A Recent Shareholder Vote Doesn’t Mean What Musk Thinks it Means.
Earlier in the year Elon Musk lost a major shareholder suit in a Delaware court. A judge “tossed out his record-breaking $56 billion Tesla pay package”. That’s a $56 billion-with-a- ‘B’ pay package that would have been the largest in history. Over forty times larger than the highest compensation package to date.
To put it in context with the rest of the business universe “. . . Equilar, an executive pay research firm, estimated that Musk's package was around six times larger than the combined pay of the 200 highest-paid executives” in the world..
The package granted stock options for some 304 million shares that would allow Musk to buy at about $23/each. At the time of the court’s decision, shares of Tesla were trading at $191.59. Musk earned each stock option award when Tesla hit escalating financial and operational goals over the years.
The package was put in place in 2018 and immediately challenged by shareholders.
The Delaware Shareholder Case
In a two-hundred-page opinion, Judge Kathaleen McCormick eviscerated the details of the incentive package. She called the compensation “an unfathomable sum that was over the top, unnecessary to secure Musk’s services and unfair to other shareholders because of the dilutive effect on their holdings.”
We think that, despite most of the rationale given by the judge, the size of the pay package was the driving force in her decision. Her previous contact with Musk – she was the judge who enforced the Twitter sale on him – probably didn’t help much.
In other words, there are reasons to not just take the ruling on its face value.
That said, we also note that the real venom in the decision was aimed almost exclusively at Tesla’s board of directors for their actions and inactions.
These were the people who approved the package in the first place.
Well, ‘approved’ is too strong a word, it was, according to the judge and the original complaint (filed by a shareholder days after the package was announced) more like ‘rubberstamped.’
The Tesla Board
Over the last six years the Tesla board has been roundly criticized – not to mention satirized – for failing to oversee “its combative, headline-making CEO as he fought regulators, invested in and ran other multi-billion-dollar corporations.”
Judge McCormick noted that “the lead director negotiating for Tesla, had a 15-year business relationship with Musk. Another member of the working group had a 20-year relationship and regularly went on holiday with Musk’s family. A third member was the company’s general counsel, Todd Maron, who was Musk’s former divorce lawyer and “whose admiration for Musk moved him to tears during his deposition.” Additional directors included Elon Musk's brother, and James Murdoch, son of media tycoon Rupert Murdoch, who had “close personal ties with the CEO.”
The board had eight members including Musk, if you’re counting at home, that’s six sure votes on everything.
In other words, what Elon the CEO asked for, Elon the CEO and shareholder got.
The Shareholder Vote
Tesla’s shareholders voted in mid-June to reinstate Musk’s pay package – now worth about $44.9 billion after Telsa stock fell over the last few months. Musk was ecstatic, “It’s incredible. I think we’re not just opening a new chapter for Tesla; we’re starting a new book.”
Not quite.
The shareholder vote was reaffirming for Musk, but it doesn’t mean that his pay will be reinstated – it is still up to the Delaware courts where Judge McCormick’s decision still stands.
The question is: will the judge reconsider her decision based on the shareholder vote? Musk and Tesla will argue that the shareholders were fully informed before the vote while aware of the judge’s previous decision and yet chose to have Musk’s pay package reinstated.
Of course, the shareholder-plaintiffs in the lawsuit will argue that the vote has no impact, isn’t legally binding, and does not change any of the facts established during the trial.
Should the judge not reconsider or opts to uphold her decision, Musk will appeal.
The odds are high that the pay package will remain in limbo for some time to come.
Meanwhile, Musk’s legal woes grow . . .
A New Shareholder Action
It’s a pretty good bet that one major Tesla stockholder – Employees’ Retirement System of Rhode Island – did not vote in favor of the Musk pay package. A safe assumption because two days before the vote, they sued Musk accusing him of making “billions of dollars by selling Tesla stock using insider information.” They are asking the court to force Musk to return “unlawful profits” to Tesla.
The Employees’ Retirement System alleges that “Musk and his brother, Kimbal Musk, a Tesla director, sold a combined $30 billion in the electric vehicle maker’s stock between late 2021 and the end of 2022, cashing in before news that would cause the stock to fall became public. . . Musk sold the shares at artificially inflated prices by concealing his plan to use the proceeds to buy social media platform Twitter, which he later renamed X . . . Musk also sold Tesla stock when he knew that deliveries of Tesla cars had fallen far below public projections.”
The Employees’ Retirement System of Rhode Island holds about 140,000 shares of Tesla, putting their stake at around $24 million.
Quick Lesson
You have to wonder if this would ever have been an issue – such a public one at that – had Tesla simply turned to the shareholders in the first place to approve the pay package? Telsa reports that – without Musk voting his shares – the package got 70-80% approval from the shareholders.
