A Delaware judge’s decision to strike down the pay package that helped make Elon Musk the world’s richest man leaves Tesla’s board of directors with some tough decisions to make.
Chancellor Kathaleen St. Now the company’s directors must find a new compensation plan that can pass muster and satisfy Mr. Musk, who recently asked the board to significantly increase his Tesla ownership.
Tesla and Mr. Musk could appeal the court ruling. Mr Musk said on Thursday he would seek to incorporate the company in Texas, a state he believes could be more welcoming to business.
What about Mr. Musk’s stock options?
As part of a compensation package Tesla completed in 2018, Mr. Musk received options to buy 304 million shares that are now worth more than $50 billion. He has met the goals required to receive those options, but Mr. Musk does not appear to have converted them into Tesla shares. If he had, he would have been banned from selling them for five years.
Chancellor McCormick said in her ruling that 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 made Mr. Musk unimaginably rich. He owns about 411 million Tesla shares, worth about $78 billion. A securities filing last year said it had pledged 238 million shares for personal loans.
Can Tesla pack up and leave Delaware?
Mr. Musk, visibly angry, threatened to reincorporate Tesla in another state. On X, the social networking platform he owns, he he said Thursday that Tesla “will immediately proceed with a shareholder vote” to incorporate in Texas, where it has its corporate offices and a large factory.
Delaware is a popular place to incorporate companies because of its streamlined legal system. Cases are heard by judges instead of juries, and there is only one level of appeal – to the Delaware Supreme Court.
Mr Musk has founded X, his social media company, in Nevada, whose laws make it much harder to sue directors. That company, formerly called Twitter, was incorporated in Delaware before Mr. Musk bought it.
But his plan to move Tesla to Texas could face resistance from shareholders if they see the move as an attempt to reduce their power.
The relocation “doesn’t give him a magic ticket,” said Gregory Varallo, a lawyer in Wilmington, Del., who argued the case against Mr. Musk’s shareholder compensation package.
How might Tesla stock react?
If the stock options Tesla had given Mr. Musk in the 2018 package were canceled, the company would have fewer shares outstanding. This, in theory, would increase the value of shares owned by other individuals or businesses.
But any upside to that share price could be offset by investor fears that Mr. Musk might leave the company or become less focused on its operations. Tesla’s share price fell about 2% on Wednesday after Ms McCormick’s decision, which was released after the market closed on Tuesday.
In the long run, a company’s share price is determined by its earnings and cash flows. Tesla’s stock has more than halved from its high and is down more than 20 percent this year, largely because its profit margins have fallen and the company expects sales to grow much more slowly this year.
What can the Tesla board do?
Chancellor McCormick said Mr Musk played too big a role in shaping the terms of his pay deal and the board, which is legally bound to serve the best interests of all shareholders, was not independent enough from him. One director is his brother, Kimbal, and several others are longtime friends and collaborators. He also said the remuneration package was excessive and paid him much more than was necessary to motivate him to do a good job.
As a result, executives may need to make changes that will convince a judge that any new compensation package they award was drawn up in a lengthy negotiation between them and Mr. Musk. Any renewed pay deal may also have to pay him significantly less.
Tesla’s board needs to find a way to keep Mr. Musk focused on the business while exercising more control over his “erratic” behavior, said Kristin Hull, founder of Nia Impact Capital, an investment firm in Oakland, California.
“We want it to play a really important role,” said Dr. Hull, but added, “There have to be some checks and balances and that’s what this decision is about.” The fund holds a small number of shares.
Robyn Denholm, the chairman of Tesla’s board of directors, did not respond to a request for comment. Nor the other seven members of the Board of Directors.
Can Mr Musk face the decision?
Tesla and Mr. Musk can appeal to the Delaware Supreme Court, which some legal experts said would likely uphold the decision.
But some legal experts said lawyers for the company and Mr. Musk could try to argue that Ms. McCormick’s decision went too far and should be overturned. Mr. Musk’s lawyers, for example, could argue that he was not the controlling shareholder of Chancellor McCormick. He owned about 22 percent 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 high 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 appeal to the US Supreme Court, but it may struggle to get the high court to take up the case because it does not raise obvious constitutional or federal issues.
Lawyers representing Mr. Musk in the case did not respond to requests for comment.
What does this mean for Tesla as a company?
The decision would change Tesla’s approach to designing, building and selling cars only if it prompts Mr. Musk to leave the company or take a less active role. Mr. Musk has shown signs of concern. Before the decision, Mr Musk had asked Tesla’s board to increase his stake in the company to 25%, from 13%.
If he didn’t get what he was asking for, he said, he would work on robotics and artificial intelligence products elsewhere. Mr. Musk has already founded an independent artificial intelligence company called xAI. He also runs SpaceX and is the founder of Neuralink, which develops implants that allow people to control computers with their brains.
It’s hard to see how Tesla’s board could meet its demand for a much larger stake in the car company in light of the Delaware ruling.
Few, if any, CEOs are as closely identified with their products, or seen as an essential part of their companies’ success, as Mr. Musk. In her ruling, Ms McCormick argued that his status as a “superstar” chief executive had a downside. “It creates a ‘distortion field’ that interferes with board oversight,” he said.