 WL 1237185, at *39 (quoting Dole, 2015 WL 5052214, at *33).
821 Weinberger, 457 A.2d at 713; SolarCity II, 2022 WL 1237185, at *32.
822 See Brehm v. Eisner, 746 A.2d 244, 263 (Del. 2000) (“the size and structure of
executive compensation are inherently matters of judgment” (citation omitted)).
823 Reis, 28 A.3d at 467 (citations omitted); Bomarko, Inc. v. Int’l Telecharge Inc., 794
A.2d 1161, 1183 (Del. Ch. 1999) (“[T]he unfairness of the process also infects the
fairness of the price.”), aff’d, 766 A.2d 437 (Del. 2000).
171
reference to reliable markets or by comparison to substantial and dependable
precedent transactions, the burden of persuading the court of the fairness of the
terms will be exceptionally difficult.” 824
Defendants’ primarily urge the court to evaluate price by comparing the terms
of the exchange—what Tesla “gave” against what Tesla “got.” 825 This allows
Defendants to argue that the Grant was “all upside” for the Tesla stockholders, who
they say risked nothing and gave “6% for $600 billion[.]” 826 There are many
alternative ways to analyze price fairness. 827 And there are good reasons to reject
the give/get model where no market-based evidence supports the price. 828 But
because Defendants bear the burden of proving fair price, the court starts with their
give/get argument.
Defendants’ other affirmative arguments go as follows. They argue that a
unique set of circumstances warranted an unprecedented Grant, which was
824 Valeant, 921 A.2d at 748–49; see also Loral, 2008 WL 4293781, at *22 (“When the
process used involves no market check and the resulting transaction is a highly
unusual one impossible to compare with confidence to other arms-length
transactions, the court is left with no reasoned basis to conclude that the outcome
was fair.”).
825Defs.’ Post-Trial Opening Br. at 69–70 (citing S. Peru, 52 A.3d at 801–02;
Dieckman v. Regency GP LP, 2021 WL 537325, at *34–35 (Del. Ch. Feb. 15, 2021)).
826 Id. at 70, 74.
827 See, e.g., SolarCity II, 2022 WL 1237185, at *39–48 (structuring the price analysis
to follow the parties’ competing price arguments).
828 Valeant, 921 A.2d at 750 (observing that the price terms could not be “justified by
reference to any reliable market[]” and that there was no “proof in the record of
substantial comparable transactions to which the court might look to find support for
the payment of bonuses”).
172
“necessary . . . at this time, for this CEO, and in this form.” 829 They contend that the
Grant was “only upside” for the additional reason that the Grant’s structure aligned
Musk’s interests with the stockholders. They assert that the Grant’s milestones were
ambitious and difficult to achieve. They maintain that the Grant is an exceptional
deal when compared to private equity compensation plans. They say that the
stockholder vote was an indicator of fair price. And they insist that the Grant worked
by delivering to stockholders all that was promised.
Each of Defendants’ fair price arguments fail. Defendants did not prove that
the Grant falls within a range of fairness.
i. The Give/Get
A “get” in this context asks what terms advance a company’s goals. A “give” is
only reasonable if it is calibrated to further those goals. To contextualize the “give”
and the “get” discussion, therefore, the court must first ask: What did Tesla want?
As set out in the June 16 Compensation Committee meeting minutes, the goals
in structuring Musk’s compensation plan were to “retain[]” Musk, “properly
incentiviz[e]” Musk, and “[k]eep . . . Musk as the Company’s fully-engaged CEO”
given the “multiple other successful large companies” he manages. 830 The lawyer-
curated record of the relevant Board and Compensation Committee meetings
identifies these goals, in general terms, as well as the directors’ desires to align
829 Defs.’ Post-Trial Opening Br. at 78.
830 JX-439.
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Musk’s interests with stockholder value. 831 These are all versions of commonly cited
and accepted goals of equity-based compensation plans. Here, however, the words
831 JX-407 (6/6/17 Board meeting minutes) (“Mr. Ehrenpreis then updated the Board
on the status and near fulfillment of all performance milestones related to Mr. E.
Musk’s current compensation plan, and that plans were underway to design the next
compensation program for Mr. E. Musk. The Board acknowledged Mr. E. Musk’s
extraordinary achievement of the stretch milestones it had set for him and for having
increased the market capitalization of the Company by more than 10x over the last
five years.”); JX-439 (6/23/17 Compensation Committee meeting minutes) (“Mr.
Ehrenpreis then led a Committee discussion evaluating the importance of retaining
and properly incentivizing Mr. Musk. The Committee discussed how Mr. Musk had
been and would likely remain a key driver of the Company’s success and its prospects
for growth, and that, accordingly, it would be in Tesla’s interest, and in the interest
of its stockholders, to structure a compensation package that would keep Mr. Musk
as the Company’s fully-engaged CEO. The Committee also discussed the fact that
unlike most other Chief Executive Officers, Mr. Musk manages multiple successful
large companies. The Committee discussed the importance of keeping Mr. Musk
focused and deeply involved in the Company’s business, and the corresponding need
to formulate a compensation package that would best ensure that Mr. Musk focuses
his innovation, strategy and leadership on the Company and its mission.”); JX-509
(7/7/17 Compensation Committee meeting minutes) (“The Committee determined
that one important theme for any compensation plan was to ensure that it created
adequate structural incentives to focus on the long term growth and success of the
Company and the creation of shareholder value as opposed to simply short-term
increases in stock price, while at the same time properly balancing risks and rewards
for the Company, its shareholders and Mr. Musk. With these principles in view, the
Committee again deliberated the pros and cons of various structures, and various
Committee members continued to express their views that the 2012 Compensation
Plan had worked extremely well for the Company, its stockholders and in
incentivizing Mr. Musk to spend the bulk of his time on the Company and create
enormous value for the Company. In light of these factors, Committee members
expressed their views that there could be significant benefits from creating a
similarly structured program for Mr. Musk’s next compensation plan, including
providing strong shareholder alignment, while also recognizing the changed nature
and size of the Company since the 2012 Plan was implemented. The Committee
further recognized Mr. Musk’s unique drive for major accomplishments and the
desire and need to motivate him with significant goals and milestones. The
Committee recognized and expressed its desire to properly balance the motivation of
stretch goals for Mr. Musk against any de-motivating factors created by seemingly
impractical, unrealistic or unachievable goals. The Committee then discussed with
Compensia and Radford the valuation and accounting considerations for a potential
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equity grant. Questions were asked and full discussion ensued.”); JX-571 (8/1/17
Compensation Committee meeting minutes) (“The Committee discussed the overall
size of the new program and how it should reflect Mr. Musk’s qualities and
motivations. They also discussed the need for stretch goals and a long term outlook
heavily focused on the creation of significant shareholder value. The Committee
discussed an overall framework of a plan that could last 10-15 years, while also noting
the pace at which Mr. Musk achieved the ambitious goals set forth in the 2012
Compensation Program (including leading the Company during a period in which the
market cap of the company grew over 10x in five years). As part of this discussion,
the Committee considered whether it was appropriate to consider new and/or
alternative metrics for milestones in light of the Company’s increased size and focus,
or whether the ultimate focus should be on the growth of the Company and the
creation of significant shareholder value. The Committee further discussed the
setting of major milestones and the importance of balancing the creation .of
aggressive incentives for Mr. Musk while not disincentivizing him with seemingly
impracticable or achievable goals. The Committee also discussed the appropriateness
of large stretch goals and a structure in which Mr. Musk would receive zero
compensation unless he achieved an incredibly significant milestone and created
significant shareholder value, and how this type of structure had served shareholders
and the Company so effectively in the 2012 Compensation Program. The Committee
acknowledged that if Mr. Musk agreed to accept the significant risk in such a
structure, the reward would have to be likewise significant, but yet fair to the
Company and optimal for the shareholders given the milestones that would be
achieved and the value created. The Committee discussed the milestones and various
metrics that could be used to measure performance. The members of the Committee
expressed a preference for simplicity and their desire to fully align the performance
metrics to, ultimately, the creation of shareholder value.”); JX-631 (9/19/17 Board
meeting minutes) (“Various topics were discussed, including the success of the
previous 2012 CEO Compensation Program and how motivating it as for Mr. Musk;
Mr. Musk’s ambitions for the Company and its potential to be one of the most valuable
companies in the world; Mr. Musk’s passion and dedication to the Company and its
mission; the directors’ views of Mr. Musk’s incentives; and Mr. Musk’s other
commitments and potential competing interests. The directors expressed their desire
to significantly align Mr. Musk’s compensation with shareholder interests; to focus
on long term creation of value; and to balance risk and reward for all stakeholders. A
full discussion ensued. During this discussion, the Board recognized, among other
things, the challenges of the CEO role and Mr. Musk’s value to the Company, its
products and businesses, and its culture of innovation. In particular, the Board
recognized Mr. Musk’s ability to execute in the face of significant challenges. The
Board further discussed Mr. Musk’s motivations and how the CEO Compensation
Program might best serve the Company and its shareholders, while properly
incentivizing Mr. Musk’s ambitions for the Company.”); JX-729 (12/12/17 special
Board meeting minutes) (stating that the “program was characterized by the . . . full
175
seem like empty phrases. One obvious reason to question these statements is that
the Board said that it wished to retain Musk as the “fully engaged CEO,” yet the
Leadership Requirement allowed Musk to step down to the role of “Chief Product
Officer.”
There is a more fundamental issue. Professor Charles Elson submitted an
amicus brief in this action persuasively arguing that “[e]quity compensation for
corporate executives was designed to solve a specific problem at a specific time in
American corporate history.” 832 To summarize that lesson in broad strokes, the first
half of the 1900s witnessed a transition from “era of the ‘robber barons’” to the era of
the Berle-Means corporation, where corporations were run by “professional managers
with little skin in the game.” 833 The theory behind equity-linked compensation plans
was that “[b]road-based equity ownership throughout the organization by
management, directors, and employees” is “the most effective motivation for
continuous vigilance throughout the organization.” 834 For that reason and due to
alignment of CEO gains with the creation of shareholder value” and that “[t]he Board
acknowledged this alignment as one of their primary focuses and discussed their
understanding that this full shareholder alignment was Mr. Musk’s desire as well”);
JX-791 (1/21/18 Board meeting minutes) (stating that “the Board concluded that the
proposed CEO Performance Award created very close alignment with shareholder
interests that had the potential to powerfully incentivize Mr. Musk, and created the
greatest likelihood to propel the Company through its next stages of growth”).
832 Elson Amicus Br. at 4.
833 Id. at 4 (citing Amy Deen Westbrook & David A. Westbrook, Unicorns, Guardians,
and the Concentration of the U.S. Equity Markets, 96 Neb. L. Rev. 688, 693–94
(2018)).
834 Id. at 7 (quoting Report Of The NACD Best Practices Council: Coping With Fraud
And Other Illegal Activity 16 (1998)).
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changes in federal tax law, by the 1980s, “pressure built on companies to . . .
strengthen the link between pay and performance.” 835 Corporations began “using
much more equity-based compensation.” 836
Equity-based compensation continues to be a powerful way to reduce agency
costs and align the interests of management with those of the stockholders, 837 as
Delaware law recognizes. 838 But where an executive has a sizeable pre-existing
equity stake, there is a good argument that the executive’s interests are already
aligned with those of the stockholders. There are many examples of visionaries with
large pre-existing equity holdings foregoing compensation entirely: Zuckerberg,
835 Id. at 6 (quoting Brian R. Cheffins, Delaware and the Transformation of Corporate
Governance, 40 Del. J. Corp. L. 1, 14 (2015)); see also John C. Coffee, Jr., What Caused
Enron? A Capsule Social and Economic History of the 1990s, 89 Cornell L. Rev. 269,
273–75 (2004) (discussing the trend toward equity-based compensation).
836 Elson Amicus Br. at 6 (quoting Cheffins, Delaware and the Transformation of
Corporate Governance, 40 Del. J. Corp. L. at 14).
837 See generally id. at 7–8; but see Coffee, What Caused Enron? A Capsule Social and
Economic History of the 1990s, 89 Cornell L. Rev. at 278–79 (cautioning that equity-
based compensation can create perverse incentives when deployed without
restrictions such as hold periods).
838 See, e.g., Chen, 87 A.3d at 670–71 (observing that owning material amounts of
stock “aligns [fiduciaries’] interests with other stockholders by giving them a
‘motivation to seek the highest price’ and the ‘personal incentive as stockholders to
think about the trade off between selling now and the risks of not doing so’” (quoting
In re Dollar Thrifty S’holder Litig., 14 A.3d 573, 600 (Del. Ch. 2010))); Orman v.
Cullman, 794 A.2d 5, 27 n.56 (Del. Ch. 2002) (“A director who is also a shareholder of
his corporation is more likely to have interests that are aligned with the other
shareholders of that corporation as it is in his best interest, as a shareholder, to
negotiate a transaction that will result in the largest return for all shareholders.”);
In re Mobile Commc’ns Corp. of Am., Inc. Consol. Litig., 1991 WL 1392, at *9 (Del.
Ch. Jan. 7, 1991) (observing that directors’ equity ownership created “powerful
economic (and psychological) incentives to get the best available deal”), aff’d, 608 A.2d
729 (Del. 1992) (TABLE).
177
Bezos, Gates, and others so familiar to the world that no first names are required. 839
In each instance, the CEO’s board recognized that the executive’s preexisting
ownership stake provided sufficient incentive to grow the companies that they had
built. 840
So why not here? Why did Tesla have to “give” anything in these
circumstances? Musk owned 21.9% of Tesla at the time of the Grant. 841 If the goals
were retention, engagement, and alignment, then Musk’s pre-existing equity stake
839 Elson Amicus Br. at 1–4; see also Dunn Dep. Tr at 138:17–139:10 (“There are
people, you know, like Jeff Bezos, for example, who doesn’t take any compensation
including no equity compensation. The only thing that shows up in his proxy is like
his security expense. . . . Warren Buffett, I think his salary is $100,000. That what
he takes in compensation, because he owns such a significant portion of the shares.”);
Dunn Opening Expert Report at 114–15 (showing how much more Musk’s
compensation for 2018 would be compared to similar high-profile executives for 2018
(Bezos, $1.6 million) (Pessina (Walgreens) $12.7 million) (Buffett, $390 thousand)
(Zuckerberg, $22 million) (Musk, $2.3 billion) (numbers are approximate)). The three-
year average compensation (from 2016–2018) paid to Musk (assuming the much
lower $2.3 billion valuation of the 2018 Grant) is “over 110x what was paid to the
median of the group” Dunn analyzed (approximately $6.8 million (others) to $761.4
million (Musk)). Id.
840 See generally Elson Amicus Br. at 3 (citing 10/4/06 Microsoft Schedule 14A Proxy
at 14 (“Messrs. Gates and Ballmer do not receive equity-based pay from the Company
because they already own a significant amount of Company stock.”); 4/29/16 Alphabet
Schedule 14A Proxy at 30 (“Larry and Sergey have voluntarily elected to only receive
nominal cash compensation. As significant stockholders, a large portion of their
personal wealth is tied directly to Alphabet’s stock price performance, which provides
direct alignment with stockholder interests.”); 4/14/22 Amazon Schedule 14A Proxy
at 92 (“Due to Mr. Bezos’s substantial stock ownership, he believes he is appropriately
incentivized and his interests are appropriately aligned with shareholders’ interests.
Accordingly, Mr. Bezos has never received any stock-based compensation from
Amazon.”); 4/12/19 Facebook Schedule 14A Proxy at 28 (“Mr. Zuckerberg did not
receive any additional equity awards . . . because our compensation & governance
committee believed that his existing equity ownership position sufficiently aligns his
interests with those of our stockholders.”)).
841 PTO ¶ 64.
178
provided a powerful incentive for Musk to stay and grow Tesla’s market
capitalization. After all, he stood to benefit by over $10 billion for every $50 billion
increase. His equity stake was also a powerful incentive to avoid allowing Tesla to
fall in what Musk might consider to be incapable hands. 842 Moreover, Musk was not
going anywhere. He stated publicly at the outset of the process and repeated
throughout this litigation that he was a lifer who intended to stay at Tesla for the
remainder of his days (or until he becomes “too crazy”), with or without the Grant. 843
The principal defect with Defendants’ give/get argument (indeed, their fair
price argument as a whole) is that it does not address the $55.8 billion question:
Given Musk’s pre-existing equity stake, was the Grant within the range of reasonable
approaches to achieve the Board’s purported goals? Or, at a minimum, could the
Board have accomplished its goals with less, and would Musk have taken it?
Defendants’ primary response is to reduce the issue to a straw man, stating
that “Plaintiff’s allegations boil down to the position that Musk should be happy to
work for free.” 844 They make a similar point elsewhere, stating that if Musk “fell
short of achieving some or all of the [Grant’s] milestones, the stockholders retained
the benefit of any increase in Tesla’s stock price, while Musk risked receiving
842 Trial Tr. at 1421:9–13 (Buss) (“Q. Shifting gears, during your board tenure, the
Tesla board had no formal documented succession plan to replace Mr. Musk; correct?
A. Formally documented, no. We had various discussions. But correct, nothing
documented.”); id. at 857:9–858:10 (Murdoch) (confirming Musk had not identified a
successor until the months after his 2021 deposition).
843 See e.g., JX-390 at 20–21.
844 Dkt. 227 (“Defs.’ Pre-Trial Br.”) at 43 (emphasis added).
179
nothing.” 845 For free? Receive nothing? Defendants’ arguments ignore the obvious:
Musk stood to gain considerably from achieving the Grant’s market capitalization
milestones (over $10 billion for each $50 billion increase in market capitalization).
Defendants also neglect the magnitude of the give in their give/get argument.
The Grant was, by Compensia’s reckoning, the “larg[est] compensation opportunity
to [a] CEO that [they] have seen.” 846 Even other “highly leveraged plan designs with
very aggressive performance requirements” did not compare to the Grant. 847 The
Grant was more than 30x greater than its nearest comparable plan, and that was
Musk’s 2012 Grant. 848 ISS noted that the Grant was 250x greater than the median
peer 2017 CEO compensation. 849 The incredible size of the biggest compensation plan
ever—an unfathomable sum—seems to have been calibrated to help Musk achieve
what he believed would make “a good future for humanity.” 850
A good future for humanity is a really good thing. Some might question
whether colonizing Mars is the logical next step. But, in all events, that “get” had no
relation to Tesla’s goals with the compensation plan. Considering this glaring defect
in Defendants’ give/get argument, it does not support a finding of fair price.
845 Defs.’ Post-Trial Opening Br. at 70 (emphasis added).
846 JX-440 at 106.
847 Id. at 14.
848 PDX-2 at 5.
849 JX-916.
850 JX-664 at 1. It is questionable as to whether the Grant would even make a dent
in that goal, given that Musk testified that his space odyssey would cost trillions.
Musk Dep. Tr. at 115:24–117 (Musk discussing his goals and stating that SpaceX’s
goals would require the help of “other companies and governments”).
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ii. The Unique Circumstances And CEO
Defendants next argue that the Grant was suited for “this time” and “this
CEO.” 851 To support that argument, they advance the following factual narrative.
Tesla was setting an ambitious course—to become “one of the most valuable
companies in the world” 852 and “accomplish[] Tesla’s mission of accelerating the
world’s transition to sustainable energy.” 853 Tesla’s ambitious goals forced it to the
point of an existential crisis in 2017, and Musk was critical to Tesla’s future. 854 Musk
was on the verge of walking away and was distracted by his other ventures. Musk
required an “added incentive” to stay “at the helm,” and he is uniquely motivated by
highly ambitious goals. 855 As Gracias explained, the Board looked to fashion
milestones that would give Musk the “dopamine hits” he needed. 856
There is no doubt that “this time” was precarious at Tesla, that the Board
viewed “this CEO” as critical to Tesla’s success, that Musk is a unique person who
has been singularly instrumental to Tesla, and that Musk is genuinely motivated by
highly ambitious goals. But there are reasons to question other aspects of
Defendants’ factual narrative. For example, if transformative growth is the goal,
then why set milestones at the time of the Grant that were 70% likely to be achieved?
851 Defs.’ Post-Trial Opening Br. at 78.
852 JX-878 at 3 (2/8/18 Schedule 14A Proxy Statement).
853 Id.
854 Trial Tr. at 1251:4–23 (Murphy).
855 Id. at 1251:17–22 (Murphy); id. at 730:21–731:7 (Gracias).
856 Id. at 728:23–729:13 (Gracias).
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Even assuming that the 70% figure was a conservative accounting metric, it casts
some doubt on the “stretch” nature of the early milestones. Further, how can one
conclude that Musk was on the verge of walking away from a leadership role at Tesla
when Musk made it clear that he “would not quit Tesla,” is “heavily invested in Tesla,
both financially and emotionally, and views Tesla as part of his family[?]” 857
Defendants also argue that Musk needed additional incentives to stay on at
Tesla or he would spend more time at SpaceX, where he could fulfill his galactic
ambitions to establish interplanetary travel, colonize Mars, and potentially earn
more money in the meantime. 858 That argument begs another question: if
encouraging Musk to prioritize Tesla over his other ventures was so important, why
not place guardrails on how much time or energy Musk had to put into Tesla?
Even assuming the truth of all of Defendants’ points, they do not add up. There
is simply no evidence that the “added incentive” provided by a Grant of this
magnitude was necessary, much less fair. This unique circumstance and this unique
CEO do not support a finding of fair price.
857 JX-831 at 13–14; see also Trial Tr. at 644:11–15 (Musk) (affirming that as of early
2018, he was heavily invested in Tesla both financially and emotionally and viewed
Tesla as part of his family); id. at 76:7–15 (Ehrenpreis) (confirming Musk affirmed
his love for Tesla during the first discussion regarding a new grant); id. at 785:1–7
(Gracias) (testifying that Musk views Tesla as one of the most important things in
his life).
858 Defs.’ Post-Trial Opening Br. at 15–16; Murphy Opening Rep., at 50–51; Defs.’
Post-Trial Opening Suppl. Br. at 23 (suggesting that Musk, without the Grant, could
work at SpaceX and keep his Tesla shares as a “passive investment”).
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iii. The “Only Upside” Argument
Defendants “only upside” argument relies on the Grant’s structure, which they
say ensured that Musk drove meaningful and sustained growth in four ways.
First, Defendants argue that pairing market capitalization milestones with
operational milestones provided “safety in the structure.” 859
The market capitalization milestones operated as the “primary goals,” while the
operational goals functioned as “support for those [market capitalization] goals.” 860
Brown testified: “There’s a high level of performance required to earn one of these.
So then, if it was possible to drive that kind of growth on a solid operational basis and
earn more than one of them in a year, that seemed like a win for . . . shareholders.” 861
But of the two operational metrics, the revenue milestones were not dependent on
profitability. As Compensia acknowledged, this aspect of the Grant “ignores
profitability.” 862 ISS noted that “up to eight tranches (three-quarters of the award,
or nearly $2 billion in value) may vest based on market capitalization and revenue
goals, even if earnings do not clear the EBITDA performance hurdles.” 863 Thus,
Musk could still receive billions under the Grant without Tesla experiencing the
fundamental growth that the Grant was intended to incentivize. 864
859 Defs.’ Post-Trial Opening Br. at 75.
860 Trial Tr. at 1439:7–18 (Brown).
861 Id.
862 JX-530 at 5 (7/17/17 Working Group discussion document).
863 JX-987 at 6 (3/21/18 ISS proxy analysis & benchmark policy voting
recommendations).
864 Dunn Opening Expert Rep. at 56.
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Second, Defendants argue the Grant’s trailing average requirements for the
market capitalization milestones—and the four-consecutive-quarter requirement for
the operational milestones—are stockholder-friendly. 865 The Board apparently “put
in both the six-month trailing average and the 30-day trailing average to ensure that
when the market capitalization would potentially increase to one of these milestones,
it would stay there for a requisite period of time that it actually seemed fair to award
the milestone to Elon.” 866 Similarly, the operational milestones required sustained
performance for four consecutive quarters. 867 Although those timing requirements
do provide stockholders with protection, that protection is limited, because the Grant
lacks any protection for lost value when the Company’s performance falls below
previously met thresholds.
Third, Defendants argue that the M&A Adjustment—which applied to both
the market capitalization and operational milestones—prevented Musk from
“gam[ing]” any of the milestones. 868 Maron explained that the adjustments “ensure
that if Elon was going to benefit from this plan, that it was because he had led the
Company to organic value creation, not just buying another big company and having
that add significantly to the market capitalization of Tesla.” 869 The adjustments
would be triggered not only by stock deals, but also by cash deals, a term that
865 Defs.’ Post-Trial Opening Br. at 75 (citing Trial Tr. at 1274:23–1276:9 (Murphy)).
866 Trial Tr. at 264:16–21 (Maron).
867 JX-878 at 15 (2/8/18 Schedule 14A Proxy Statement).
868 JX-784 at 1–2 (1/17/18 emails between Maron and Musk).
869 Trial Tr. at 265:8–13 (Maron).
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Compensia “hadn’t put in . . . other plans before.” 870 But an M&A adjustment is
standard in executive compensation, 871 and Musk acknowledged that Tesla would not
“be making any big acquisitions,” limiting the utility of this provision. 872
Fourth, Defendants argue that the Five-Year Hold Period served stockholder
interests. 873 Defendants state that “[w]hile every other stockholder could have
cashed in during the nearly 400 trading days that Tesla’s market capitalization was
over $650 billion, 874 Musk was unable to sell a single share of the compensation he
earned under the 2018 [Grant].” 875 This is true. 876 But it ignores that there was no
limit to Musk’s ability to sell any of the millions of Tesla shares he already owned.
Certainly, the structural provisions on which Defendants rely have value. But
that value is limited as to each provision. Given the other defects in the Grant, these
provisions do not individually or in the aggregate lead to a finding of fair price.
iv. The Ambitious Milestones
Defendants argue that the Grant price was fair because its milestones were
ambitious and difficult to achieve. The defense witnesses all testified in harmony
870 Id. at 1465:11–19 (Brown).
871 Id. at 1010:20–24 (Dunn).
872 JX-784 at 2.
873 Defs.’ Post-Trial Opening Br. at 76–77.
874 Id. at 77 (citing JX-1510 at 1).
875 Id.
876 Trial Tr. at 255:6–13 (Maron) (discussing holding periods and the “lock” on Musk);
id. at 63:20–64:1 (Ehrenpreis) (stating the Board “negotiated an agreement that
[Musk] would hold for five years after both the achievement and vesting and exercise
of the options”).
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that the milestones were “audacious” and “extraordinarily ambitious.” 877 Defendants
concede that three operational milestones aligned with internal projections but note
that the Company routinely missed projections. 878
It is hard to square Defendants’ coordinated trial testimony concerning Tesla’s
internal projections with the contemporaneous evidence. 879 The Board deemed some
of the milestones 70% likely to be achieved soon after the Grant was approved. 880
This assessment was made under a conservative accounting metric, but there are
other indications that Tesla viewed its projections as reliable. They were developed
in the ordinary course, approved by Musk and the Board, regularly updated, shared
with investment banks and ratings agencies, and used by the Board to run Tesla. 881
Several Tesla executives affirmed their quality, accuracy, and reliability. 882 Plus,
Tesla hit the first three milestones, consistent with its projections, by September 30,
2020. 883
877 Defs.’ Post-Trial Opening Br. at 85.
878 Defs.’ Post-Trial Answering Br. at 67–68.
879 See, e.g., BCIM Strategic Value Master Fund, LP v. HFF Inc., 2022 WL 304840, at
*2 (Del. Ch. Feb. 2, 2022) (“The witness testimony often conflicted with the
contemporaneous record. In resolving factual disputes, this decision generally has
given greater weight to the contemporaneous documents.”).
880 JX-1028 at 15 (4/27/18 Audit Committee Agenda); JX-1023 at 6 (4/27/18
Significant Accounting Matters for 2018 Q1 Audit Committee).
881 See e.g., id. at 353:6–355:15 (Ahuja) (projections were “accurate and truthful”); id.
at 466:14–469:24 (Ahuja) (noting the projections were shared with outside rating
agencies).
882 See e.g., id. at 391:16–23 (Maron) (“Tesla would do its . . . earnest best to . . . provide
quality information” to the rating agencies).
883 PTO ¶¶ 265–71.
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Defendants bore the burden of proving fair price. Given the conflicting
testimony concerning the projections, Defendants failed to prove the factual predicate
for their argument that all the milestones were “ambitious” and difficult to achieve.
This argument does not support a finding of fair price.
v. The Private-Equity Analogy
Defendants argue that the Grant price is fair by comparing the Grant to
compensation structures common in the portfolio companies backed by venture
capital and private equity funds, where CEOs often receive a percentage of the equity.
That argument has one obvious problem: Tesla is not a privately held portfolio
company.
Defendants offer no theoretical justification for comparing the Grant to
venture capital or private equity compensation structures when Tesla is not a venture
capital or private equity backed entity. This was something Defendants came up with
for trial. During the negotiations, neither Defendants nor their experts benchmarked
the Grant to venture capital compensation. They never considered an analogy to a
venture capital or private equity investment. That is because Tesla was a publicly
traded corporation with a market capitalization of $53 billion, tens of thousands of
stockholders, and a CEO who already owned 21.9% of Tesla’s equity.
Examined on its own terms, Defendants’ private-equity analogy relies on
valuing the Grant as a percentage of Tesla’s fully diluted shares. Defendants peg
that percentage at 6.4%, but there is no evidence that Musk, the Board, the
Compensation Committee, or its advisors ever considered this figure during the
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process. Defendants take the 6.4% figure from the Proxy, which based the figure on
“illustrat[ive]” dilution assumptions. 884
Focusing on the 6.4% figure alone, Defendants’ financial expert testified that
“something like 6 to 10 percent [equity] for a new CEO would be totally normal” in
VC- and private-equity-backed companies. 885 Gracias testified that an equity stake
of around 6% for a CEO would be considered “on the low end.” 886 Defendants describe
the Grant as riskier than VC compensation, because it was “100 percent risk-free” for
Tesla and its stockholders, 887 but Musk would get “nothing if we hadn’t doubled the
market cap.” 888 Referring to his portfolio companies, Gracias put it bluntly: “I don’t
have a CEO who would sign up for that.” 889 Gracias’s testimony, however, was simply
not credible. Based on Tesla’s April 25, 2022 market capitalization of just over $900
billion, 890 6% of Tesla would be worth $54 billion, just under the maximum value
884 JX-878 at 24 (2/8/18 Schedule 14A Proxy Statement). It represents one of many
possible scenarios for what Musk could receive on a fully diluted basis if the Grant
fully vests and all five of the assumptions listed in the Proxy hold. For example, for
Musk to achieve a mere 6% under the Grant, “the 527,491 shares of common stock
subject to the tenth and final tranche of the 2012 [Grant]” would need to “become
fully vested, outstanding and held by Musk.” Id. But the tenth tranche of the 2012
Grant never vested. PTO ¶¶ 209–10.
885 Trial Tr. at 1112:2–24 (Gompers).
886 Id. at 735:11–736:2 (Gracias).
887 Id. at 1395:19–1398:3 (Buss).
888 Id. at 736:24–737:11 (Gracias).
889 Id. at 736:24–737:4 (Gracias).
890 PTO ¶ 71.
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disclosed in the Proxy. 891 Any number of CEOs would sign up for that. And many VC
startups offer CEOs the prospect of great riches or nothing at all.
Even if the comparison holds, Musk already is earning more than the 20% a
hedge fund would earn as a typical carried interest. So, while Musk is not receiving
a base salary, he is already receiving more (incentive-wise) than a fund who would
manage Tesla’s assets. And given that Musk does not need a base salary to keep his
pretend hedge fund afloat, it would not be necessary.
Regardless, there are other ways to value the Grant, such as its maximum
value and its grant date fair value. The Board and stockholders were told that, if
Musk achieved all 12 tranches of the Grant, he would receive a maximum value of
$55.8 billion. 892 As disclosed to the Board and stockholders, the grant date fair value
was $2,615,190,052. 893 By this measure, it was a massive award—an internal ISS
email described it as “about 250 times the peer median.” 894 Brown, Ehrenpreis, and
Denholm all acknowledged that the award was exceptionally large, with Ehrenpreis
agreeing it was “entirely without precedent.” 895 Plaintiff’s expert noted that the
Grant was 33x larger than Musk’s 2012 Grant’s $78M grant date fair value. 896 By
891 JX-878 at 18 (2/8/18 Schedule 14A Proxy Statement).
892 Id. at 24.
893 JX-792 at 7; JX-878 at 34.
894 JX-916.
895 Trial Tr. at 130:22–131:7 (Ehrenpreis); id. at 360:20–361:12 (Denholm); id. at
1480:9–14 (Brown).
896 Dunn Opening Expert Rep. at 103; Dkt. 291 (“Pl.’s Demonstrative 2”), at 9
(showing the magnitude of the comparison); Trial Tr. 994:7–13 (noting the
comparison between the two grants).
189
the most conservative comparison that Plaintiff’s expert could conceivably devise, the
Grant’s grant date fair value was 11.7x larger than the median peer group. 897 Indeed,
the Grant entitled Musk to billions even if Tesla significantly underperformed its
historical results. 898 Just as they did during the negotiation process, Defendants
ignored these figures.
Defendants’ portfolio-company analogy misses the mark in multiple ways. It
does not support a finding of fair price.
vi. The Stockholder Vote
Defendants argue that disinterested stockholder approval is “compelling
evidence” that the price was fair. 899 The stockholder vote is one component of the fair
price analysis, but whether the vote represents a form of market evidence that can
support a certain price depends on the sufficiency of the disclosure. Generally, a
stockholder vote is only “compelling evidence” of fairness absent a disclosure
violation. 900 The Delaware Supreme Court in Weinberger held that an uninformed
897 Trial Tr. at 992:2–7 (Dunn); Pl.’s Demonstrative 2 at 6, 7.
Dunn’s most aggressive
estimation reflected that the Grant was 544.8x greater than the median peer group.
Pl.’s Demonstrative 2 at 6, 8.
898 Gompers Dep. Tr. at 302:10–303:19.
899 Defs.’ Post-Trial Opening Suppl. Br. at 21 (citing ACP Master, Ltd. v. Sprint Corp.,
2017 WL 3421142, at *29 (Del. Ch. Aug. 8, 2017)).
900 ACP, 2017 WL 3421142, at *29; cf. Kahn v. Lynch Commc’ns Sys., Inc., 669 A.2d
79, 89 (Del. 1995) (holding that a finding of adequate disclosure in a parent-subsidiary
merger was persuasive evidence of entire fairness, because “although the merger was
not conditioned on a majority of the minority vote . . . more than 94 percent of the
shares were tendered in response to [the] offer”); Cinerama II, 663 A.2d at 1176
(considering the stockholder vote as persuasive evidence of fair price where “the
directors had complied with the disclosure duty”).
190
stockholder vote is totally “meaningless.” 901 Under Weinberger, therefore, the
stockholder vote is a meaningless indicator as to fair price. In SolarCity III, the high
court took a more nuanced approach, affording a stockholder vote some weight
despite a deficient proxy statement where the key issue was SolarCity’s value. The
high court noted that there was significant public information available concerning
that issue, “SolarCity traded in an efficient market,” and a strong independent
fiduciary positively affected the process. 902 Defendants did not establish those facts
here. 903
Because the stockholder vote was not fully informed, it does not support a
finding of fair price.
vii. The Hindsight Defense
Defendants finally argue from hindsight. They claim the Grant was fair
because it worked: “Tesla thrived because of the 2018 Plan.” 904 With this argument,
Defendants ask the court to infer a direct causal relationship between the Grant and
Tesla’s subsequent performance. But Defendants failed to prove that Musk’s less-
than-full time efforts for Tesla were solely or directly responsible for Tesla’s recent
901 Weinberger, 457 A.2d at 712.
902 SolarCity III, 298 A.3d at 728–29.
903 See also ACP, 2017 WL 3421142, at *23 (holding that, where information was not
expected nor asked for by a committee, that information was not required to be
disclosed because there was not an unfair disparity between the market and the
decision-makers).
904 Defs.’ Post-Trial Opening Br. at 52 (emphasis added).
191
growth, or that the Grant was solely or directly responsible for Musk’s efforts. This
last argument is empty rhetoric, not evidence of fair price.
D. Rescission Is A Reasonable And Appropriate Remedy.
As a remedy, Plaintiff only seeks recission. 905 Plaintiff’s lead argument is that
the court must rescind the Grant due to the disclosure defects because the Board
conditioned the Grant on stockholder approval. 906 Plaintiff also argues that the court
has discretion to order rescission as a remedy for fiduciary breaches. 907 Plaintiff
further argues that, “at minimum,” the court should rescind the options for the first
three tranches given lack of disclosure regarding the probability of achievement. 908
Plaintiff’s first argument does not work. It would create an overly rigid rule
that runs contrary to the Delaware Supreme Court’s holding in Weinberger. But
Plaintiff’s second argument prevails, so the court need not reach Plaintiff’s third
argument. The court orders rescission of the Grant as a remedy for Defendants’
fiduciary breaches.
905 Plaintiff sought alternative remedies but has abandoned those requests. Pl.’s
Post-Trial Opening Br. at 104–06.
906 The court referred to this as Plaintiff’s “kill shot” theory, which was a reference to
the racquet term meaning an unreturnable volley that ends a match, not the Eminem
song.
907 Pl.’s Post-Trial Opening Br. at 105.
908 Id. at 105–06.
192
1. The Automatic-Invalidation Argument Fails.
In their lead argument, Plaintiff argues that because Tesla conditioned the
Grant on stockholder approval, 909 “a single material disclosure failure invalidates”
the Grant. 910 Plaintiff says that because stockholder approval was secured by a
materially misleading Proxy, the Grant is void, and rescission must follow
automatically.
There is appeal in the simplicity of Plaintiff’s approach, but it is not quite right.
The consequence of an uninformed stockholder vote depends in part on whether that
vote was required or voluntary. 911 The DGCL requires stockholder approval of
certain transactions—a merger, sale of assets, or charter amendment, for example. 912
For transactions that require stockholder approval, there are strong arguments that
a material disclosure deficiency “warrant[s] an injunction against, or rescission of,
the transaction.” 913
But even when a Delaware statute requires a vote, this court does not
necessarily void the transaction when that vote was uninformed. 914 In Weinberger,
909
JX-791 at 4 (Board resolution approving the Grant) (stating that the Grant was
effective “subject to the Requisite Stockholder Approval” and that if the Grant
“fail[ed] to receive the affirmative vote” of a majority of non-Musk shares, it would be
“forfeited and cancelled”).
910 Pl.’s Post-Trial Opening Br. at 1–11.
911 See generally In re Wayport, Inc. Litig., 76 A.3d 296, 314 (Del. Ch. 2013).
912 8 Del. C. §§ 241, 242, 271, 251(c).
913 Wayport, 76 A.3d at 314–15; Gantler, 965 A.2d at 713.
914 See SolarCity III, 298 A.3d at 729; Arnold v. Soc’y for Sav. Bancorp, Inc., 678 A.2d
533, 537 (Del. 1996) (holding that “the argument that the disclosure violation renders
193
the Delaware Supreme Court made that plain by correcting a misunderstanding that
it believed had arisen regarding the importance of its ruling in Vickers. That earlier
decision held that rescission was the preferred remedy for a transaction tainted by
disclosure violations and that rescissory damages—the monetary equivalent of
rescission—could substitute where rescission was not feasible. 915 The Weinberger
decision stressed that rescissory damages were not the exclusive remedy for a
disclosure violation. 916 By the same logic, rescission need not follow automatically
either.
That is especially true for transactions where the DGCL does not require a
stockholder vote. A corporation may seek stockholder approval for those
transactions, and the vote is “voluntary” in this sense. 917 When voluntarily seeking
stockholder approval, the failure to disclose material information “will eliminate any
effect that a favorable stockholder vote otherwise might have for the validity of the
transaction or for the applicable standard of review.” 918 For example, the failure to
disclose material information will render Corwin cleansing and burden shifting
the statutory merger void must fail”); see also 13 Am. Jur. 2d Cancellation of
Instruments § 4 (“Cancellation or rescission as an equitable remedy is not available
as a matter of right. Rather, relief by way of cancellation is a matter within the court’s
discretion and is granted or withheld according to what is reasonable and proper
under the circumstances of each case.”).
915 See Vickers, 429 A.2d at 501.
916 Weinberger, 457 A.2d at 704 (overruling Vickers “to the extent that it purports to
limit a stockholder’s monetary relief to a specific damage formula”).
917 Wayport, 76 A.3d at 314 (citing Gantler, 965 A.2d at 713).
918 Id.
194
unavailable. 919 The failure to disclose material information might also support an
independent claim and remedies for breach of the duty of disclosure, 920 but the court
has discretion when fashioning a remedy in that context as well. The failure to
disclose material information for voluntary stockholder votes, however, does not
automatically invalidate the transaction.
The stockholder vote on the Grant was not required by the DGCL. 921 The
Proxy deficiencies defeated Defendants’ effort to shift the burden under the entire
919 See, e.g., van der Fluit, 2017 WL 5953514, at *8 n.115 (“[O]ne violation is sufficient
to prevent application of Corwin.”).
920 See, e.g., Weinberger, 457 A.2d at 703; In re Mindbody, Inc., S’holder Litig., 2023
WL 7704774, at *10–11 (Del. Ch. Nov. 15, 2023) (awarding Weinberger damages); In
re Columbia Pipeline Gp., Merger Litig., 299 A.3d 393, 494–500 (Del. Ch. 2023)
(same).
921 In this case, the stockholder vote was required by NASDAQ Rules. NASDAQ R.
5635(c) (“Shareholder approval is required prior to the issuance of securities when a
stock option or purchase plan is to be established or materially amended or other
equity compensation arrangement made or materially amended”). Plaintiff argues
that the NASDAQ requirement renders the vote “legally required” and thus
mandates recission for transactions approved by a materially deficient vote. Pl.’s
Post-Trial Suppl. Answering Br. at 8. Effectively, Plaintiff urges this court to serve
as NASDAQ enforcement agent, which would run contrary to multiple strains of
Delaware law. See Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d
44, 70 (Del. Ch. 2015) (holding that stockholder plaintiff had no standing to prosecute
a violation of the NYSE Rules); In re Aquila Inc. S’holders Litig. 805 A.2d 184, 192
n.11 (Del. Ch. 2002) (noting that plaintiffs conceded they had “no standing directly to
bring an action to enforce the NYSE rules or to seek sanctions for any alleged
violation thereof”); see also Mill Bridge V, Inc. v. Benton, 2009 WL 4639641, *12 (E.D.
Pa. Dec. 3, 2009) (“courts in [the Third Circuit] have ‘unanimously refused to
recognize any private right of action for violation of a stock exchange rule” (quoting
In re Farmers Gp. Stock Options Litig., 1989 WL 73245, at *3 (E.D. Pa. July 5, 1989))).
Given the complexities of this issue in an otherwise complex case, the court does not
reach it. And the court need not do so because, ultimately, Plaintiff is getting what
he asks for—recission.
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fairness standard to Plaintiff, but the uninformed vote does not automatically
invalidate the Grant.
Plaintiff responds that although a stockholder vote was not required by the
DGCL, the Board elevated the vote to a requirement by conditioning the Grant on a
favorable vote. That does not change the outcome, because the court has the
discretion to determine a remedy for corporate transactions where a vote is required.
The same is true for a transaction that is conditioned on a vote.
2. Rescission Is Warranted.
Although rescission does not automatically flow from the disclosure
deficiencies, it is nevertheless an available and appropriate remedy.
The remedy of rescission “restore[s] the parties substantially to the position
which they occupied before making the contract.” 922 “Rescission ‘is not given for every
serious mistake and it is neither given nor withheld automatically, but is awarded as
a matter of judgment.’” 923 The court has broad discretion to award recission where
the facts and circumstances warrant. 924 This court has awarded rescission as a
922 Craft v. Bariglio, 1984 WL 8207, at *12 (Del. Ch. Mar. 1, 1984) (citing Henry
Campbell Black, On Rescission and Cancellation § 616 (2nd ed.)); accord Geronta
Funding v. Brighthouse Life Ins. Co., 284 A.3d 47, 61 (Del. 2022) (“rescission results
in abrogation or unmaking of an agreement, and attempts to return the parties to the
status quo” (quoting Norton v. Poplos, 443 A.2d 1, 4 (Del. 1982)); id. at 61
(“‘[E]quitable rescission offers a platform to provide additional equitable relief, such
as cancellation of a valid instrument—the formal annulment or setting aside of an
instrument or obligation.’” (quoting Ravenswood, 2018 WL 1410860, at *21)).
923 Gotham P’rs, L.P. v. Hallwood Realty P’rs, L.P., 817 A.2d 160, 174 (Del. 2002)
(quoting Gaffin v. Teledyne, Inc., 1990 WL 195914, at *16 (Del. Ch. Dec. 4, 1990)).
924 Id. at 164 (stating that whether to order rescission is within the discretion of the
Court of Chancery); 13 Am. Jur. 2d Cancellation of Instruments § 4 (“Cancellation or
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remedy for breach of fiduciary duty, 925 particularly in the context of self-dealing
transactions. 926 Indeed, as discussed above, the Delaware Supreme Court referred to
recission as “the preferrable remedy” in Vickers for breach of fiduciary duty where
one party has misled another. 927
rescission as an equitable remedy is not available as a matter of right. Rather, relief
by way of cancellation is a matter within the court’s discretion and is granted or
withheld according to what is reasonable and proper under the circumstances of each
case. A court may shape the rescission of contract remedy in order to serve substantial
justice.”); see also Weinberger, 457 A.2d at 714 (“[T]he Chancellor’s powers are
complete to fashion any form of equitable and monetary relief as may be
appropriate.”); Int’l Telecharge, Inc. v. Bomarko, Inc., 766 A.2d 437, 440 (Del. 2000)
(“In determining damages, the powers of the Court of Chancery are very broad in
fashioning equitable and monetary relief under the entire fairness standard as may
be appropriate, including rescissory damages” (internal citations omitted)).
925 See, e.g., eBay Domestic Hldgs., Inc. v. Newmark, 16 A.3d 1, 46 (Del. Ch. 2010)
(ordering rescission of a rights plan as a remedy for breach of fiduciary duty);
Coleman v. Newborn, 948 A.2d 422, 433 (Del. Ch. 2007) (ordering rescission of a deed
as remedy for breach of fiduciary duty); Valeant, 921 A.2d at 752 (ordering rescission
of a compensation plan where the defendants “failed to show that the transaction was
entirely fair” and it was “clear that he has no right to retain any of the $3 million
bonus he received”); see also Zutrau v. Jansing, 2014 WL 3772859, at *26 (Del. Ch.
July 31, 2014) (ordering partial rescission); Loral, 2008 WL 4293781, at *32 (same).
926 Zutrau, 2014 WL 3772859, at *26 (stating “recission frequently is granted where
self-dealing transactions are found not to be entirely fair”); see also Oberly v. Kirby,
592 A.2d 445, 466 (Del. 1991) (“An interested transaction is not void but is voidable,
and a court will uphold such a transaction against a beneficiary challenge only if the
trustee can show that the transaction was fair and that the beneficiaries consented
to the transaction after receiving full disclosure of its terms.”); Firefighters’ Pension
Sys. of Kans. City, Mo. Tr. v. Presidio, Inc., 251 A.3d 212, 251 (Del. Ch. 2021) (“A
finding that a transaction is not entirely fair thus could lead to transaction-based
relief, such as an injunction, rescission, or an equitable modification of the
transaction’s terms.”).
927 Vickers, 429 A.2d at 501; but see ENI Hldgs., LLC v. KBR Gp. Hldgs., LLC, 2013
WL 6186326, at *24 (Del. Ch. Nov. 27, 2013) (denying on a motion to dismiss a request
for rescission, but noting that “[r]escission is . . . a remedy available only where facts
indicate equity so requires,” and that the plaintiff’s “burden to establish an
entitlement to rescission, in light of the likely change in circumstances due to the
passage of time, is heavy”).
197
To be entitled to equitable rescission, a plaintiff must demonstrate that
rescission is both “reasonable and appropriate” under the circumstances. 928 This
includes showing that it is possible for “all parties to the transaction [to] be restored
to the status quo ante, i.e., to the position they occupied before the challenged
transaction.” 929
Plaintiff has demonstrated that rescission is reasonable, appropriate, and
practicable. This Grant is not “too complex to unscramble[.]” 930 Rescission is
uniquely available: no third-party interests are implicated, the entire Grant sits
unexercised and undisturbed, and exercised shares would be subject to the Five-Year
Hold Period. 931
Defendants argue that rescission is a harsh consequence that would leave
Musk uncompensated. But Musk’s preexisting equity stake provided him tens of
billions of dollars for his efforts. And Defendants have not offered a viable alternative
short of leaving the Grant intact.
On this point, Valeant is instructive. 932 There, the plaintiff claimed that the
directors of Valeant Pharmaceuticals International breached their fiduciary duties
by awarding themselves and other executives and employees large cash bonuses in
928 Lenois v. Lawal, 2017 WL 5289611, at *20 (Del. Ch. Nov. 7, 2017).
929 Strassburger v. Earley, 752 A.2d 557, 578 (Del. Ch. 2000) (emphasis in original).
930 In re Sunbelt Beverage Corp. S’holder Litig., 2010 WL 26539, at *14 (Del. Ch. Jan.
5, 2010); see, e.g., Weinberger, 457 A.3d at 714 (finding transaction “too involved to
undo[]”).
931
JX-878 at 56 (2/8/18 Schedule 14A Proxy Statement).
932 Valeant, 921 A.2d 732.
198
connection with a “later-aborted corporate restructuring.” 933 All but one defendant
settled before trial, and the court found that the remaining defendant failed to prove
that the transaction was fair. 934 Although that defendant went all-in on the defense
that the entirety of his bonus was fair and presented no evidence for why a portion of
the bonus was more defensible than the remaining amount, 935 he asked that the court
limit disgorgement “to the extent that the bonus was unfair.” 936 The court rejected
that argument given the defendant’s failure of proof and ordered disgorgement of the
entire amount. 937
As in Valeant, Defendants heralded the Grant as fair but failed to meet their
burden. They also failed to identify any logically defensible delta between the unfair
Grant and a fair one. As a result, there is nothing in the record to allow the court to
fashion a remedy that would order recission only to the extent the Grant was unfair.
“Once a breach of duty is established, uncertainties in awarding damages are
generally resolved against the wrongdoer.” 938 Here, the wrongdoers are Defendants,
and so the court resolves uncertainty against them.
933 921 A.2d at 735.
934 See id. at 736.
935 Id. at 744 (noting that the defendant “embrace[d]” the burden).
936 Id. at 752.
937 Id. at 752–53.
938Dole, 2015 WL 5052214, at *44 (quoting Thorpe v. CERBCO, Inc., 1993 WL
443406, at *12 (Del. Ch. Oct. 29, 1993)).
199
III. CONCLUSION
For the foregoing reasons, judgment is entered in Plaintiff’s favor. The parties
are to confer on a form of final order implementing this decision and submit a joint
letter identifying all issues, including fees, 939 that need to be addressed to bring this
matter to a conclusion at the trial level.
939 See Pope Invs. LLC v. Marilyn Abrams Living Tr., 166 A.3d 912, 2017 WL 2774361,
at *1 (Del. June 26, 2017) (TABLE) (holding that “a judgment on the merits is not
final until an outstanding related application for an award of attorneys fees has been
decided” (citing Lipson v. Lipson, 799 A.2d 345, 348 (Del. 2001))).
200