How was Musk's $56 billion compensation plan formulated?|Delaware Court of Chancery Judgment (Part I)

The initial attempt to read the 201-page judgment opinion (the "post-trial opinion") was purely out of curiosity to understand what Elon had to say at trial in this unprecedented $56 billion compensation case.

Reading and reading, I realized that this document was not as obscure as I imagined that the legal document was. Although many law-related terms are not easy to understand, with the help of tools, it is still stumbling to read it. So I simply spent some more time to make a rough correction and sorting out the results of the machine translation, and shared them.

The full text of the judgment opinion has been translated into nearly 60,000 words, and it will be issued in two parts, and the next part is scheduled to be issued tomorrow.

Part I consists of a summary and Part I: Factual Background. This article focuses on realism, focusing on the initial draft, repeated discussions and revisions, board approvals, shareholders' meeting approvals, and follow-up events of Elon's 2018 CEO performance compensation, describing the objective facts that occurred at various points in time and the testimony of relevant personnel.

In the first part, there are some materials that are rarely seen in other channels, including two major Musk biographies, such as: Elon's 2009 performance-based pay, 2012 performance-based compensation, Elon's identification of his relationship with Tesla, Elon's attitude to wealth, the execution of the SEC settlement, and the most detailed aspects of Elon's push for 2018 performance-based compensation.

Reading the first part carefully helps to understand and judge the important question of "will Elon leave Tesla".

Part II consists of Part II: Legal Analysis and Part III: Conclusion. The second part is to analyze why the defendant lost the case from the judge's point of view.

"Together with Ark Investment's general counsel, I analysed the Delaware Court of Chancery's more than 200-page judgment and came to the conclusion that the nuances of the law and the controversial interpretations of those nuances are shocking and unfair for the trees and the forests," Ark Investment's general counsel was quoted as saying. ”

But in the second part, the judge tried to clarify the relationship between Elon, the "superstar CEO", and the board of directors, on the scale of the forest, and on the scale of trees, it helps to understand how Tesla and Elon are viewed under a microscope, looking for loopholes, and waiting for an opportunity to attack.

In a way, this is an additional tax burden on money, time, and energy that some of history's most amazing star businesses and star entrepreneurs have been forced to bear.

directory

*

理查德·托尼塔(Richard Tornetta)

sue

Elon Musk, Robin M. M. DeHome,

Antonio S. J. Gracias

、

James Murdoch,

琳达·约翰逊·赖斯n Rice）、

Brad S. W. Bass and

Ella Ehrenpleis

Post-trial opinions

Delaware Court of Chancery Justice Kathaleen Saint Jude McCormick

Is the world's richest man overpaid?" said the plaintiff shareholder in the derivative lawsuit. He alleges that Tesla's directors violated their fiduciary duty by granting Elon Musk a performance-based equity compensation plan. The program provides Musk with access to 12 tranches of options, each representing 1% of Tesla's total outstanding shares as of January 21, 2018. Each tranche of options vests on the condition that Tesla's market capitalization must increase by $50 billion and that Tesla must meet its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) target or revenue target for four consecutive fiscal quarters. With a maximum value of $55.8 billion and a fair value of $2.6 billion at grant date, the plan is the largest potential compensation opportunity ever seen on the public market, orders of magnitude higher than the median of contemporaneous peer compensation plans — 250 times — and 33 times higher than Musk's previous compensation plan, which is closest to the program. The post-trial judgment ruled in favor of the plaintiffs, finding that the compensation plan should be reviewed against a standard of full fairness and that the defendants had the burden of proving that the compensation plan was fair, but that they had failed to meet their obligations.

The plaintiff, Richard Tornetta, a heavy metal drummer, owned nine shares of Tesla stock when he sued Tesla's board of directors in 2018

The board of directors' decision on how much to pay the company's CEO is a typical business decision that should be highly respected by justice. However, Delaware law recognizes the unique risks inherent in a company's transactions with its controlling shareholders. Given these risks, the standard of presumption of review of conflict-controlled transactions under Delaware law is perfectly fair. In order to invoke the perfect fairness standard, the plaintiffs argued that Musk's compensation plan was a conflict controller transaction. The plaintiffs thus raised the question: Does Musk control Tesla?

The Delaware court had confronted this issue three times before, when the more savvy judges found a way to avoid explicitly addressing the issue. The judgment dared to "boldly enter areas untouched by previous men," or at least not in areas where the Delaware Court of Chancery had not ventured. A series of features of Musk's relationship with Tesla and its directors give him enormous influence over Tesla. In addition to his 21.9% stake, Musk is the quintessential "superstar CEO" who holds some of the most influential corporate positions (CEO, chairman, and founder), has close relationships with the directors tasked with negotiating on Tesla's behalf, and leads the process by which the board approves its compensation plan. At least in this deal, Musk took control of Tesla.

The main consequence of this conclusion is that the burden is on the defendant to prove at trial that the compensation plan is completely fair. Delaware law allows defendants to shift the burden of proof based on a perfectly fair standard, as long as the transaction was passed by a fully informed vote of a majority of minority shareholders. In this case, Tesla made a majority vote of minority shareholders a condition of the compensation plan. However, the defendant could not prove that the shareholder vote was conducted with full knowledge because the proxy statement inaccurately described the independence of the principal directors and misleadingly omitted details about the process.

As a result, defendants had to take on the daunting task of proving the fairness of the largest potential compensation program in the history of the open market. If there is one group of lawyers who can prevail in this unlikely situation, it must be the brilliant defense attorneys in this case. But the task turned out to be too daunting.

The concept of fairness requires a holistic analysis, considering two fundamental issues: process and price. The approval process for Musk's compensation plan is deeply flawed. Musk has extensive contacts with the people responsible for negotiating on Tesla's behalf. He has a 15-year relationship with Ira Ehrenpreis, chairman of the compensation committee. Another compensation committee member, Antonio Gracias, has a business relationship with Musk dating back more than 20 years, and his personal relationship with Musk also allows him to spend frequent vacations with Musk's family. The task force included members of management who had listened to Mr. Musk, such as general counsel Todd Maron, a former divorce lawyer who had moved him to tears as he collected evidence. In fact, Malone is the main contact between Musk and the committee, and it is unclear which side Malone thinks he is on. However, many of the documents used by the defendant to prove the fairness of the process were drafted by Malone.

Todd Maron, Tesla's general counsel at the time

Given that the above people are responsible for negotiating on behalf of Tesla, it is not surprising that there has been no meaningful negotiation of any of the terms of the plan. In his testimony, Ellen Price said he did not see the negotiations as a confrontational process. "We're not on different sides," he said. Malone explained that he sees the negotiation process as a process of "cooperation" with Musk. Gracias admitted that there was no "negotiating position". This testimony comes closest to acknowledging a controlled state of mind. Consistent with this practice, which applies specifically to Musk, the committee avoids the use of objective benchmark data that would reveal the unprecedented nature of the compensation program.

To their credit, the testimony of these witnesses is true. They are not on the "opposite side" of Musk. This is a cooperation without a negotiating position. Musk made a proposal about the size and structure of the grant, which provided the terms that the compensation committee and board of directors considered, until Musk unilaterally lowered the requirements six months later. Musk doesn't seem to care much about other details, which are eliminated.

In the lawsuit, defendants are touting certain features of the compensation plan as concessions — a five-year holding period, a merger adjustment, and a 12-step structure that requires Tesla to increase its market value by $100 billion more than Musk originally proposed in order to maximize compensation under the plan. But part of the reason for adopting the holding period is to increase the discount on the publicly disclosed grant price, the merger adjustment is the industry standard, and the 12-step structure was reached to convert Musk's fully diluted share proposal into a board-preferred metric of total outstanding shares. It would be inaccurate to refer to these terms as concessions.

The defendant also noted that the duration of the process (nine months) and the number of board and committee meetings (ten) attested to the thoroughness and breadth of the process. However, the defendants' statistics ignore the lack of substantive work. Time is only important when it is spent wisely. In addition, most of the work on the compensation plan was done in a small period of time during this nine months, under the enormous time pressure exerted by Musk. Musk dominated the timing of the process, and six of the ten board or compensation committee meetings where the plan was discussed were last-minute changes to the timeline or amendments to substantive terms before the meeting began.

And that's just the process. The price is not much better. In defending the unprecedented compensation plan, the defendants urged the court to compare Tesla's "give" with Tesla's "gains." This structure laid the groundwork for the defendant's argument that the compensation plan was "entirely beneficial" to shareholders. The defendants allege that the board's primary purpose in creating the compensation plan was to enable Tesla to achieve transformational growth, and that Tesla achieved this goal by ensuring Musk's continued leadership. The defendants offered Musk an opportunity to increase Tesla's stake by approximately 6% (from approximately 21.9% to a maximum of 28.3%) as long as he increased Tesla's market capitalization from approximately $50 billion to $650 billion while meeting operational milestones related to Tesla's top-line (revenue) or bottom-line (adjusted EBITDA) growth. According to the defendants, the deal was "a 6% exchange for $600 billion in shareholder value growth."

From a macro point of view, the "6% for $600 billion" argument is attractive. But when one thinks that Musk already owns 21.9 percent of Tesla when the board approves Musk's compensation plan, that allure quickly fades. For every $50 billion increase in market capitalization, Musk can earn more than $10 billion. Musk has no intention of leaving Tesla, and he made it clear at the very beginning of the entire litigation process. In addition, the compensation plan is not conditional on Musk investing any fixed amount of time in Tesla, as the board has never proposed such a condition. Perhaps bewildered by the "totally favorable" rhetoric, or perhaps seduced by Musk's superstar charisma, the board never asked a $55.8 billion question: Is this plan necessary for Tesla to keep Musk and achieve its goals?

This issue is particularly important in price analysis, making every effort made by the defendant to prove a fair price seem insignificant. The defendants proved that Musk was uniquely motivated by ambitious goals and that Tesla desperately needed Musk to succeed in the next phase of development, but these facts do not justify the largest compensation plan in the history of the open market. The defendants argued that the milestones that Musk had to meet in order to acquire the equity in the package were ambitious and difficult to achieve, but they failed to prove it. The defendants insisted that the plan was a special deal compared to a private equity compensation plan, but they did not explain why anyone would compare a public company's compensation plan to a private equity compensation plan. The defendants insisted that the plan worked and that all promises were made to shareholders, but they made no effort to prove causation. Nor did they make an effort to explain the rationale for giving Musk 1% per tranche instead of taking a smaller portion of the added value. All of these arguments don't add up enough to derive a fair price.

At the end of the day, Musk initiated a self-driven process, recalibrating speed and direction as he saw fit along the way. This process resulted in an unfair price. Through this lawsuit, the plaintiff requested withdrawal.

The plaintiffs asked the court to revoke Musk's compensation plan. The plaintiff's main argument was that since the plan was conditional on shareholder approval, the court had to rescind the compensation plan on the grounds of disclosure deficiencies. This argument, while concise and straightforward, is too rigid and wrong. The plaintiffs did not provide any legal basis as to why an unwitting vote had to be automatically revoked. In general, the general principle that the Court of Chancery has a wide discretion in setting remedies for breach of contract by a trustee also applies here.

Although deficiencies in disclosure do not automatically result in revocation, revocation is nevertheless an available remedy. The Delaware Supreme Court referred to rescission as the "preferred" (but not the only) remedy for breach of fiduciary duty, as rescission could restore the parties to the way they were before the challenged transaction. In the present case, the revocation could have achieved this result, as no third party interests were involved in the case, and the entire compensation plan was not exercised or interfered with. In such cases, the preferred remedy is the best option. The plaintiff has the right to claim revocation of remuneration.

I. Factual background

The trial lasted five days. The record includes 1,704 trial exhibits, live testimony of 9 fact witnesses and 4 expert witnesses, video testimony of 3 fact witnesses, 23 fact witnesses and 5 expert witnesses, and 255 statements of fact. The following are the facts found by the court after the trial.

A. Tesla and its visionary leaders

Tesla is a vertically integrated clean energy company. Tesla and its employees "design, develop, manufacture, sell, and lease high-performance all-electric vehicles and power generation and energy storage systems." As of December 31, 2021, Tesla and its subsidiaries had nearly 100,000 full-time employees worldwide and a market capitalization of more than $1 trillion. Tesla's success came relatively late, and by all accounts, Musk contributed to it. In 2004, Musk led Tesla's Series A funding round with an investment of $6.5 million. He will also invest more money before the company goes public, serving as chairman of Tesla's board of directors (April 2004 to November 2018) and eventually becoming Tesla's CEO (since October 2008). Musk has the ability to "bring others into his possible vision" and "motivate his employees to achieve the impossible." Although Musk was not at the helm of Tesla at the beginning of its existence, he became the driving force behind Tesla's development. He earned the title of "Founder".

1. Master plan

When Musk first invested, Tesla was a small start-up that produced only a small number of single models: the "Tesla Roadster," a high-end electric sports car. However, by 2006, Tesla's goals had expanded. This year, Musk, who was the chairman at the time, published "The Secret Tesla Cars Master Plan" (also known as the "Master Plan") on Tesla's blog, which provided a roadmap for Tesla's future. Spiral's vision is to start with the Roadster, a sports car, and then "build an affordable car with that money" and then "make a more affordable car with that money," and "provide zero-emission power generation options" while achieving these production milestones. The plan advances what Musk describes as Tesla's "overarching goal" — to move toward a sustainable energy economy or, as he wrote at the time, "to accelerate the transition from a hydrocarbon-extracting and burning economy to a solar-electric economy."

The master plan is bold. Although it seems hard to believe now, at the time, the market for electric vehicles had not yet been proven. Electric vehicle technology has been described as "impossible". Even traditional automotive start-ups face "incredible challenges", with many failing in failure. In fact, since Chrysler in the 20s of the 20th century, not a single new domestic automobile company has been financially successful. Considering the risks, Musk himself believes that the likelihood of Tesla completing the master plan is "extremely small".

Even Musk himself was surprised that the "master plan" finally came to fruition. In short, here's how it happened: In 2006, Tesla announced that it would start selling the Signature 100 Roadster for about $100,000. By August 2007, Tesla had pre-sold 570 Roadsters and delivered them in 2008, the same year Musk became Tesla's CEO. Tesla went public in January 2010 and raised $226.1 million. In June 2012, Tesla launched the Model S, which delivered 2,650 units by the end of the year. In 2013, sales of the Model S increased to approximately 22,000 units, 32,000 units in 2014, and 50,000 units in 2015. During this period, Tesla developed stationary energy storage products for commercial and residential use, which began to be sold in 2013. In 2014, Tesla announced its intention to build its first battery gigafactory and work with suppliers to integrate battery precursor materials. The plant was commissioned in 2015. In September 2015, Tesla launched the Model X, a midsize SUV crossover.

2. Chapter 2 of the Master Plan

By 2016, Tesla had entered the final stages of the master plan, and Musk began to think about the next chapter in Tesla's development. In July 2016, he released a new strategy document: "Master Plan Chapter 2" (also known as "Chapter 2").

This year, Tesla released a long-range compact sedan called "Model 3". Tesla is expected to start mass production of the Model 3 in 2017. This effort proved to be crucial for Tesla. As the company disclosed on March 1, 2017, "The future of the business will depend heavily on our ability to execute our plans to develop, manufacture, market and sell Model 3 vehicles...". Tesla also announced an ambitious deadline, saying it aims to "achieve mass production and delivery of the car in the second half of 2017."

At the time, no one thought Tesla would be able to mass-produce the Model 3. In the "second chapter", Musk said: "As of 2016, there are two American auto companies that have not gone bankrupt: Ford and Tesla". Tesla was on the verge of bankruptcy in its early years. As of March 2017, about 20% of Tesla's total outstanding shares were shorted, making it the most shorted company in the U.S. capital market at that time. Everyone is betting on Tesla and its helmsman to fail.

3. Musk's background and motivations

Musk is used to challenges, and he was a serial entrepreneur. In 1995, he and his younger brother, Kimbal Musk, founded Musk's first startup. Later, Musk co-founded an electronic payment system called X.com, which was renamed PayPal after the acquisition. He also founded SpaceX, a rocket development and launch company, in 2002, OpenAI, an artificial intelligence research organization, in 2015, Neuralink Corp., a neurotechnology company, in 2016, and The Boring Company, a private tunneling company, in 2017.

From 2017 to 2018, Musk served as CEO, CTO, and chairman of the board of directors of SpaceX, as well as co-chairman of the board of directors of OpenAI, in addition to his role at Tesla. As of June 2017, Musk split most of his time between SpaceX and Tesla, but by the end of 2017, he had increased his time at Tesla.

Musk is motivated by ambitious goals, the most noble of which is to save humanity. Musk fears that AI will either reduce humans to "domestic cats" or wipe them out entirely. Musk believes that space colonization is a means to save humanity from this existential threat. Musk hopes to achieve the "multiplanetization" of life by colonizing Mars. Sane people can debate the merits and consequences of these long-term beliefs held by Musk, but those beliefs are not being judged. Related to this case is the fact that Musk really holds these beliefs.

Colonizing Mars is a costly undertaking. Musk believes he has a moral obligation to dedicate his wealth to this goal, and Musk sees the payment he receives from Tesla as a means to fund this mission. Musk argues that only when Tesla's work generates "additional economic resources... OK... to make life multiplanetary", he was worth spending time at Tesla.

B. Musk's previous compensation plan

Prior to the questionable deal, Musk received two compensation plans from Tesla — one in 2009 and the other in 2012. Both plans are equity-linked. The first plan includes a performance-based component. The second plan is entirely performance-based.

1. Granted in 2009

On December 4, 2009, the Board of Directors approved Musk's first compensation plan (the "2009 Grant"). The 2009 grant plan consisted of two parts, each of which provided Musk with the option to purchase 4% of Tesla's fully diluted shares, based on the grant date.

The first part granted in 2009 is automatically vested in batches, with 1/4 vesting immediately and 1/48 per month for the next three years, provided that Musk continues to work at Tesla.

The second part of the 2009 grant is performance-based, and Musk will receive an additional 4% of Tesla's fully diluted shares prior to the grant date if he meets the following requirements: "Successful completion of the Model S engineering prototype";" Successful completion of Model S vehicle prototype";" Completion of the first Model S production car" and "Completion of the 10,000th Model S production car". The 2009 grant required Musk to reach these milestones within four years, failing which he would forfeit the rights to the unvested portion.

Tesla began deliveries of its next electric car, the Model S, in June 2012, and Musk achieved all of the performance milestones awarded in 2009 by December 31, 2013.

2. Granted in 2012

Prior to the achievement of the milestones granted in 2009, the Board of Directors approved Musk's second compensation plan (the "2012 Grant") on August 1, 2012. The 2012 grant involved 10 tranches, each offering options representing 0.5% of Tesla's outstanding common stock as of August 2012.

Tesla must reach both the market capitalization milestone and the operational milestone for each tier to be vested. Each tranche asks Musk to increase Tesla's market value by $4 billion — higher than Tesla's $3.2 billion market value in the 18 trading days before the board approved the 2012 grant. Operational milestones require Tesla to meet specified product-related goals, such as the development and launch of Model X and Model 3, and to reach total production of 300,000 vehicles. These milestones work in tandem with each other. For example, if Tesla achieves one of the operational milestones and adds $4 billion to its market capitalization, it will be assigned to Tier 1, and if Tesla achieves two of these operational milestones and its market capitalization has increased by $8 billion, it will be assigned to both Tiers. The term granted in 2012 is ten years.

By the end of 2016, Tesla had achieved seven market capitalization milestones and five operational milestones in the 2012 grant, with another four operational milestones "deemed likely to be achieved." By March 2017, 7 of the 10 levels granted in 2012 had been vested.

From the Board's point of view, the 2012 award was a success. In just five years, Tesla's market capitalization has increased more than 15 times, from $3.2 billion to $53 billion. Tesla's operations have also grown significantly, designing and launching the Model S, Model X, and Model 3, with total annual production of cars increasing from about 3,000 units in 2012 to more than 250,000 units in 2017. Musk has worked hard to achieve these goals, and he has also been paid extremely well. As a result, the value of Musk's stake increased from about $981 million to $13 billion, which means that Musk ended up receiving about 52 times the fair value at the grant date in 2012.

C. Initiation of the compensation process

In 2017, Tesla is close to completing the milestone awarded in 2012, despite the 10-year period granted in 2012. This sparked a discussion that led to the compensation plan at issue in this lawsuit ("2018 Grant" or "Grant"). At this time, Musk has accumulated beneficial ownership of 21.9% of the outstanding shares of Tesla's common stock through early investments and two previous grants.

1. Meet the decision-makers

At all relevant times, Tesla had a team led by Elon Musk, Kimbar, Brad Brown, and the company. Brad W. Buss, Robin W. Robyn M. Denholm, Ella Ehrenpress, Antonio M. The nine-member board of directors made up of J. Gracias, Steve Jurvetson, James Murdoch and Linda Johnson Rice. The Board of Directors has established a standing compensation committee (the "Compensation Committee") to negotiate Musk's compensation plan. Ellen Price, Bass, Dehome, and Gracias serve on the Compensation Committee, with Ellen Price serving as Chair. Musk and Kimbar recused themselves from most of the meetings and all votes regarding the 2018 grant, while Jurvesson took a long leave of absence during the relevant period. As a result, the trustee responsible for Tesla's 2018 grant is a member of the compensation committee plus Murdoch and Johnson Rice.

a. Member of the Remuneration Committee

i. Ellen Price

艾拉·埃伦普赖斯(Ira Honorary Award)

Ellen Price is the founder and managing partner of DBL Partners, an impact investing venture capital firm focused on driving environmental change through investment. Ellen Price and DBL have invested tens of millions of dollars in various companies controlled by Musk.

Ellen Price has served as a member of the Board of Directors since 2007 and as Chairman of the Compensation Committee and Nominating and Corporate Governance Committee since 2009. Between 2011 and 2015, Ellen Price was granted 865,790 Tesla options. He exercised less than a quarter of those options in 2021, worth more than $200 million. Serving on Tesla's board of directors has been "a great benefit to Ellen Price's fundraising."

Ellen Price and Musk brothers have known each other for more than 15 years. As Ellen Price admitted, his personal and professional relationship with Musk's brother "has had a significant impact on his career."

To argue for the importance of Ellen Price's relationship with Musk in other ways, the plaintiffs noted that in a tweet in July 2017, Ellen Price confessed his love for Musk. But the exchange did not reveal the deep relationship that the plaintiffs had described. It was an inconsequential joke.

Ellen Price was a close friend of Kimbal's. They have known each other since at least 1999, and Ellen Price also attended Kimbal's wedding in Spain. Ellen Price also invested in Kimbal's company, The Kitchen Group, a series of restaurants based in Colorado and Chicago.

ii. Bath

布拉德· W·巴斯(Brad W. Bus)

Bass joined the Board and Remuneration Committee in 2009. He worked as an accountant in the semiconductor sector until his retirement in 2014, after which he served as CFO of SolarCity until February 2016. Bass has no personal relationship with Musk or other members of the board and has never invested in any of Musk's other ventures.

From 2014 to 2016, Bass's holdings were worth between $30 million and $60 million, not including his stakes in Tesla and SolarCity. He was paid a total of about $2 million for his work at SolarCity. Between 2011 and 2018, Bass reported that he was paid about $17 million as a director of Tesla. Before January 21, 2018, he sold Tesla stock as a reward and realized about $24 million.

About 44% of Bath's net worth comes from Musk's industry. Bass does not have any other personal or business ties to Tesla, and he left the board shortly after the board approved the 2018 grant.

iii. Dhomme

Robin S. Robyn M. Denholm is the current chairman of Tesla's board of directors

DeHomme joined the Board and Remuneration Committee in 2014. Her background is in accounting and telecommunications. She became acquainted with Bass by profession and was recruited by Bass to the board. Musk invited Deholm to serve as chairman of the board in 2018 after a settlement with the U.S. Securities and Exchange Commission (the "SEC Settlement") required Musk to relinquish his position as chairman of the board.

Aside from serving on the board, Deholm does not appear to have any personal relationship with Musk. The vast majority of Dehomem's fortune comes from her remuneration as a director of Tesla. Between 2014 and 2017, Deholm's compensation from Tesla was worth about $17 million at the time of distribution, an amount she acknowledged was significant to her at the time. Dhomme eventually earned $280 million by selling some of her Tesla options as director compensation in 2021 and 2022. She described the deal as "life-changing." Dehomme confirmed that between 2017 and 2019, she earned about $3 million a year in non-Tesla positions. Even if Dhomme estimates her Tesla compensation at a fraction of the value of the Black-Scholes model, the amount far exceeds what she receives from other sources.

iv. Gracias

安东尼奥·格拉西亚斯(Antonio Gracias)

Gracias joined the Board of Directors in 2007 and the Remuneration Committee in 2009. He founded and continues to manage Valor Equity Partners ("Valor"), a private equity firm with approximately $16 billion under management. Valor has also been "deeply involved" in Tesla's operations for years. Valor actively assists management in its efforts to drive sales of Tesla Roadster models and reduce their production costs.

Gracias has amassed "dynastic or generational wealth" by investing in Musk's company. Gracias invested in PayPal in the 90s of the 20th century, and the return was "about 3 to 4 times." In 2005, at the invitation of Musk, Valor began to invest in Tesla. By 2007, Valor had invested $15 million. Valor eventually gave some of its Tesla stake to investors, including Gracias. As of 2017, Gracias is Tesla's third-largest individual investor, and almost all of his Tesla shares are entrusted to his children. As of 2021, these Tesla shares are worth about $1 billion. Valor and Gracias have also invested hundreds of millions of dollars in SpaceX, SolarCity, The Boring Company, and Neuralink, all of which have grown substantially in value.

All in all, Gracias and his fund have netted billions of dollars by investing in Musk's companies, many of which have been made at Musk's personal invitation. When Gracias promoted his fund, he touted Musk's support.

Musk and Kimbar have also invested in Gracias' businesses. At Gracias' request, Musk invested $2 million in Valor by 2003 and an additional $2 million in 2007. Musk planned to invest in another Valor fund in 2013, but he ultimately did not because Gracias feared a conflict in fiduciary duties. Kimbar also invested between $1 million and $2 million in Valor, and Valor invested a total of $15 million to $20 million in the two joint ventures in Kimbar. Gracias personally donated up to $500,000 to a charity in Kimbal and serves as a member of its board of directors.

Gracias and Musk are "close friends". Gracias had personally loaned Musk $1 million, but he does not remember whether he charged Musk interest. They meet up to once a month outside of work. They had spent the night at each other's homes. They went on vacations with their respective families, including trips to the Bahamas of magician David Copperfield, trips to Africa, and ski trips. They spend Christmas together. They have a long-standing tradition of spending President's Day weekend with their families at Gracias' home in Jackson Hole. Gracias attended Musk's second wedding and served as the groom's official at Kimbal's wedding in 2018. Gracias attended the birthday party of the Musk brothers and their children. Gracias is friends with two of Musk's cousins and has vacationed with them on several occasions. Gracias is also friendly with Musk's mother and sister.

b. Other Directors

i. Murdoch

James Murdoch, the second son of media mogul Rupert Murdoch

Murdoch's professional background is in the media and entertainment industry. At the time of joining Tesla's board of directors, he was the CEO of 21st Century Fox. Murdoch met Musk in the late 90s, but the two did not contact again until Murdoch bought a Tesla Roadster in 2006 or 2007. After that, the two became friends and would meet when they happened to be in the same city. Before joining the board, Murdoch and Musk's family went on vacation to Israel, Mexico and the Bahamas. Gracias and Kimbar also took part in one of the trips, during which Musk asked Kimbar to help him decide whether to let Murdoch join the board. After the trip, Gracias and Musk invited Murdoch to join the board, and Murdoch agreed. Murdoch and Kimbal were also friendly, and Murdoch attended Kimbal's 2018 wedding.

As of December 31, 2017, Murdoch held 10,485 Tesla shares through a family trust. He bought the shares on the market before anyone approached him as a director. Murdoch now runs a private investment firm that invested about $50 million in SpaceX in 2019 and 2020. Murdoch also personally invested about $20 million in SpaceX in 2019.

During his tenure as a director of Tesla in 2017 and 2018, Murdoch received a total of about $35,000 in cash compensation.

ii. Johnson Rice

琳达·约翰逊·赖斯（Linda Johnson Rice）

Johnson Rice joined the board on the recommendation of Grecias. She and Gracias are friends and operate in the same social circle in Chicago. Before and during his time at Tesla, Johnson Rice's sole employer was a family-owned company, Johnson Publishing Company, which publishes Ebony and Jet magazines. She also serves on a number of other boards. Johnson Rice refused to run for re-election in 2019. Although she was offered Tesla options as compensation for serving as a director, these options were not exercised upon expiration.

2. Musk proposes terms for a compensation plan

The first mention of the 2018 grant plan was a text message from Ellen Price to Musk on April 8, 2017, a day after Tesla's compensation committee certified the vesting of the sixth tranche of options in the 2012 grant plan. Ellen Price asked Musk to discuss "some pay-related issues." They spoke on the phone on April 9. Ellen Price confirmed that he had reached out to Musk to see if he was "ready to continue playing" and to "figure it out... Is he willing to stay with Tesla for a longer period of time?"

Musk presented the terms of the new compensation plan on his April 9 phone call. He envisioned a purely performance-based compensation plan with a similar structure to the 2012 grant plan, but with more challenging market cap milestones, with 15 $50 billion market value milestones — with total awards that could reach 15 percent of Tesla's outstanding shares.

From Musk's proposed perspective, each additional $50 billion in market cap milestones would require Tesla to grow roughly in size equivalent to the respective market capitalizations of Tesla, Ford, and General Motors in early 2018. Therefore, for Musk to get every level of compensation, Tesla's market value growth must be equal to the market value of the most important domestic automaker. Musk thinks the proposal is "really crazy."

Musk's initial proposal was reflected in a draft proxy statement related to the 2018 grant. The draft reads:

April 9, 2017,... Compensation Committee Chair Ira Ellen Price and Mr. Musk discussed the possibility of setting up a new performance reward that would have a similar incentive structure to the 2012 performance bonus, but with a more challenging threshold for performance.

Mr. Musk expressed interest in such an arrangement and suggested a compensation structure that would motivate management to develop Tesla into one of the most valuable companies in the world.

At the meeting, Mr. Musk proposed a number of performance milestones that would trigger stock option awards of 1% of the company's current total number of outstanding shares, based on every $50 billion increase in market capitalization, with a maximum of 15% of the company's current total outstanding shares if Tesla grows by $750 billion.

Mr Musk said this reward structure would align his incentives with shareholders and motivate him to continue to lead the company's stewardship for the long term.

Mr. Ellen Price said that the compensation committee will consider Mr. Musk's views in its analysis.

Language similar to the one described above appears in other drafts, but not in the final proxy statement.

The draft proxy statement is the most reliable (and indeed the only) evidence of the substance of the discussion on 9 April. Neither Musk nor Ellen Price took contemporaneous notes or otherwise recorded their April 9 discussions. During the investigation and trial of this lawsuit, Musk has only vague memories of what was discussed, while Ellen Price has no memory at all.

It's unclear who drafted the proxy statement, but the matter was handled by Tesla's general counsel Malone at the time. Malone testified that he spoke with Ellen Price and reviewed the draft within hours of the April 9 call.

Malone's complete obedience to Musk makes the accuracy of the draft proxy statement more credible. But his relationship with Musk has raised concerns about other aspects of Mr. Malone's advice to the board and compensation committee. Malone joined Tesla in September 2013 as Deputy General Counsel and was promoted to General Counsel in September 2014, reporting directly to Elon Musk. Prior to joining Tesla, Malone was Musk's divorce lawyer. While working at Tesla, Malone neither socially socialized with Musk nor considered himself a friend of Musk, but he owes his career to Musk and has genuine feelings for him. In testimony and at trial, when asked about leaving Tesla in January 2019, Malone held back tears, calling it the "hardest decision" he had made so far.

After speaking with Ellen Price on April 9, Malone enlisted other Tesla employees to help him model Musk's proposal. A total of 13 Tesla internal executives participated in the 2018 award. In addition to Malone, Tesla's chief financial officer, Ahuja, is also an important executive.

Tesla's then-CFO Deepak Ahuja

At the beginning of his engagement, Ahuja proposed a substantial change to the structure – pairing the market capitalization milestone with the operational milestone. His proposal for this change was for accounting purposes. Malone conveyed the change to Ellen Price, who questioned whether the operational milestone was necessary. Malone explained that there was "an important accounting reason" for setting operational milestones.

Malone's team began analyzing Musk's initial proposal on April 10 and invited Tesla's legal counsel, Wilson Sonsini Goodrich & Rosati ("Wilson Sonsini"), and compensation consultants to discuss it. Malone suggested keeping Compensia, a compensation consulting firm hired by Tesla in its 2009 and 2012 grants, but he also offered four other options for Ellen Price to consider.

3. Musk said he will work for Tesla for life

As of May 2017, Musk's new compensation plan had made little progress. During the May 3 earnings call, an analyst asked Musk "his thoughts on staying at Tesla aggressively for longer in the future." Musk replied that he should not be "CEO forever." He further said that he will reevaluate his position after Tesla achieves the mass production of the Model 3.

The plaintiffs argue that Musk's statement that he "won't be CEO forever" was intended to pressure Tesla in negotiations over Musk's compensation plan, but the record does not support this conclusion. Musk later clarified his claims on the May 3 earnings call, saying:

Well, maybe I didn't say it clearly enough. I intend to be actively involved in Tesla for the rest of my life. Hopefully stop before I'm too old or too crazy, I don't know. But basically, as long as I can still make a positive contribution to Tesla, I intend to be closely involved in Tesla's work.

In other words, Musk fully intends to remain "intimately engaged" in some kind of leadership at Tesla, although he does not envision himself "forever as CEO." Musk repeated this statement at the trial, making it clear that he would remain at Tesla even if shareholders vetoed the new compensation plan because he "invested heavily in Tesla, both financially and emotionally, and sees Tesla as part of his family." Trial witnesses likewise testified that they had never heard Musk say that he had any plans to quit Tesla. Even if Musk doesn't intend to be CEO forever, he has no plans to step down from the role immediately. This fact is also confirmed by the absence of any succession planning during the relevant period. That said, before 2021, neither Musk nor Tesla had identified a potential successor to the position of Tesla's CEO.

4. First (and easily forgotten) board discussion

By June 5, 2017, Tesla had achieved all ten CEO market capitalization milestones granted in 2012, leaving only three operational milestones to be met. At the June 6, 2017 board meeting, the board discussed for the first time the prospect of developing a new compensation plan for Musk. Musk chaired the meeting.

At the June 6 meeting, the board's conversation about Musk's compensation was brief and apparently easily forgotten. At that meeting, Ellen Price updated the board on the near-completion of the 2012 award milestone and said that "plans are underway to design the next compensation plan for Musk." The minutes of that meeting were three pages long, and the discussion about the new compensation plan was limited to one sentence. At least one director who served on the compensation committee, DeHome, had no recollection of the June 6 board discussion at all. She testified at the trial that any discussion of the new compensation plan at the June 6 board meeting was certainly not substantial.

5. Musk accelerates the process

On June 18, 2017, Malone emailed the Compensation Committee stating that "we want to... Discuss Elon's next share grant". In the process, this connection of Malone is common. Although he is Tesla's legal counsel, he will proactively contact the compensation committee to get the committee to take action that will benefit Musk (i.e., "we" in the previous quote).

A few days earlier, on June 15, 2017, Malone's team had prepared an aggressive timeline for approving the compensation plan. The timeline sets for the Compensation Committee and Board of Directors to approve the plan by July 17 or July 24 at the latest. The original June 15 plan contemplated only two Compensation Committee meetings prior to final approval, with only a little over one month allotted to the Committee. The subsequent version of the 26 June version of the timetable was even more hasty, proposing only one meeting of the Remuneration Committee (and an additional meeting if necessary), giving the Committee less than three weeks to complete its mandate. As envisaged in the timeline, the Compensation Committee will "agree on the proposed methodology, award size and metrics/targets" and "preliminarily approve the award agreement" on July 7.

Given that the Remuneration Committee has not yet discussed any substantive terms and has not convened a meeting on the grant, the timeline reflects a reckless approach to the fiduciary process. Despite the very aggressive pace of the timeline's assumptions, Malone reported to lawyers on June 18 that Ellen Price was "consistent in plan and timing."

After Musk asked to discuss his compensation plan, the team led by Malone began to go all out. They had an initial call with five potential compensation consultants and selected three consultants for Malone and Ellen Price to interview. During the initial call, they briefed the advisers on Musk's initial proposal, as well as a tight timeline for approval at the end of July. On June 20, 2017, Malone and Ellen Price updated Musk on the process.

6. First Discussion of the Remuneration Committee

On June 23, 2017, the compensation committee first discussed Musk's compensation plan. The Committee formally decided to engage Wilson Sonsini and Compensia as legal counsel and compensation advisors, respectively. A few days later, Tesla hired Jon Burg of Aon Hewitt Radford ("Radford") to value the 2018 grant against market capitalization milestones and advise on the accounting treatment of the 2018 grant based on the performance milestones.

乔恩·伯格(Jon Burg)

During the meeting, Ellen Price said the compensation committee's goal was to develop a new compensation plan similar to the one awarded in 2012. Subsequently, the Committee broadly defined the objectives of the compensation plan. The minutes describe the discussion as follows:

The committee discussed how Mr. Musk has been, and is likely to continue to be, a key driver of the company's success and its growth prospects, and discussed compensation packages that would allow Mr. Musk to remain the company's fully committed CEO, which is in the interest of Tesla and its shareholders. The committee also discussed the fact that, unlike most other CEOs, Mr. Musk manages several successful large companies. The committee discussed the importance of keeping Mr. Musk focused and deeply engaged in the company's business, and the need to develop compensation packages accordingly to best ensure that Mr. Musk focuses his innovation, strategy, and leadership on the company and its mission.

The minutes did not reflect any discussion by the committee about the impact of Musk's previous 21.9% stake on these targets.

The Committee was not informed of any of the proposed terms of the remuneration plan and did not consider any of the proposed terms. Although behind the scenes, Ellen Price and Musk discussed Musk's initial proposal, which was also modeled by Musk's team.

While the committee did not know what the terms of the plan were, they were told they were prepared to approve it in July. Brown didn't think the schedule was wise and he called Ellen Price to ask for more time to work on the matter, but Ellen Price responded: "That's our work schedule." A member of Malone's team later repeated the message, telling Brown and Berg that "we have a short deadline and we have to make sure this thing moves forward." The message is clear – go all out. With the exception of Brown, there is no evidence that anyone has ever questioned this timeline.

7. First meeting of the Working Group

Following the June 23 Compensation Committee meeting, Ellen Price formed a "working group." The team consisted of Ma Long and at least two in-house lawyers reporting to him (Phillip Chang, Phillip Chang and Phuong Phillips), Ahuja, Brown, Berg and Wilson Sonsini. Ellen Price and Gracias also participated in the working group, but the compensation committee decided that two members who were not as close to Musk — DeHomme and Bass — were "optional" participants.

The Working Group held its first meeting on 30 June. Phillips presented the agenda, and Brown prepared a slideshow with a high-level overview of the proposed terms of Musk's new equity plan. In the relevant sections, the presentation consisted of several slides summarizing the 2012 awards, a slide entitled "Preliminary Concepts" reflecting the combined structure of the 15 market capitalization and operating objectives, and three slides entitled "Key Program Terms: Alternatives and Considerations", which elaborated on the terms of the compensation plan under the heading "Initial Alternatives" and the considerations related to each clause under the heading "Considerations/Decision Points".

The presentation addressed the following question for discussion: "Will there be both operational objectives and company valuation objectives?" The presentation presented this structure as a question, indicating that this was an open issue. However, the notes Brown made on the June 26 draft presentation suggest that the issue has actually been resolved. "There will be a total of 15 targets for each type," he wrote, referring to market capitalization targets and operational targets, and "market cap targets in $50 billion increments, with a total market capitalization of $750 billion across all 15 tiers." So, in a way, this presentation was a means of giving members of the Compensation Committee an idea of the behind-the-scenes work that had been done prior to this.

Following the conclusion of the meeting on 30 June, the Working Group was ready to move forward. Zhang sent emails to working group members about developing operational milestones, including a structure whereby each market capitalization milestone would also require an increase of $15 billion in GAAP revenues. Zhang said Tesla should "expect to achieve a milestone approximately every 12 to 15 months over the next three years."

8. Musk slows down the process

On 6 July, the Working Group met again, the day before the next meeting of the Remuneration Committee. After the meeting, Ma Long informed Zhang, Ahuja and others: "We are now slowing down the issuance of CEO grants. We now want to release it in August or September, not in the next few weeks."

Malone claims he doesn't know why the schedule is slowing down. Zhang and Phillips don't remember either. Ellen Price testified that "it was too complicated to complete the work based on the initial timeline initially described," but he did not remember further details. Brown testified that he was opposed when he asked for an extension, so he was not the driving force behind the delay. Malone will not unilaterally decide to extend the schedule to August or September. The reality is that Malone was responsible for Musk at that time and spoke on Musk's behalf. It was Musk who asked to slow down the work, or Musk stopped urging the work to be done as soon as possible.

Phillips circulated the "Proposed New Timeline for Equity Grants to Elon" to the Working Group on the evening of July 6. The initial timeline envisaged initial approval by the Compensation Committee on July 7 and final approval by the Committee and Board by July 24. The revised timeline delays final approval by the Committee and Board of Directors until September 8 and September 19, respectively.

9. First discussion of the substantive terms by the Remuneration Committee

The July 7 Remuneration Committee meeting took place as scheduled, but the agenda was revised in accordance with the new schedule. The revised agenda includes Brown's "Short Presentation on CEO Grants." This was the first meeting to present the terms of a remuneration plan to the Committee.

In addition to Musk's proposed $50 billion market cap milestone, Brown's speech included other options — a flat increase of $25 billion, or a gradual increase from $10 billion to $50 billion. These different market cap methods correspond to different reward sizes, ranging from 7.5% of the total outstanding shares to 15% proposed by Musk.

Although alternatives to Musk's proposal were listed in the presentation, only Musk's proposal was valued. So, while this was the first time the committee had considered any provisions, the presentation was biased in favor of Musk's proposal.

In addition to market capitalization and operational milestones, the presentation identified other potential grant characteristics, including the following:

A "Refund Clause". Around April 2015, the Board of Directors adopted a new Corporate Governance Code (the "Code"), which stipulates that Tesla's "executives are subject to a refund policy of returning certain incentives if our financial statements are restated." The presentation contained the following question: "Is the current return clause sufficient to protect the company?" There was no evidence that the Committee had discussed the issue and there was no call for a more protective refund clause. The final version granted includes a return clause based on the Code.

An "M&A Adjustment", which is a provision that takes into account the impact of a financing or M&A on a market capitalization milestone (a "M&A Adjustment"). These Terms are standard.

A "holding period", i.e., a period of time after exercising the option, prohibits Musk from selling his shares. The presentation states that "the holding period after exercise will reduce the grant/accounting value of the shares" as follows: "2 years = 15% reduction, 3 years = 18% reduction, 5 years = 22% reduction".

The consultants took into account the benchmarking analysis. Prior to the first meeting of the Working Group, Fang suggested that "Benchmark Companies – Risks Associated with Such Grants" be included in the agenda. In an appendix to his July 7 remarks at the Compensation Committee meeting, Brown listed "the largest CEO compensation package of 2016," summarizing compensation plans for other executives at SolarCity, Nike, Avago Technologies and Apple, Radford's valuation of $3.1 billion with a $50 billion market capitalization milestone and granting 15% of the total outstanding shares, and Radford's other preliminary models based on different market capitalization methodologies. However, the data in the appendix does not constitute a traditional baseline study, and it is unclear whether the Committee has discussed this information or "the risks associated with such grants."

10. Shareholder Outreach

At its July 7 meeting, the compensation committee instructed Ellen Price and Malone to reach out to Tesla's largest institutional shareholder to discuss Musk's new compensation plan. Malone's team worked with outside counsel to prepare talking points to use on the call. Between July 7, 2017 and August 1, 2017, they ended up talking to 15 shareholders. Malone's subordinates attended the calls and took notes.

According to the script, Ellen Price should have to: introduce himself and Malone and make clear his goals as chairman of the compensation committee ("keep executives motivated and perform at their best"), praise Musk ("I think we can all agree that he is an extraordinary leader and continues to achieve incredible things for Tesla and its shareholders"), remind shareholders that "the 2012 grant was an impressive success", and explain that they are considering a new compensation structure for Musk," Obviously, the goals of the new program will be similar to those awarded in 2012. "

In the lawsuit, the defendants allege that shareholders who spoke with Ellen Price and Malone were "satisfied with the results of the 2012 plan and support a similar approach to the new compensation plan," and that the shareholders also made recommendations for the new compensation plan that the board ultimately adopted. The defendant's account is difficult to believe for two reasons. First, the script reads like a robust questionnaire soliciting positive shareholder feedback, rather than a way to get an objective view of potential new initiatives from shareholders. There's nothing wrong with the script itself; it just weakens the evidentiary power of the resulting communication. Second, what the shareholders said in response to these inquiries was hearsay and had not been tested by the defence process, including cross-examination.

11. The working group develops operational milestones

The next meeting of the Working Group was held on 17 July. One of the goals of the meeting is to develop metrics for operational milestones. Brown prepared a presentation for the conference that listed the following potential operating metrics: "EBITDA; operating income; free cash flow; gross margin; strategy/execution targets" (e.g., introducing a new model or producing a certain number of products, similar to those granted in 2012), and "return metrics (ROA, ROIC, ROE)," with some "pros" and "cons" attached to each option.

Ahuja set the strategic milestones awarded in 2012 and he is responsible for setting the operational milestones awarded in 2018. On July 19, Berg sent Ahuja and other members of the task force an analysis of the historical market capitalization-to-income ratios of large U.S. companies. Ahuja used this data to propose a 6.5x revenue-to-market cap milestone as a starting point, which can be used to determine the initial revenue milestone – $7.5 billion in additional revenue for every $50 billion in market capitalization. Then, the revenue milestone in the last tranche drops to 4x, increasing by $12.5 billion per $50 billion in market capitalization.

On July 23, in addition to the 15 revenue-based milestones, Ahuja proposed four EBITDA profit milestones: $4 billion, $8 billion, $12 billion and $16 billion. Ahuja expects that Tesla "should be able to reach $12 billion in EBITDA over the next 4-5 years, depending on production... and the assumption of profit margins".

The agenda for the July 17 working group meeting included a discussion of M&A adjustments and holding periods. Brown prepared a detailed slide on the M&A adjustment, but other than that slide, there was no contemporaneous communication that reflected the discussion of the adjustment.

With regard to the holding period, the presentation noted that the Guidelines require a holding period of six months after vesting. The next day, Phillips emailed Berg and Brown a question raised by Ellen Price about what "innovative options" they could adopt to address the issue of "getting a greater discount" on the grant date fair value of public reports, such as extending the holding period to five years (the "five-year holding period"). BOGE offers holding periods ranging from one to ten years and option options with corresponding discounts.

Following the July 17 meeting, the Working Group began planning for the Remuneration Committee meeting on August 1, 2017. The agenda included an update to the full board of directors (excluding Musk and Kimbal) on the compensation plan structure being discussed, as well as shareholder feedback on the structure. Malone sent an email to the full board on July 27 summarizing the progress to date and asking everyone to attend an upcoming compensation committee meeting.

12. Musk hits the brakes

Late July 2017 was a busy time for Tesla, and on July 29, Tesla delivered its first Model 3. This triggered the eighth milestone of Musk's 2012 grant program. This also prompted Musk to once again reset the timeline of the compensation committee. In Malone's view, Musk wants to extend the timeline given the difficulties with the launch of the Model 3, either because he is not sure whether to commit to Tesla (which Musk denies), or because he does not want to focus on compensation during busy periods.

Whatever the reason, Musk hit the brakes in the process. On June 30, two days before the planned compensation committee meeting, Musk sent Malone a brief email asking that his compensation discussions be put on hold for a few weeks. Malone replied that he "would rather continue to discuss this issue... Because there's quite a bit of that that we've been discussing with the board, and it's about lead time." Musk agreed to let Malone continue, saying he "just wants to make sure Tesla's interests come first." Musk reminded Malone: "The reason for the increase is only because if I can successfully lead Tesla to become one of the most valuable companies in the world, I can put as much money as possible into Mars (plan) and reduce the risk of survival as much as possible." It's a little crazy, but it's true. "

D. Process derailment

By August 2017, Musk was still super-focused on the production of the Model 3, a process that proved to be slow and painful. As Musk described at the trial, "the pain required to achieve this goal is beyond words." Musk's testimony in this regard is completely credible.

Although Musk agreed to let Malone "keep working," progress on the compensation plan has stalled. From August to September, there was some discussion around Musk's compensation plan, but no action was taken, and there was no meaningful discussion about the 2018 award in October. The main points of this interlude are briefly discussed below.

The Compensation Committee held a conference call on August 1, at which Compensia made a presentation summarizing the progress of the Committee's work to date. The most noteworthy aspect of the meeting was the following undiscussed "key question": "Is additional compensation necessary given the CEO's current ownership share and its potential to appreciate with the company's performance?" Musk made an initial proposal in April 2017 that the process would end in July 2017 according to the original timetable, but this was the first time that this "critical question" was raised - does Musk need additional compensation? The most curious thing about this issue is that there is no evidence that any director has considered this issue, and it does not appear in the materials of any other board or committee.

The next noteworthy event occurred on Sept. 8, when Ellen Price and DeHomme spoke with Musk to discuss his compensation plan. The most noteworthy aspect of this conversation was an issue that was not discussed. The agenda for the Sept. 8 call identified the following topic for discussion: "Should there be some type of commitment as part of the compensation structure?" Trial testimony showed that no one had raised the issue with Musk. Ellen Price recalls that the discussion at the time was generally about Musk's total devotion to Tesla. And Malone's summary of the call reflected that participants discussed the "opportunity cost" of Musk's time for Tesla. Although Musk "doesn't quite remember the content of the Sept. 8 call," he's sure they didn't put in the time or effort to discuss "other interests relative to Musk." Musk said "in that case, it would be stupid".

The board met on September 19, but it wasn't very interesting. Ellen Price reported on the progress of the committee's work and his conversation with Musk on September 8. Brown's statement was essentially the same as his statement on 1 August. Brown valued the 15% market capitalization option at a grant date fair value of $2.3 billion. According to the minutes, "the Board expressed general support for the overall structure of the grant", i.e., the structure of 15 grades. The Board of Directors approved the "long-term stock option grant... Attribution is based on performance, which is mainly linked to the market value of the company". The board noted that "Musk is driven by ambitious goals" and "believes that the goals discussed are achievable and believes that Mr. Musk can do the same, given the potential of the company".

Prior to this period of inactivity, the only milestone discussed was the $50 billion market cap milestone. Operational milestones are still "pending", but Ahuja gave them some thought in August and September. A working group meeting was held on August 3, and the post-meeting discussion focused on adjusted EBITDA. It is not clear who made the decision to focus on this indicator.

On Aug. 17, Ahuja asked one of his employees to provide "operational metrics that match 15 incremental market capitalizations of $50 billion." Ahuja envisioned 15 adjusted EBITDA milestones "from $2 billion to $25 billion" and asked for comparisons with historical EBITDA/market cap correlations with Apple, Amazon, and Google. After calling up the data, members of Ahuja's team responded that they "do not see a direct similarity to our current situation". Ahuja asked for more information on the data they had collected on "Adjusted EDITDA/Revenue Percentage and Market Capitalization to Adjusted EBITDA Multiple".

On the second day of the Sept. 19 board meeting, Ahuja reached out to his team to help develop "10 metrics based on adjusted EBITDA that end with approximately $150 billion in revenue and approximately $800 billion in market capitalization, using percentages and multiples from high to low." He explained that "the idea is to develop an operating metric based on EBITDA, not a revenue-based metric". It is not clear who dominated this "idea" at that time. On September 21, a Tesla employee responded to Ahuja's request by offering ten potential EBITDA milestones (from $2 billion to $20 billion, in even-digit increments of $2 billion, similar to Ahuja's range). The data reflects the adjusted EBITDA/revenue ratio of Tesla and its peers such as Apple Inc (34%) and Google Inc. (42%). The employee found that the ratio of BITDA to market capitalization would have to be much higher than that of Amazon, Apple or Google, depending on the range of EBITDA milestones proposed by Ahuja.

E. Process Restart

By the end of October, Tesla's production difficulties seemed to have eased. The "Quarterly Update Letter" signed by Musk and Ahuja at the October 31, 2017 meeting of the Audit Committee of the Board of Directors (the "Audit Committee") is generally optimistic. The letter notes that "productivity will soon enter the steep part of the manufacturing S-curve", which will create "non-linear capacity growth" in the coming weeks. As Tesla's production stabilized, Musk turned his attention to his compensation plan.

1. Musk lowers the requirements

In the early hours of Nov. 9, Musk sent an email to Malone, saying that he wanted to "move forward [with his compensation plan] now, but by a reduced amount than before." Musk testified that by "reduction" he meant less than 15% of the total outstanding shares. It's unclear why Musk decided to lower his asking price. It is possible that he simply wants to adjust the compensation package to more reasonable terms on his own. Later that morning, Musk told Malone that he "wants to take board action as soon as possible, if they feel appropriate, before submitting it to shareholders." Musk said:

I think if I can get Tesla to be valued at $550 billion, then my Tesla stake increment should be reduced to 10%, but that should be a fully diluted 10% because it would also dilute my stake. So, if the hypothetical grant is given to me and I have (probably) ~20% fully diluted, then I will get ~30%. Of course, there will be dilution in the future due to employee grants and equity additions, so when it has a chance to be fully granted in 10 years, the proportion may be more like around 25%.

Musk proposes to use a 10% fully diluted figure of 1% per gear, which means he is now seeking a 10-stop structure.

A few minutes later, Musk sent another email to Malone, saying:

Given that all of these funds will be used for causes that will at least maximize the creation of a better future for humanity, and that all Tesla shareholders will be very happy, I think this will be well received.

If I "just" only doubled Tesla's market capitalization, the compensation package would be almost worthless, and from that point it is

A very optimistic perspective on the future.

At a special meeting on November 16, 2017, Ellen Price conveyed Musk's revised proposal to the board of directors. Prior to that meeting, Zhang sent a list of talking points to Ellen Price, noting that "the numbers we are discussing now are lower than they were before... 10 tranches up to $550 billion;

2. Some turmoil

Meanwhile, on November 13, Jurvesson began his vacation. At the time, Jürvesson was a managing director at Draper Fisher Jurvetson ("DFJ"), a venture capital firm that invested in Tesla and other Musk-related ventures. After a scandal, Jurvesson was removed from the DFJ. This became a "PR problem" for Tesla. Jürvesson returned to the board in April 2019 but left again in September 2020. On Nov. 14, Musk emailed Malone again asking him to "pause for a week or two" because it would be a "bad time." During the trial, Musk did not recall the essence of the problem. But he's a smart guy, and it's possible that he thinks it's best to avoid publishing controversial news after it.

3. Musk further "negotiates with himself"

Musk's Nov. 9 proposal unexpectedly raised his requirements. According to Zhang, Musk is asking for a 10 percentage point (about 28.9%) increase in his current share of fully diluted shares (about 18.9%), which would require awarding 28,959,496 shares, equivalent to about 17.23% of the total number of shares issued as of November 2017. As a result, Musk's request on November 9 is higher than his initial proposal, which is contrary to Musk's desire to "reduce" the amount.

On November 29, Malone sent Zhang's calculations to Musk. Malone submitted to Musk: (i) the total number of shares to be acquired by Musk (28,959,456 shares) pursuant to Musk's request to increase 10% of the shares on a fully diluted basis on November 9;( ii) the total number of shares to be acquired by Musk pursuant to Musk's March 2017 request to receive 15% of the total number of undiluted outstanding shares (25,217,325 shares).

Musk replied to Malone on December 1: "This exceeded my expectations. Let's take 10% of the current number of fully diluted shares, so it's 20.915 million shares. Musk arrived at this figure by multiplying Tesla's total number of fully diluted shares as of November 2017 by 10 percent, or based on pre-grant and taking into account dilutions.

When asked about the Dec. 1 proposal, Musk offered an answer that the plaintiff's attorneys were happy to emphasize at every opportunity. The Dec. 1 proposal, he said, "I think I'm negotiating with myself."

4. Surge in activity

Over the course of a few days in December, a great deal of work was carried out on both sides. Over the course of five days during the month, the Compensation Committee met twice (December 8 and 10) and the Board met once (December 12). After the meeting on December 8, Tesla's top employees rekindled their sense of urgency to work, and on December 10 and 11, Tesla's top employees exchanged ideas in emails.

At its meeting on 10 December, the Compensation Committee approved the award structure of 12 tranches and a series of operational milestones. Ellen Price reported that Musk "appears ready to accept" the structure, which the minutes described as "the lower end of the previously envisaged range, 12% of the total outstanding shares." The minutes of the meeting on 12 December also indicate other provisions under consideration.

a. 12%/12-gear structure

According to Musk's proposal, all discussions up to Nov. 9 assume 15 notches. And on November 9, Musk proposed 10 grades based on fully diluted shares. But on December 10, the Compensation Committee approved the 12-tier structure, which was presented to the board two days later. There is a dispute between the two sides about the evolution of the 12-gear structure.

According to Ellen Price, the purpose of the 12-tier structure is to counter Musk's proposal to fully dilute 10% of the stake and its inevitable 10-tier structure. This seems counterintuitive, as 12% of the total outstanding shares equals approximately 10% fully diluted – so there seems to be no practical benefit to using a 12% figure. The difference, however, is that adding two more gears to Musk's proposed 10 would require Tesla to reach its $50 billion market cap target two more times to generate an additional $100 billion in market cap. As a result, the 12-tier structure makes it more difficult for Musk to achieve the maximum payout granted. Musk testified that the shift from fully diluted to gross outstanding shares is "one of two areas that the board is pushing hard... I admit it".

But this testimony has no basis in the records of the time. While the 12-tranche structure is beneficial to minority shareholders, the board's preference to determine grants based on the total outstanding shares rather than fully diluted shares has led to the adoption of the 12% and 12-tranche structures.

The issue first appeared at the November 16 board meeting. At the meeting, the board discussed the issue of moving from Musk's proposed fully diluted shares to total outstanding shares favored by the board. The Board considers the total number of shares outstanding to be a simpler metric and used this metric in the issuance of the 2012 grant.

On 10 December, the Remuneration Committee held a special meeting to discuss the award. There are no minutes of the 10 December meeting. Zhang attended the meeting and took notes, which he distributed by e-mail that night. He wrote in his record:

Todd introduces/leads the discussion on the review of the terms

We seem to be in the right place in terms of size: 10% of fully diluted shares (about 12% of total outstanding shares)

How many bins?

10 simplicity

10 means the end goal is smaller

Agree to 12 gears, 1% each.

In summary, the board agreed with Musk's requested size, but preferred to base it on total outstanding shares, which was in line with their discussion at their meeting on November 16. Zhang said in the minutes of the meeting that he would "send another email soon with the numbers for the size of the grant." A few minutes later, he sent an email to the same crowd with a spreadsheet that read:

The size of the grant considered is here. Details are attached.

This is based on 12% of the total number of shares outstanding (the total number of shares outstanding as of 11/8 should be updated closer to grants, but this figure is still very close).

The size of the grant is 20,173,860 shares.

12% of total outstanding shares

9.8% of fully diluted shares

On December 11, Ahuja emailed Zhang and Tesla's corporate controllers, confirming that the 2018 grant would grant 20,173,860 shares (12% of the total outstanding shares or 9.8% of the fully diluted shares) in 12 tranches.

On December 12, Ellen Price told the board that Musk was ready to accept the grant scale.

In the minutes or notes of the Nov. 16, Dec. 8, Dec. 10 or 12 meetings, there was no discussion that the board wanted to be issued in 12 tranches because it was more beneficial to minority shareholders. Quite the contrary, the only explanation for the 12-tranche structure in the record is that, for the sake of simplicity, the board prefers to measure grants in terms of the total number of shares outstanding.

There is also no evidence that the board pushed for a 12%/12-gear structure. Malone doesn't remember what the board pushed for, or what Musk admitted. He testified that while the "size of the overall plan" was different from "I think Elon had what he originally thought... I don't want to say that it must be against him." At the trial, Musk conflated the two, mistaking the grant for "10%", which further confirmed the similarity between Musk's fully diluted 10% request and the board's offer of 12% of the total outstanding shares.

b. Operational Milestones

At the Nov. 16 Board meeting, the Board "discussed the structure of the operational milestones," reached consensus on the use of sales and profit metrics, and "directed the compensation committee and management to use revenue and EBITDA to develop operational milestones."

Ahuja and his team took over the task. On December 7 and 8, Ahuja developed a series of alternatives with a relatively low EBITDA/revenue margin of 10%. By December 10, Ahuja had refined the model into three scenarios with revenue and adjusted EBITDA milestones of 6, 8 or 12, all with EBITDA/revenue margins of 10%.

Back in September 2017, Tesla attempted to set achievable operational milestones and analyzed information on the adjusted EBITDA/revenue ratio for certain peers, such as Amazon 8%, Apple 34%, and Google 42%. The 10% EBITDA/revenue ratio simulated by Ahuja is relatively low, making it easier to achieve. Tesla eventually set the EBITDA milestone awarded to Grant based on an 8% EBITDA/revenue margin, making it easier to achieve.

Ahuja explained his approach at the trial. He "started" with the $50 billion market cap milestone and worked backwards to revenue and EBITDA targets. Zhang likewise explained that the operational milestone and the market capitalization milestone "have to be aligned to some extent." must be able to achieve it at the same time, or at the same time as you think". Therefore, in order to identify operational milestones, the Working Group asked the following question: "Based on this valuation,... What will revenue and EBITDA look like?

At its Dec. 12 meeting, the board also reviewed Tesla's operating plans and forecasts at the time. In the December leading up to the meeting, Ahuja formulated these projections, which Musk also approved (the "December 2017 Forecast"). The one-year forecast on which the operating plan is based shows that Tesla will achieve total revenue of $27.4 billion and adjusted EBITDA of $4.3 billion by the end of 2018, and therefore predicts that it will achieve three milestones in 2018 alone. The three-year long-term forecast ("LRP") on which the plan is based indicates that Tesla will achieve seven and eleven operational milestones by 2019 and 2020, respectively. The following diagram illustrates the relevant inferences:

Unit: USD

F. Burnout

On the second day of the December 12 board meeting, Zhang provided Berg and Brown with a "near-final" term sheet (the "December 13 term sheet"), saying that Musk was "very consistent" on terms and that the board was expected to approve it in early January 2018. The key terms regarding the structure and milestones have been finalized, which allows BOGE to complete the calculation of the fair value at the grant date. Other provisions, such as Leadership Requirements (as defined below), holding periods, and M&A adjustments, will be implemented in the coming weeks.

1. Leadership requirements

The Dec. 13 term sheet reflects an agreement on "leadership requirements" that grant vesting conditional on Musk being "CEO, or executive chairman and chief product officer."

The 2012 grant contained stricter "leadership requirements" on the condition that Musk must remain as CEO. Board materials from the September 19 meeting show that the Board considered leadership requirements similar to those in the 2012 grant. At some point between Sept. 19 and Dec. 13, the board relaxed the requirement to allow vesting if Musk was not the CEO but the executive chairman and chief product officer. There is no indication of how or when this decision was made, whether it was proposed to Musk, or when the clause was finalized, but it appeared in the final grant.

During the trial, Gracias explained that the less stringent leadership requirements reflect the board's belief that Musk's "most valuable function" is to be the "chief product officer," not the CEO. There is no evidence that the board has ever discussed or consulted with Musk on this issue.

2. M&A adjustments

The December 13 term sheet reflects the Board's intention to incorporate merger adjustments into the grant. The 2018 grant included a merger and acquisition adjustment that has been in discussion since at least the June 23 Compensation Committee meeting. In the final form of the M&A adjustment, the market capitalization milestone excludes acquisitions priced above $1 billion, and the revenue milestone and adjusted EBITDA milestone exclude acquisitions over $500 million or $100 million, respectively.

At trial, Ellen Price described it as a negotiating clause and testified that Musk wanted "merger adjustments to apply only to one milestone at the time of acquisition, and we ultimately made those adjustments apply to the basis of all milestones." Ellen Price was referring to Musk's request to Malone on Jan. 16 that the M&A adjustment threshold be 5% of the then-market capitalization, rather than a uniform $5 billion. Musk also told Malone that adjusting the milestones for revenue and adjusted EBITDA was too complicated and unnecessary.

However, Musk finally accepted the merger adjustment plan proposed by the board of directors, and even proposed stricter terms. After speaking with Ahuja, Malone proposed on January 16 a threshold to exclude acquisition-based market capitalization growth, which is the lesser of (i) a 5% market capitalization at the time of acquisition and (ii) between $5 billion and $10 billion. Musk retorted — and he retorted to himself — that the threshold should be 2% of the market capitalization at the time or $1 billion, whichever is lower. He told Marlon and Ahuja that "I don't think we're going to make big acquisitions" and that "it's impossible for me to play an economic game here, so I don't have a problem with restrictions to prevent that from happening". After discussing this issue with the Compensation Committee, all agreed on the following triggers that excluded growth-based on acquisitions: the market capitalization milestone of 2% of the then-market capitalization or $1 billion, whichever is lower, the revenue milestone of more than $500 million in revenue, and the adjusted EBITDA milestone of more than $100 million in adjusted EBITDA.

3. Holding Period

The December 13 term sheet reflects that the duration of the "holding period" is an open question. The Dec. 13 term sheet states that the holding period is "likely to be five years", but remains uncertain. The 2018 grant ultimately included a five-year holding period.

At trial, Ellen Price described the "five-year holding period" as a negotiated clause. Musk likewise testified that the board "pushed" the deadline, which was his "biggest concern, because it meant 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 could run the company well enough to avoid a significant drop in valuation after that... A lot can happen in five years."

But nothing in the record reflects any actual negotiations with Musk about that deadline. The only explanation for the five-year period in the records was in July, when Ellen Price raised the possibility as a "creative choice" to "get a bigger discount" on the publicly disclosed grant value.

4. Fair value at the grant date

On 22 December, Berg provided a valuation letter based on the term sheet dated 13 December. Berg uses Monte Carlo simulations to estimate the probability of reaching a market capitalization milestone, a "generally accepted statistical technique" that simulates a series of outcomes "likely to occur in the future" over a given time frame using repeating random possible scenarios.

Berg determined that the first market capitalization target – described as $100 billion, or $50 billion growth – had a 45.55 percent chance of being achieved, after which the likelihood of achieving subsequent milestones dropped rapidly, with the probability of a sixth milestone falling below 10 percent. The Monte Carlo valuation does not take into account the likelihood of achieving operational milestones and does not take into account Tesla's internal forecasting considerations.

Based on these estimates, BOGE concluded that the initial grant date fair value for the 2018 grant was USD 2,656,430,639. He then applied a 10.52% illiquid discount based on the five-year holding period, arriving at a final value of $2,377,077,626. Over the next few weeks, Berg and Ahuja's team continued to refine this valuation by adjusting assumptions, including holding periods and dilution ratios.

On 19 January, BOGE provided an updated valuation letter. The final valuation of the letter is slightly higher at $2,575,342,854 compared to the December 22 valuation of $2,377,077,626 (again taking into account the holding period illiquidity discount). Another updated letter dated January 21 provided a higher final valuation of $2,615,190,052 due to an increase in the total number of shares, an increase in the share price, and other slight changes in assumptions during the period.

G. Board Approval of Grant

On January 21, 2018, the Board of Directors held a special meeting to approve the 2018 grant. Musk and Kimbar reckoned and Julverson took a sabbatical. The other six directors – Ellen Price, Dehome, Gracias, Bass, Murdoch and Johnson Rice – unanimously approved the 2018 grant.

The final form of the 2018 award is divided into 12 vesting grades. Each tranche vests upon the achievement of a market capitalization milestone and the achievement of an operational milestone. The 12 market cap milestones increase in increments of $50 billion, starting at $100 billion and ending at $650 billion. There were 16 operational milestones granted in 2018: 8 based on revenue and 8 based on adjusted EBITDA. For each tranche of vesting, the achievement of any one operational milestone can be paired with the achievement of any one market cap milestone. The increments of operational milestones are shown in the following table.

Unit: USD

To accomplish each goal, the grant requires Tesla to achieve a market capitalization milestone and an operational milestone. For each step completed, Musk will receive an option to purchase 1% of Tesla's outstanding common stock as of January 19, 2018. Prior to the 2020 5-for-1 and 2022 3-for-1 splits, this 1% was equivalent to 1,688,670 shares. Thus, if fully vested, the 2018 grant would grant Musk the option to purchase 20,264,042 shares (before the stock split). The options have a strike price of $350.02, which is the closing price of Tesla's common stock on January 19, 2018. After adjusting for Tesla's two stock splits, the strike price is $23.33.

The grant also includes a return clause, leadership requirements, merger adjustments, and a five-year holding period. Like the 2012 grant, the 2018 grant expires ten years later.

H. Shareholder Approval Grant

The Board's approval is not the end of the road, as the Board has stipulated that the 2018 grant must be approved by a majority vote of disinterested shareholders.

1. Proxy Statement

Tesla announced the 2018 grant to the public on January 23, 2018, and filed a preliminary proxy statement. Tesla filed a definitive proxy statement (the "proxy statement") on February 8 informing shareholders that it voted to approve the 2018 grant on March 21, 2018.

The statement of representation contains a statement relating to this lawsuit. Despite Gracias' close ties to Musk, it described all members of the compensation committee as "independent directors." The proxy statement did not disclose the financial or personal relationship between the members of the compensation committee and Musk.

The proxy statement did not disclose the content of Musk's April 9 conversation with Ellen Price, in which Musk identified the key terms granted in 2018. Discussion of this conversation appeared in at least four earlier drafts of the proxy statement. The final version of the agent's statement reads:

As the 2012 performance rewards drew to a close, the board of directors held more than six months of active and ongoing discussions about Mr. Musk's new compensation plan, and finally decided to award the CEO a performance reward. These discussions were first conducted between the members of the Board's Compensation Committee (the "Compensation Committee"), all of whom are independent directors, and then with other independent directors of the Board, including two of the newest independent directors, Linda Johnson Rice and James Murdoch.

"Every requirement of the performance milestone is extremely difficult to achieve," the Board "has built this new award on extremely challenging targets," and the milestones awarded are "ambitious" and "challenging," the proxy statement noted. Like the revenue milestones described above, the Adjusted EBITDA milestone is challenging to design" and "the Board believes that the market capitalization milestone is a challenging obstacle".

The proxy statement disclosed that in setting the milestones, "the board carefully considered a variety of factors, including Tesla's growth trajectory and internal growth plans, as well as other investments in the technology sector in new businesses and tangible assets, with a high growth and high multiple of the company's historical performance." "Internal growth plan" refers to Tesla's forecast.

Along the way, Tesla prepared three sets of forecasts. In July 2017, Tesla updated its internal three-year financial forecast (the "July 2017 Forecast"). The July 2017 forecast, reflecting the exponential growth phase of the S-shaped curve, is coming. Tesla shared the July 2017 forecast approved by the audit committee with rating agencies Standard & Poor's and Moody's for the debt issuance. Forecasts for 2017 show that Tesla's revenue will grow to $69.6 billion in 2020 and adjusted EBITDA will grow to $14.4 billion. Based on the July 2017 forecast, Tesla will achieve three revenue milestones and all adjusted EBITDA milestones in 2020. The proxy statement does not disclose this.

In December, Ahuja developed a new operational plan and forecast – the December 2017 forecast – which was approved by Musk. As noted above, the Board reviewed these projections on 12 December. The one-year forecast on which the operating plan is based shows revenue of $27.4 billion and EBITDA of $4.3 billion by the end of 2018, so three milestones are forecast for 2018 alone. The longer, three-year projections on which the plan is based indicate that Tesla will achieve seven and eleven operational milestones by 2019 and 2020, respectively. This was not disclosed in the agent's statement.

Following Tesla's proxy statement, but before the shareholder vote, Ahuja submitted a three-year operating plan to the board of directors (the "March 2018 Forecast"), which Tesla later shared with rating agency Moody's. Musk reviewed and approved the March 2018 forecast before submitting it to the board. The March 2018 forecast is more pessimistic than the previous forecast, but still forecasts one revenue and two adjusted EBITDA milestones by March 31, 2019, and two more revenue and four adjusted EBITDA milestones by the end of 2020. As described below, Tesla will issue supplemental disclosures on this information, but only after a shareholder vote.

2. Public reaction

Tesla tracked shareholder support and opposition to the 2018 grant and conducted outreach activities. Two of the largest proxy advisory firms, ISS and Glass Lewis, have both recommended voting against the 2018 grant.

Glass Lewis expressed concern about the size of the grant and the potential dilution effect, noting that "any relative comparison of the size of the grant would be tantamount to comparing a stacked coin to a stacked dollar" and that "given the relevant time period, lower-tier targets are relatively easy to achieve and may result in large payments without commensurate excellence".

The ISS described the value of the award as "staggering" and concluded that even "challenging" and "far-reaching performance targets" did not justify an extraordinary amount of award. In an email, the ISS noted that it "refrained from dwelling too deeply on this issue" because "making such an argument essentially puts us in a situation where Tesla's board is not strong enough to stand up to Musk."

In addition, both proposals expressed concerns about Musk's interests outside of Tesla, although Glass Lewis said that "Musk's activities outside the company have undoubtedly helped to enhance his value to the company."

Shareholders also criticized the grant, pointing out that Musk's Tesla stake provided enough momentum to Musk's performance, that the size and dilution of the grant were too large, that the EBITDA milestone was too low, and that the linear milestone was not appropriate for an "index company" like Tesla.

Five days before the shareholder vote, on March 16, Malone informed the board that the outcome of the shareholder vote was "not yet clear." Malone reported that while the initial voting results were favorable, many large shareholders have not yet voted and their attitudes remain unclear.

By March 20, Malone had informed Musk that the grant might be approved, but two of Tesla's major shareholders voted against it on the grounds that the grant was too large. In response, Musk asked Malone to tell one of the major shareholders that "if he chooses to vote like this, he will be very disgusted by their behavior, but just vote like this anyway." Musk also asked Malone to speak on the phone with one of the shareholders after the vote, in which Musk would "convince them to divest from Tesla and any of his companies." They are not popular". It appears that a Tesla employee who is not for Musk called the shareholder after the vote.

3. Shareholder voting

At the extraordinary meeting of shareholders on March 21, 2018, shareholders approved the grant with 73% of the affirmative votes (excluding the stakes of Musk and Kimbal).

I. Subsequent Events

After shareholders approved the grant, there were a number of events related to assessing the fairness of the grant, such as: Tesla disclosed that there was a greater than 70% chance of several grant milestones being achieved, almost all of the grants were vested, Musk got into trouble with the SEC, appointed himself the "Technoking" (Technoking), and bought Twitter.

1. Tesla disclosed that several milestones awarded are likely to be achieved

For accounting purposes, BOGE provided a final fair value letter on March 27, resulting in a fair value of USD 2,283,988,223 at the grant date. Subsequently, Ahuja and his team must determine when Tesla is likely to achieve its performance milestones, which Tesla is required to disclose to shareholders on its Form 10-Q for the year ended March 31, 2018 ("March 31 on 10-Q"). Tesla identified three operational milestones as "considered very likely to be achieved," meaning there is a greater than 70% chance that they will be achieved within about a year after the grant date.

Tesla's approach to determining the probability of achieving a milestone is "using a documented operating plan." Tesla's operating plan is an internal set of one-year forecasts. Tesla regularly develops and updates one-year and three-year internal forecasts. They are not the product of bottom-up predictions. These forecasts are meant to drive and motivate, not to make plans. They reflect what Tesla needs to do to achieve the aggressive goals set by Musk.

Tesla's March disclosure is based on its March 2018 forecast. Ahuja described the March 2018 forecast as "extremely aggressive and challenging", based on "extremely challenging targets" and "very large... Risk. However, Tesla disclosed that "the following performance milestones are considered likely to be achieved: total revenue of $20 billion, adjusted $EBITDA15 billion, and adjusted EBITDA30 billion." The March 31 10-Q included the usual disclaimer stating that "the likelihood of meeting operational milestones is based on a subjective assessment of our future financial projections." According to Ahuja, the disclosure means "three operational milestones... There is a 70% chance of achieving it by the end of 2018 and in 2019".

From an accounting perspective, Ahuja describes probabilistic assessment as an inherently "conservative approach". However, it is unclear how Tesla's management reconciled their view that the milestone was both "risky" and "extremely challenging", but at the same time there was a more than 70% chance that it would be achieved.

Regardless, the management stuck to their guns. On April 3, Ahuja told his team that "in keeping with our approach to using the documented operating plan, we should assume that the second EBITDA milestone has more than 70% vesting opportunities by June 30, 2019". According to an audit committee presentation dated April 27, 2018, Tesla sees a greater than 70% chance of achieving the $20 billion revenue milestone and $1.5 billion adjusted EBITDA milestone by December 31, 2018, and a more than 70% chance of achieving the $3 billion adjusted EBITDA milestone by March 31, 2019, based on March 2018 projections. On May 7, 2018, Tesla filed a Form 10-Q disclosing to shareholders that three operational milestones were "deemed likely to be achieved" as of March 31, 2018.

2. Tesla's performance

With the take-off of Tesla's business, vesting began in 2020. While Tesla's business performance between 2018 and 2020 did not meet its March 2018 forecast, it slightly exceeded its 2018 adjusted EBITDA forecast. By the end of 2020, there will be 4 levels of attribution, and the following year there will be 3 levels of attribution. As of April 29, 2022, 11 of the 12 tranches granted have been vested. As of June 30, 2022, all market capitalization milestones have been achieved, all adjusted EBITDA milestones have been achieved, three revenue milestones have been achieved, and one milestone is considered probable.

3. Settlement with the U.S. Securities and Exchange Commission

On September 29, 2018, the U.S. Securities and Exchange Commission (SEC) announced that it had settled with Musk over fraud charges sparked by a tweet sent by Musk in August 2018. As part of the settlement, Musk agreed to pay a $20 million fine, step down as chairman of Tesla's board of directors, submit company-related communications to a process implemented by Tesla for pre-approval, and not "publish... any public statement that directly or indirectly denies any allegation in the complaint or creates the impression that the complaint has no factual basis".

Tesla also agreed to add two new independent directors and establish a permanent independent board committee to oversee the implementation of the settlement agreement, control over Tesla's public statements, and "review and resolve human resources issues or conflicts of interest issues involving Tesla's management."

On April 30, 2019, the SEC's final judgment on the settlement agreement was amended to specify that Musk must "obtain prior approval from an experienced securities attorney engaged by the Company ('securities advisers') to enter into written communications containing the following information" on a long list of topics, including Tesla's financial condition, nonpublic projections, and "events relating to the Company's securities."

As part of the settlement, Musk resigned as chairman of the board. Kimbal proposes to let Dhomme replace him. Dehomme initially refused, but then Musk asked Deholm to reconsider. DeHomme agreed, and the Board appointed DeHomme as Chair on 7 November 2018.

The SEC's settlement requires the board to establish a new independent committee, and in order to comply with the terms of the settlement, the board established an "Disclosures Committee." Dehome's testimony revealed a lack of understanding of how the committee worked. She testified that she was not aware of whether the Disclosures Committee had "received reports of human resources issues or conflicts of interest involving senior management" in order to carry out its duties. Dehomme testified that "conflict issues are reviewed by the Audit Committee, which is made up of independent board members who are also members of the Disclosures Committee."

Musk testified that his procedure for complying with the SEC settlement agreement was as follows: He "decided that a certain tweet could be something that the settlement agreement requires review... Submit it to an in-house lawyer before publishing, wait for a period of time that is up to him, and if the lawyer does not give an opinion, tweet it".

DeHomem described the process as "homemade" and "knew that Musk would wait an unspecified amount of time and tweet if he didn't receive a response." After the SEC's settlement agreement was amended, Musk made public remarks about Tesla's business prospects or plans without first clarifying with anyone.

During the trial, Musk said the SEC settlement was "reached under duress" because "the lender held a gun to his head." He also admitted that he had previously said in a public interview that the SEC's claims were false and that he had actually received the funds to take Tesla private. He did so despite the fact that the SEC settlement requires Musk not to "make any public statement that directly or indirectly denies any of the allegations in the complaint or creates the impression that the complaint has no factual basis." Musk also publicly called the SEC's San Francisco office a "bastard" and "a shameless puppet of Wall Street short-sellers who don't protect actual shareholders at all."

4. The King of Electromusic

On March 15, 2021, Musk changed his title to "King of Tesla's electronic music". Musk testified that the role is different from the traditional CTO role because of "charisma" and joked that the king of electronic music has "beautiful dancing and amazing rhythms." At the time of the deposition, Musk testified that he did not consult with the board about the new title, but he at least communicated with Dhomme before Tesla filed an 8-K document announcing the new title. At the trial, Musk testified that he did consult the board of directors before giving himself the title.

5. The advent of Twitter

On April 25, 2022, Twitter Inc. and Musk announced the signing of a merger and acquisition agreement, under which Musk will acquire Twitter. Musk then sought to terminate the merger agreement, and Twitter sued for enforcement.

Musk's time spent on the Twitter takeover is undoubtedly a concern for Tesla. In addition, in the Twitter lawsuit, Musk filed a complaint stating that no one at Tesla has the right to view his Tesla email account without his consent, except to the extent required by law. Musk eventually bought Twitter and called himself "Chief Twit," a role akin to that of a CEO. Musk also testified that he asked about 50 Tesla engineers to "volunteer" to help him evaluate Twitter's engineering team. No one on the board called to tell Musk not to do it. In the weeks leading up to the trial, Musk spent "most" of his time on Twitter.

J. Litigation

The plaintiff, Richard Tornetta (the "Plaintiff"), a shareholder of Tesla, filed a lawsuit on June 5, 2018. His initial indictment contained four counts: Count I was Musk's breach of fiduciary duty as the then-controlling shareholder, Count II was Musk, Kimbal, Gracias, Jul Wesson, Ellen Price, Bass, de Home, Murdoch and Johnson Rice as directors (collectively, the "Defendants") for breach of fiduciary duty, Count III was Musk's unjust enrichment, and Count IV was waste. Counts I and II are brought as both direct and derivative actions. Charges III and IV are derivative actions.

The defendant filed a motion to dismiss the complaint, and the court denied the motion to dismiss charges I to III, and only dismissed the claim for waste. In a motion to dismiss the complaint, the defendant admitted that Musk controlled Tesla. The defendant argued that under Section 216 of the Delaware General Corporation Law (the "Act"), the shareholder votes approved for the grant were eligible for approval of the vote and were justified in respecting business judgment. Associate Justice Joseph R. Slights III rejected this argument, arguing that a well-informed vote by shareholders was not sufficient to restore commercial judgment priority in a conflict controller transaction such as the grant. The Justices held that the de minimis provided a "roadmap" for controllers to seek to avoid scrutiny based on a standard of full fairness, even when squeezed out of context. The Deputy Chancellor also rejected another ground of dismissal put forward by the defendant, namely the lack of sufficient evidence in the complaint that the "grant" was unfair.

特拉华州衡平法院时任副大法官Joseph R. Slights III

Evidence disclosure continues in the case. On January 25, 2021, the court issued an order of agreement agreeing to collective certification.

On September 20, 2021, the Delaware Supreme Court issued a ruling in the Brookfield Asset Management, Inc. Brookfield case that even fiduciary duty claims against controlling shareholders alleging overpayment or dilution of voting rights are derivative claims rather than dual claims. As a result of the outcome of the Brookfield case, the plaintiffs filed a motion on September 30, 2021 for leave to amend their complaint. The proposed amended pleadings make the same claims as the original pleadings, but define indictals I and II as fully derivative rather than dual.

The next day, the plaintiff filed a motion for summary judgment with defendants Kimbal and Jurvesson. The plaintiffs argued that the 2018 grant was invalid because it was conditional on shareholder approval, but the proxy statement did not disclose material information. For example, the plaintiffs argue that Tesla failed to disclose how achievable Tesla's management believed the milestone was to be achieved, nor did it adequately assess for shareholders the close professional and personal relationship between Ellen Price and Gracias and Musk. Kimbal and Jürvesson requested summary judgment on all counts, citing their role in the 2018 award process as little or non-existent.

While these motions were pending, on October 27, 2021, the parties agreed to discard the class action, dismiss the direct claims portions of Counts I and II, and voluntarily dismiss all claims against Kimbal and Jurvesson. The agreement retains the plaintiff's motion to allow the plaintiff to file an amended pleadings to change the action from a direct action to a derivative action pursuant to Rule 23.1 of the Rules of the Chancellor's Court. Taken together, these motions avoided the Gentile issue, which was at the heart of the original complaint.

The court approved the agreement on October 27, 2021. The remaining defendants sought summary judgment on November 19, 2021, filing a retrospective recognition theory on the grounds that Tesla shareholders received all material information prior to voting.

In light of the retirement of Deputy Justice Slights, the court changed the jurors on 12 January 2022. The Chamber held a status conference on 7 February 2022 and resolved the pending motions for modification and summary judgment in its judgment dated 24 February 2022. The court granted the plaintiff's motion to amend, but denied the plaintiff's crossover motion for summary judgment and expressed "doubts as to whether this lawsuit can be resolved on an indisputable factual basis."

The plaintiff filed an amended complaint on March 2, 2022. The court amended the trial schedule on August 12, 2022. The parties heard the case from November 14 to 18, 2022. The court heard post-trial oral arguments on February 21, 2023.

The post-trial oral arguments revealed several themes that needed further development. In a letter dated 22 February to counsel, the court requested a supplementary briefing. The parties completed their supplementary briefing on 11 April.

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