Tesla shareholder Richard Tornetta brought a lawsuit against Elon Musk, CEO of both Tesla and SpaceX, and acting CEO of Twitter, alleging that the $55 billion pay package which helped make Elon Musk the world’s richest person, was excessive and violated the Tesla Board’s financial duties. The case Tornetta v. Musk, 2018-0408, Delaware Chancery Court (Wilmington) further alleges that the Tesla board who gave Elon Musk the award was stacked with Elon Musk’s personal friends and “yes-men”. James Murdoch who has been on the board of Tesla since 2017 and is the son of News Corp founder, Rupert Murdoch, testified that the board was aware Elon Musk was using Tesla engineers to work at Twitter. Musk testified that he did not think that he was using Tesla’s assets, by using its engineers to work at Twitter, stating that there’s 120,000, employees, 50 of whom are Tesla engineers, working at Twitter, arguing the Court should disregard the testimony of the board members. The package includes more than 100 million Tesla stock options to be doled out over 12 periods, but only if the car company hit certain performance goals, according to court filings. The company vastly exceeded those metrics, and Tesla’s market capitalization jumped from $53 billion to more than $690 billion over four years, the filings show. Tornetta filed his civil actionn against Musk and other Tesla directors on behalf of the company. That means any money recovered will go back to Tesla and not to Tornetta.
So does Richard Tornetta have a case? The 9th Circuit held in 2012 that while corporation may exist separate from their owners, one must separate transactions, assets and actions from personal accounts to avoid piercing the corporate veil. Wachovia Securities, LLC v. Banco Panamericano, Inc., 674 F.3d 743 (9th Cir. 2012) In this case, Loop was essentially a shell corporation for its owners. Loop’s assets were basically raided after in incurred its debt and distributed amongst the owners.The Court held that the compensation of Nichols and Jahelka are just one of the many instances of diversion of assets after incurring the Wachovia debt. Loop’s failure to timely file tax returns or not at all, among its other actions, such as failed accounting, also sdhowe that Loop failed to observe corporate formalities. Loop failed to keep arm’s length relationship with its related entities and with zero documentation as to the Banco-Loop Loan, and the entities failed to respect the normal corporate conditions and form. Wachovia did not know that Loop’s assets were co-mingled by Banco, that Loops funding were tightly controlled by its owners, and that Loop would drain itself of assets when third-party debts would arise. Loop made fraudulent transfers. Based on the aforementioned and the evident fraud which is an automatic way of piercing the corporate veil and the payments to Jahelka and Nichols, the 9th Circuit held that the corporate veil should pierced and Greenblatt, Jahelka, and Nichols should be held personally liable.
This sounds simlar to the instant matter regarding Tornetta and Musk. A co-mingling of company assets while Musk simultaneously drained Tesla of stock. Tesla (TSLA) stock dropped this past Wednesday after CEO Elon Musk disclosed Tuesday evening he sold shares worth $4 billion in the first two weeks of November. Musk sold 19.5 million shares for $3.95 billion on Nov. 4, 7 and 8, according to SEC filings late Tuesday. The decision to sell some of his Tesla stock comes as Musk has finalized his $44 billion purchase of Twitter. Here, Musk could be seen by the Court to have liquidated Tesla value to increase Twitter investing, while simultaneously co-mingling the companies assets, which per Wachovia, would essentially pierce the corporate veil, and join the companies as one, holding Musk accountable for any loss to shareholders who were unaware of the $55 billion pay package. Investors have called Elon Musk the “boy who cried wolf” after he dumped the stock, promising his investors he wouldn’t sell any more stock on April 28, 2022. Delaware Chancery Court Judge Kathaleen St. J. McCormick — who was overseeing Musk’s Twitter litigation — will review testimony about his Tesla pay package and decide whether it amounted to a waste of corporate assets. McCormick must decide whether Musk was acting like a controlling shareholder, even though his 17% holding of Tesla stock is below the 50.1% threshold, according to Fisch. That determination plays a role in how his compensation package is viewed under Delaware law. Musk is scheduled to testify along with current Tesla directors James Murdoch and Robyn Denholm, and ex-board member Antonio Gracias.
