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I’ll admit — based mostly on the varied headlines and articles I examine Elon Musk’s canceled compensation packet, I assumed it was a fairly easy case: Elon Musk acquired, by far, the largest CEO comp package deal in historical past, some individuals and a decide thought that it was far too large and the Tesla board was too near Elon for the package deal to be legit, it received canceled by mentioned decide, and Musk and firm determined they might transfer the company headquarters to Texas and re-approve primarily the identical package deal (with the vote finalizing in days).
However then, studying the feedback beneath one among our articles about it, a few readers began indicating that there was extra to it than that. All the time open minded, or attempting to be open minded, I noticed that the case was extra difficult than I sometimes noticed it summarized. There are a handful of fascinating factors that jumped out as information to me, though I used to be following alongside intently years in the past when the pay package deal was initially proposed and accredited. And that’s really the purpose, that shareholder by no means had sufficient data or truthful illustration in negotiations. I’m going to focus on a number of fascinating notes from the Delaware court docket choice letter in a bullet-point record beneath. Additionally, in between, I’m going to focus on a couple of factors from Musk and the board’s aspect that I believe many who’re in opposition to the pay package deal nonetheless are likely to ignore or overlook. That features one among their core arguments — the issue is the Delaware court docket has a retort. However first …
Because of Jonny_K for sharing the precise findings and rationalization of the court docket, and due to Karen for summarizing among the key under-discussed factors in a helpful method that broadened my perspective and piqued my curiosity. Right here’s a helpful remark from Jonny_K: “I posted this elsewhere but dang, folks, read the decision or at least the first few pages. Musk and the board were to say the least fast and loose with that pay package and less than truthful with the shareholders. The board represents the shareholders. They didn’t even try. There is way this things are supposed to be done. They didn’t do it.” And right here’s one from Karen: “You don’t have to read the whole thing — just at least read the first couple pages. TL/DR: if Tesla had just followed the rules, they could have used the vote to [shift] the burden, making the plaintiffs have to prove that it was unfair. Except Musk instead willingly chose to repeatedly lie his arse off in order to get the pay deal through. This rendered the vote ineligible for shifting the burden, leaving Tesla with having to prove that it was fair. Which simply didn’t fly, for a wide range of reasons (not just how outsized it was, and the fact that Elon was already heavily incentivized due to his wealth being tied up in Tesla, but also Tesla’s internal metrics showing that they would achieve the stock conditions regardless).”
Okay, now some straight bullet factors from the Delaware choice.
Why Elon Musk’s Document Tesla Compensation Bundle Was Voided By Delaware Court docket
- “With a $55.8 billion maximum value and $2.6 billion grant date fair value, the plan is the largest potential compensation opportunity ever observed in public markets by multiple orders of magnitude—250 times larger than the contemporaneous median peer compensation plan and over 33 times larger than the plan’s closest comparison, which was Musk’s prior compensation plan.” (emphasis added) That’s fairly wild how a lot bigger it’s than the median — 25 instances bigger can be wild, however 250 instances bigger? And the truth that Musk’s earlier package deal was the most important and this was 33 instances bigger is loopy in its personal proper.
- “Delaware law allows defendants to shift the burden of proof under the entire fairness standard where the transaction was approved by a fully informed vote of the majority of the minority stockholders. And here, Tesla conditioned the compensation plan on a majority-of-the-minority vote. But the defendants were unable to prove that the stockholder vote was fully informed because the proxy statement inaccurately described key directors as independent and misleadingly omitted details about the process.” (emphasis added) The overall argument — and one I’ve used and thought of most essential — is that Tesla shareholders already voted on the compensation package deal, so it’s a finished deal and Elon Musk ought to get his winnings. Nonetheless, the factors listed below are that the method was by no means carried out appropriately, shareholders didn’t have all the small print, and a few claims had been really unfaithful.
- “The concept of fairness calls for a holistic analysis that takes into consideration two basic issues: process and price. The process leading to the approval of Musk’s compensation plan was deeply flawed. Musk had extensive ties with the persons
tasked with negotiating on Tesla’s behalf. He had a 15-year relationship with the compensation committee chair, Ira Ehrenpreis. The other compensation committee member placed on the working group, Antonio Gracias, had business relationships with Musk dating back over 20 years, as well as the sort of personal relationship that had him vacationing with Musk’s family on a regular basis. The working group included management members who were beholden to Musk, such as General Counsel Todd Maron who was Musk’s former divorce attorney and whose admiration for Musk moved him to tears during his deposition. In fact, Maron was a primary gobetween Musk and the committee, and it is unclear on whose side Maron viewed himself. Yet many of the documents cited by the defendants as proof of a fair process were drafted by Maron.” In different phrases, the board members had been presupposed to be unbiased from Musk and representing shareholders, however they weren’t. Actually, it is a key matter at Tesla that the choice letter said earlier had been a tough matter for the courts for years. “The plaintiff thus forces the question: Does Musk control Tesla? Delaware courts have been presented with this question thrice before, when more adroit judges found ways to avoid definitively resolving it.” (emphasis added) - “Given the collection of people tasked with negotiating on Tesla’s behalf, it is unsurprising that there was no meaningful negotiation over any of the terms of the plan. Ehrenpreis testified that he did not view the negotiation as an adversarial process. He said: ‘We were not on different sides of things.’ Maron explained that he viewed the process as ‘cooperative’ with Musk. Gracias admitted that there was no ‘positional negotiation.’ This testimony came as close to admitting a controlled mindset as it gets. And consistent with this specific-to-Musk approach, the committee avoided using objective benchmarking data that would have revealed the unprecedented nature of the compensation plan.” In different phrases, the Tesla board was not negotiating on the behalf of shareholders for the good thing about shareholders. They had been simply rubber-stamping no matter Elon dropped at them.
- “In credit to these witnesses, their testimony was truthful. They did not take a position ‘on the other side’ of Musk. It was a cooperative venture. There were no positional negotiations. Musk proposed a grant size and structure, and that proposal supplied the terms considered by the compensation committee and the board until Musk unilaterally lowered his ask six months later. Musk did not seem to care much about the other details. They got ironed out.” Basically the identical level as above: The board was simply rubber-stamping no matter Elon dropped at them. In different phrases, Musk controls Tesla — an unbiased board of administrators doesn’t.
The Retort … Retorted
On the flip aspect, the argument from Tesla shareholders who assist the earlier package deal and giving Elon Musk billions of {dollars} value of shares once more is fairly easy: however look how a lot Tesla inventory grew, so all of us gained! The court docket summarizes it like this: “The defendants offered Musk an opportunity to increase his Tesla ownership by about 6% (from about 21.9% to at most 28.3%) if, and only if, he increased Tesla’s market capitalization from approximately $50 billion to $650 billion, while also hitting the operational milestones tied to Tesla’s top-line (revenue) or bottom-line (adjusted EBITDA) 6 growth. According to the defendants, the deal was ‘6% for $600 billion of growth in stockholder value.’” Certainly — that’s the large argument in protection of the package deal, and it’s a convincing argument on the floor. However … there’s a flaw within the argument. “Swept up by the rhetoric of ‘all upside,’ or perhaps starry eyed by Musk’s superstar appeal, the board never asked the $55.8 billion question: Was the plan even necessary for Tesla to retain Musk and achieve its goals?” (emphasis added) Certainly — did Elon Musk have to be given virtually $56 billion with a purpose to do his job as CEO of Tesla? Would Musk not have finished the identical job at Tesla with a extra cheap pay package deal? For that matter, one thing the court docket doesn’t even ask, may another person — like JB Straubel — have achieved the identical targets in the event that they had been CEO as a substitute?
“The defendants insisted that the plan worked in that it delivered to stockholders all that was promised, but they made no effort to prove causation. They also made no effort to explain the rationale behind giving Musk 1% per tranche, as opposed to some lesser portion of the increased value. None of these arguments add up to a fair price.”
And I’ll add a bit extra right here. What did Elon Musk do along with his winnings? As we all know, he used billions of {dollars} to purchase Twitter. He offered loads of Tesla inventory all of the sudden with a purpose to try this, which tanked the inventory, and it has not recovered. He received centered on loads of different issues at Twitter (now “X”) from that, with many associated public statements and choices massively hurting the Tesla model. In different phrases, one may argue that the unprecedented (by 33×, or 250× the median) compensation package deal led Musk to distraction, hubris, and actions counterproductive to his function because the CEO of Tesla. One may argue that the compensation package deal has ended up deeply hurting Tesla, past diluting Tesla shares.
Extra Studying, and Ramifications of This Week’s Vote
The quotes above are from the primary 8 pages of the post-trial opinion. It’s a 201-page doc. For those who assume the decide didn’t give a radical rationalization for the choice and again it up meticulously in one of many greatest circumstances the court docket has ever seen, I encourage you to learn the entire letter.
Will the brand new Texas-based compensation package deal be accredited by shareholders? I don’t know. Whether it is, although, my understanding is that may imply nice dilution of Tesla shares for shareholders (in comparison with not approving it). And it’ll implicitly present approval of Elon Musk’s actions the previous a number of years as they relate to Tesla and what Musk has finished with Tesla inventory he was granted after which offered. One has to marvel the place all of that may lead subsequent….
If it isn’t accredited, I don’t assume Tesla shareholders would promote their inventory. Some would possibly purchase in, or purchase in once more. Nonetheless, may it result in Elon Musk leaving Tesla? Who is aware of, however it’s a particular risk. If that did occur, many assume it might be good for the way forward for Tesla. Nonetheless, I believe a a lot bigger share of Tesla shareholders can be very sad with that and there’s a very good likelihood a large portion of them would promote their inventory. I don’t know. A lot is on the road this week. And I don’t have any clear advice for anybody on what they need to do or favor relating to this matter.
