Elon Musk. Photo Credit: Steve Jurvetson via Wikimedia Commons

The Tesla Inc. board defended what its lawyers termed Elon Musk's “unusual and audacious” pay package in a motion last week to dismiss a derivative challenge to a compensation scheme that could make the electric car manufacturer's CEO one of the most highly compensated public-company executives in the world.

In the filing, made public on Sept. 7, Musk and the Tesla directors said the Silicon Valley magnate would only receive the full $55.8 billion payout in stock options if he reaches each of the 12 market capitalization and operational milestones to up Tesla's value to $650 billion and achieve unprecedented revenues and profits within the next 10 years.

If Tesla fails to at least double in value, they noted, Musk would get nothing at all.

The motion seeks to extinguish a Delaware Court of Chancery lawsuit from shareholder Richard Tornetta, who targeted the package as a “massive, unfair and unprecedented” gift to Musk at the expense of Tesla's investors.

In a June 5 complaint, Tornetta said the deal was unnecessary to incentivize Musk, given his nearly 22 percent stake in the company he helped to found in 2003. According to Tornetta, the decision to grant the stock options was plagued by a “web of conflicts” on Tesla's board, and the measure failed to receive a majority of all Tesla's outstanding disinterested shares at the meeting.

The board's Wachtell, Lipton, Rosen & Katz attorneys, however, said nearly three-quarters of the shares not controlled by Musk or his brother Kimbal were cast in favor of the plan at a special stockholder meeting in March. And they argued that there was “no basis” in Delaware case law to subject the grant of options to the so-called “majority-of-the-outstanding” standard.

While the majority-outstanding rule has been applied to “extraordinary” transactions, like mergers or bylaw amendments, the attorneys said it had never been used in the context of option grants, which “do not fundamentally alter the corporate contract.”

“That affirmative vote of a majority of the disinterested stockholders present and entitled to vote at the special meeting constituted a ratification of the option grant,” the directors said in the motion, signed by Garrett B. Moritz, who is acting as local counsel in the case.

“The relevant standard for ratification of non-extraordinary transactions like a grant of options is a majority of the disinterested shares present at the meeting, not a majority of the disinterested outstanding.”

Tornetta argued in his complaint that the class and derivative allegations should be reviewed under the entire fairness standard, and not Delaware's business judgment rule, which is far more deferential to board decisions made on behalf of the company. A pre-litigation demand that the board consider filing its own suit was excused as futile, he said, because most of Tesla's directors are either close personal friends of Musk or are tied up in Musk's other ventures.

In its motion, the board denied that demand was excused did not argue for business-judgment protections, after Vice Chancellor Joseph R. Slights III found in a separate case that there was reason to believe Musk was Tesla's controlling shareholder.

Instead, the directors said Tornetta's suit should fail on the issue of ratification and further that he failed to show the transaction was unfair in price or practice.

Tornetta is represented by Jeremy S. Friedman, Spencer Oster and David F.E. Tejtel of Friedman Oster & Tejtel in New York and Peter B. Andrews, Craig J. Springer and David Sborz of Andrews & Springer in Wilmington.

Musk and the Tesla directors are represented by William Savitt, Anitha Reddy and Noah B. Yavitz of Wachtell in New York. Moritz, David E. Ross and Benjamin Z. Grossberg of Ross Aronstam & Moritz are acting as local counsel.

The case, captioned Tornetta v. Musk, has been assigned to Slights.