DOVER, DEL. -- A Delaware judge on Monday ordered lawyers representing Tesla Inc. directors to turn over certain communications that CEO Elon Musk may have shared with the company's top in-house attorneys before the board approved a compensation plan in 2018 that could net Musk more than US$50 billion.
The ruling by Vice Chancellor Joseph Slights Jr. came in response to a motion to compel filed on behalf of shareholders who have accused Musk and Tesla's board of directors of breaching their fiduciary duties to the company and its stockholders, granting unjust enrichment to Musk and wasting corporate assets.
While granting the plaintiffs access to certain documents that Musk either sent or received, Slights denied access to a broader range of other documents that defence attorneys have argued are similarly protected by attorney-client privilege.
Slights said documents that Musk shared with Tesla general counsel Todd Maron or deputy general counsel Jonathan Chang before the board signed off on the compensation plan should be provided to the shareholder plaintiffs.
The plaintiffs have argued that Chang and Maron, who was Musk's former divorce attorney, worked to advance Musk's interests and negotiated on his behalf against the board's compensation committee.
"Leveraging his control, close personal relationships, and reputation for retribution, Musk co-opted Maron and Chang to help him structure the plan free from committee involvement," plaintiffs' attorneys wrote in asking Slights to force the company to turn over documents.
"Musk and his agents handed the committee a fully-baked plan," they added.
While Slights agreed that communications directly involving Musk should be disclosed, he refused to order defence attorneys to turn over other communications among board members, Chang and Maron, and an outside law firm.
The judge said there was no basis for him to order the production of documents that may be protected by attorney-client privilege when the information might be available from other sources. He noted that Musk, Maron, Chang and compensation committee chair Ira Ehrenpreis have yet to be deposed in the case.
The plaintiffs argued in their motion to compel that Tesla was improperly shielding hundreds of documents that Maron or Chang shared with the compensation committee and its advisers.
Attorney Gregory Varallo told Slights on Monday that the plaintiffs in the lawsuit, which was filed in 2018, still don't have an answer to a simple question: "Whose idea was the largest compensation plan ever designed?"
"If you read the record to date, no one seems to know," said Varallo.
"There was quite a lot of sausage-making taking place before this was even a twinkle in the eye of the compensation committee," he added.
Vanessa Lavely, an attorney representing the Tesla directors, told Slights that the board followed "a robust process" to develop and approve the compensation plan.
"There was absolutely no rubber-stamping here, and the defendants look forward to the opportunity to present this record to the court," she said.
In 2019, Slights refused to dismiss the breach-of-duty claims against Musk and Tesla directors, and an unjust enrichment claim against Musk.
Under Delaware's "business judgment" rule, courts typically give strong deference to a corporate board's decision-making unless there is evidence that directors had conflicts or acted in bad faith. If a plaintiff is able to overcome the business judgment rule's presumption, the board's action is then subject to an "entire fairness" analysis, which shifts the burden to the corporation to show that the deal involved both fair dealing and fair price.
Slights said that because the plaintiffs had adequately pleaded that Musk was a controlling shareholder and had a conflict of interest, the case lent itself to "heightened judicial suspicion."
Under the plan, Musk stands to reap billions if the electric car and solar panel maker hits ambitious market capitalization and operational milestones. For each of 12 milestones the company achieves, Musk, who already owned more than 20 per cent of Tesla when the plan was approved, would get stock equal to 1 per cent of outstanding shares at the time of the grant.
Each milestone includes growing Tesla's market capitalization by US$50 billion and meeting aggressive revenue and pretax profit growth targets. Musk would receive the full benefit of the pay plan, US$55.8 billion, only if he leads Tesla to a market capitalization of US$650 billion and unprecedented revenues and earnings within a decade.
