Billionaire inventor Elon Musk is in the middle of several legal conflicts charging that he keeps his own interests before those of Tesla’s shareholders.
Tesla shareholders have brought complaints against Musk, the company, and the rest of its board. One is challenging the terms and conditions of a compensation package that could result in paying him stock worth more than $50 billion over ten years. That could propel him to becoming the world’s richest man. The other alleges that he engineered Tesla’s 2016 purchase of SolarCity — another company in which he was the largest shareholder — mainly as a bailout of the distressed solar panel company.
Tesla like other automakers is the defendant in uncountable other lawsuits. And shareholder suits are not uncommon for all main companies. But these are giving new attention to questions about the interconnecting nature of Musk’s several diverse interests, which also comprises of space exploration company SpaceX. Regardless of the efforts of Musk’s lawyers, neither suit has been discharged by the courts. That could be bad news for Tesla and Musk, possibly disturbing the determined goals he has established for his various companies.
“They are interruptions at a time they don’t need distractions,” said tech specialist Gene Munster, managing partner at Loup Ventures.
Tesla spokesperson and attorneys say the suits are without worth and Tesla will forcefully contest them and expects the cases.
The first lawsuit questions the company’s acquisition of SolarCity, the solar panel, and the battery company that Tesla purchased for $2.1 billion. Musk was chairman and the main shareholder of SolarCity, a company that was operated by his cousins at the time of the buying.
In a filing that was opened on Monday, accusers claimed that at the time the deal closed, Ernst & Young, SolarCity’s auditor, suspected SolarCity could stay in business as a “going concern” if it continued as a separate company.
According to the filing, stockholders in SpaceX pushed for SolarCity to refund money that SpaceX had lent it, creating a cash-crunch at SolarCity. The litigation charges that cash crunch made Tesla’s purchase more of a “bailout” of one of Musk’s companies than a strategic merger that would assist Tesla, as Musk reasoned.
“As an individual entity [SolarCity] will not have enough cash to meet its responsibilities as they come due,” the filing quotes breakdown of SolarCity prepared by Ernst & Young. But in response to a request for comment, Tesla said Ernst & Young’s concerns cited in the shareholders’ suit were from a previous draft, not the firm’s final investigation.
“These allegations are based on the allegation of plaintiff’s lawyers looking for a payday, and are not representative of our shareholders who back our mission and eventually voted in favor of the purchase,” said a declaration from Tesla. “The claims made in the plaintiff’s brief are misleading and false.”
Munster said it’s not uncommon for companies, mainly tech companies, to be facing a cash crunch at the time they are acquired by a more prosperous, deeper-pocketed buyer. It doesn’t make those purchases wrong, he said. But the fact that Musk was the prime shareholder raises questions that Tesla doesn’t need to be engaging with right now, Munster said.
“Make the purchase in solar, I think it makes sense,” said Munster. “But find somebody else to buy, not somebody he wasn’t invested in.”
The other shareholder lawsuit questions Musk’s pay package. If Tesla attains certain performance thresholds, mostly an increased market value, Musk will get extra shares of Tesla worth billions. He is presently paid nothing.
The lawsuit questions a compensation package that Musk was allowed last year by Tesla’s board. The package was worth $2.6 billion over 10 years, using accounting approaches for estimating the cash value of stock options. But if Tesla’s market value expands just as the payment plan expects, those stock awards could be valued more than $50 billion. Shareholders permitted the reimbursement package in March 2018.
Telsa, which still has to post an annual profit, did not meet any of the performance marks last year, so Musk received no benefit. In May, Musk tweeted that after paying for Tesla expenditures, he was actually at “net negative” compensation.
Usually, suits litigating compensation packages are dismissed by the courts, particularly if there is a shareholder vote.
Nevertheless, the judge in the case said the reasons against the pay package were adequate to be “very outer margins of adequacy.” He stated that “it is reasonably conceivable the award is unfair.” Thus the suit is still alive.
Tesla has said that if Musk gets a huge bonus from the compensation package, it will be because the worth of the company has increased remarkably, profiting shareholders. It said that’s why shareholders overpoweringly accepted the deal. In justification of the pay package, a Tesla representative indicated to the unconvincing nature of the judge’s decision.
Tesla is the subject of numerous other lawsuits as well, as are nearly all automakers. But these shareholder suits are getting special attention because they are inquiring about the intentions of the company’s superstar CEO.
Furthermore, to the shareholder suits against Tesla, Musk is also coping with a federal defamation lawsuit from Vernon Unsworth, a rescue worker who help out save a Thai youth soccer team from a flooded cave in 2018.
Even though the young soccer players were still stuck in the flooded cave, attracting global attention, Musk advised that the best way to rescue them would be a ‘kid-size” submarine that engineers on his staff created. Unsworth stated that the submarine, which was not used in the rescue, had no possibility of working. Unsworth called Musk’s sub a “PR stunt.”
So Musk made an unproven tweet, which he since removed, in which he called Unsworth a “pedo” guy, proposing Unsworth was a pedophile. Ultimately, Musk deleted the tweet and issued a request for forgiveness. But last September, Unsworth filed suit against Musk.
Some time ago, Musk’s lawyers filed a motion in the case, debating the suit should be terminated even if the Unsworth is not a paedophile. They claimed that “pedo guy” is usually used in Musk’s home country of South Africa to mean “creepy old man.”
“He intended his statements related to Mr Unsworth to be schoolyard mocking and not depictions of fact,” his attorney said in their motion.