Finding a way to get Elon paid
Tesla board must rethink chief executive’s compensation
A Delaware judge’s decision to void the pay package that helped make Elon Musk the world’s richest person leaves Tesla’s board of directors with some difficult decisions to make.
Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery on Tuesday ordered Tesla to cancel stock options awarded to Musk, the electric car company’s chief executive, worth about US$50 billion ($81 billion).
Now the company’s directors must figure out a new compensation plan that can pass legal muster and satisfy Musk, who recently demanded that the board substantially increase his ownership of Tesla.
Tesla and Musk could appeal the court decision.
Musk has also indicated he might seek to incorporate the company in another state that he believes could be more hospitable to businesses, such as Texas.
What of Musk’s stock options?
As part of a compensation package Tesla finalised in 2018, Musk received options to buy 304 million shares that are now worth more than US$50b.
While he has met the goals needed to receive those options, Musk does not appear to have converted them into shares of Tesla.
If he had, he would be banned from selling them for five years.
McCormick said in her decision Tesla must cancel the options, although she has not yet issued a formal order requiring the company to do so.
Even without the stock from that package, Tesla has made Musk unimaginably rich. He owns roughly 411 million Tesla shares, worth about US$78 billion. A securities filing last year said he had pledged 238 million shares for personal loans.
Can Tesla just leave Delaware?
Musk, clearly angry, threatened to reincorporate Tesla in another state. On X, the social media platform he owns, formerly known as Twitter, he asked his followers to vote on whether Tesla should incorporate itself in Texas, where it has its corporate offices and a large factory.
“I recommend incorporating in Nevada or Texas if you prefer shareholders to decide matters,” he said.
Delaware is a popular place for companies to incorporate because of its streamlined legal system. Cases are heard by judges instead of juries, and there is only one layer of appeal — to the Delaware Supreme Court.
Musk has incorporated X in Nevada, whose laws make it much harder to sue directors. But a move there would require a vote by shareholders, some of whom might not want the company to move to a state where they have less power.
Relocation “doesn’t give him a magic ticket,” said Gregory Varallo, a lawyer in Wilmington, Delaware, who argued the case against Musk’s pay package for shareholders.
How might Tesla’s stock react? If the stock options Tesla had awarded Musk in the 2018 package are voided, the company would have fewer shares outstanding.
That, in theory, would increase the value of the stock owned by other people or businesses.
But any lift this gives the stock price could be offset by investor fears that Musk might leave the company or become less focused on its operations. Tesla’s share price fell by about 2 per cent on Thursday after McCormick’s ruling, which was released after the stock market had closed on Wednesday.
Over the long term, a company’s share price is driven by its profit and cash flow. Tesla has slumped by more than half from its high and is down more than 20 per cent this year largely because its profit margins have plunged and the company is expecting sales to grow much more slowly this year.
What can the Tesla board do?
McCormick said Musk played too great a role in devising the terms of his pay deal, and the board, which is legally obligated to serve the best interests of all shareholders, was not sufficiently independent of him.
One director is his brother, Kimbal, others are old friends and associates. She also said the pay package was excessive and paid him much more than was needed to motivate him to do a good job.
As a result, directors might have to make changes that will convince a judge that any new compensation package they award him was put together in an arms-length negotiation between them and Musk.
Any revamped pay deal might also have to pay him a lot less.
The Tesla board needs to find a way to keep Musk focused on the business while also exerting more control over his “erratic” behaviour, said Kristin Hull, founder of Nia Impact Capital, an investment firm in Oakland, California.
“We want him to play a really important role,” Hull said, but added, “There need to be some checks and balances and that’s what this decision is all about.” The fund owns a small number of shares.
Robyn Denholm, the chair of Tesla’s board, did not respond to a request for comment.
Nor did the other seven members of the board.
Can Musk fight the decision?
Tesla and Musk can appeal to the Delaware Supreme Court, which some legal experts said would likely uphold the ruling.
But some legal experts said lawyers for the company and Musk could try to argue McCormick’s ruling went too far and should be reversed. Musk’s lawyers, for instance, might argue that he was not the controlling shareholder that McCormick suggested he was. He owned about 22 per cent of Tesla when the package was devised, not giving him enough votes to control the company. The chancellor also said his “superstar” status gave him undue influence on the board.
“The Supreme Court could go either way” on that argument, said Michal Barzuza, a law professor at the University of Virginia, referring to the Delaware Supreme Court.
Tesla could also seek to take its appeal to the US Supreme Court, but might have a tough time getting the high court to take the case because it does not raise any obvious constitutional or federal issues.
Lawyers who represented Musk in the case did not respond to requests for comment.
What does this mean for Tesla?
The decision would change Tesla’s approach to designing, manufacturing and selling cars only if it prompts Musk to leave the company or play a less active role. Musk has shown signs of being restive. Before the decision, Musk had demanded that the Tesla board increase his stake in the company to 25 per cent, from 13 per cent.
If he didn’t get what he was asking for, he said, he would work on robotics and artificial intelligence products elsewhere. Musk has already established an independent artificial intelligence company called xAI. He also runs SpaceX and is the founder of Neuralink, which is developing implants allowing people to control computers with their brains.
It’s hard to see how the Tesla board could meet his demand for a much bigger stake in the car company in light of the Delaware decision.
Few, if any, chief executives are so closely identified with their products, or seen as such an essential part of their companies’ success, as Musk. In her decision, McCormick suggested his status as a “superstar” chief executive has a downside.
It “creates a ‘distortion field’ that interferes with board oversight,” she said.