If you move out without paying, can Musk's "sky-high salary defense war" be won?

Southern Weekly

2024-06-19 15:00Posted on the official account of Guangdong Southern Weekly

Musk's game with shareholders is not over.

On June 14, 2024, Tesla held its 2024 annual shareholders' meeting. Shareholders voted to approve all five of Tesla's proposals, including Musk's nearly $56 billion (more than 400 billion yuan) compensation and moving the company's domicile to Texas. The ballot campaign was directed against a Delaware court decision.

In January 2024, a judge in the Delaware Court of Chancery rejected the company's compensation package approved at the company's 2018 shareholder meeting. Musk immediately said on the social platform X that if the compensation package is not approved, the company will be moved from Delaware to Texas.

Supporters believe that Musk has completed the business tasks in accordance with the agreement and should receive the agreed amount of compensation. Opponents believe that this agreement is unreasonable, and the main reason why the shareholders' meeting passed the agreement is that Musk "covered the sky with one hand" in the board of directors and did not fully inform shareholders of information.

Can relying on shareholder votes change a court's previous decision? A senior legal source told Southern Weekend, "It is very difficult, it may not overturn the previous judgment of the court, and it may not even be enough for Xiao Ma to get this remuneration smoothly." ”

According to reports, shareholders have filed a new lawsuit, arguing that the second remuneration vote held on June 14 should also be ruled "invalid".

Musk's sky-high salary has caused an uproar. Visual China Diagram

250 times higher salary than peers

Elon Musk's compensation structure is rather rare. According to the agreement he signed with the board of directors in 2018, Musk usually receives 0 salary, and all the remuneration comes from option incentives.

According to the agreement, if Musk increases Tesla's market value from $50 billion to $650 billion in the next 10 years, he can unlock the corresponding stock options after completing each of the operating goals. After all is completed, Musk's shareholding can increase from the original 21.9% to 28.3%, equivalent to a market value of $56 billion.

"This is the largest potential compensation opportunity ever seen on the public market, and is orders of magnitude higher than the median of contemporary, peer compensation plans – 250 times." The Delaware Court of Chancery wrote in its 200-page judgment.

After the compensation plan was approved by the board of directors and the general meeting of shareholders, a minority shareholder who only owned nine Tesla shares took Musk to court. In January 2024, the court ruled to revoke the compensation package. At the shareholders' meeting on June 14, Musk initiated a second vote, and the plan was passed again.

Why are Delaware courts so "-for-tat"? There are two main reasons given in the judgment: the directors are not independent and the plan is not transparent.

The compensation package was not approved by the "independent" board. In the judge's view, Musk is the controlling shareholder of the company, and the judgment devotes a considerable amount of space to describing the personal relationship between the directors and Musk, as well as the economic dependence on Musk.

For example, Price, the chairman of the compensation committee in charge of negotiations, who and the venture capital fund he founded have a $75 million interest in companies controlled by Musk and have been friends with the Musk brothers for more than a decade, admitted to the court that his relationship with the two Musk brothers "had a huge impact on his career."

It is highly bound to Musk's personal level, making it difficult for board members to objectively decide on this compensation plan from the standpoint of small and medium-sized shareholders. Therefore, before the first shareholder meeting, Musk did not disclose his close relationship with these directors, which may lead to small and medium-sized investors misjudging the board of directors and them in the same camp, and finally approved the compensation plan.

Whether the board of directors is independent

Soon after the compensation package was announced, Tesla's development entered the "fast lane", with its market capitalization exceeding a historic $1 trillion in 2021. Tesla said that in the six years since Musk's 2018 compensation package was approved, he has created more than $735 billion in value for the company's shareholders.

Is the vote at the second general meeting of shareholders in accordance with the relevant legal provisions? According to Zhang Wei, deputy dean of the School of Law at Singapore Management University, much depends on what kind of fiduciary duty review standard the court will apply.

Under Delaware law, when a company has a controlling shareholder (Musk has been identified by the court as the controlling shareholder), a transaction decision with a conflict of interest with that shareholder, such as the payment of compensation, must be negotiated and approved by a fully independent special committee of the board of directors, and approved by a majority of minority shareholders.

"This requires the defense [Musk] to prove that the previous compensation package was completely fair to all shareholders." Zhang Wei pointed out to Southern Weekend that this fairness standard includes two factors: fairness in the transaction process and fairness in transaction price.

The first is the trading process. The court questioned Musk personally, as well as all members of the board of directors. The conclusion is that although the timing of the start of the compensation package negotiations was not chosen by Musk, Musk completely took the initiative in the subsequent negotiation process, and the board members had little "bargaining" power with Musk.

The compensation committee, which is made up entirely of Musk's friends and stakeholders, admitted to the court that they saw the negotiations as a process of "cooperative and collaborative" with Musk, rather than a-for-tat back and forth, making it difficult to conclude that the committee had taken responsibility for the interests of all shareholders.

Second, the sky-high compensation package is not comparable to that of any other company of the same kind. According to the minutes of the Tesla compensation committee, the purpose of the plan is to "retain" Musk and "make him a fully committed CEO" through appropriate incentives.

However, the judge found that the so-called goals were empty words for the purposes of this remuneration package. The obvious evidence is that while the compensation committee wants to make Musk a "committed CEO" through this plan, the plan allows Musk to step down as CEO and move to chief product officer.

"After Tesla's board of directors approved the plan, Musk devoted his energy to buying another internet giant, Twitter and other companies, and it is difficult to measure how much he cares about Tesla." Zhang Wei said.

Retail investors are in favor of it, institutions are against it

Most ordinary investors (retail investors) support Musk and cheer on social media for Musk's brave resistance to Wall Street. However, many institutional investors with more stakes have expressed opposition to this plan.

The California Civil Service Pension Fund, the largest public pension fund in the United States, has repeatedly expressed its opposition to Musk's $56 billion compensation package. In a May 2024 interview, the fund's CEO said: "This excessive compensation compared to executives at peer companies will severely dilute the equity of existing shareholders and reduce their shareholdings, and has nothing to do with Tesla's long-term profitability." ”

Norges Bank Investment Management (NBIM), which manages Norway's sovereign wealth fund, also announced in a statement a few days ago that it will vote against Tesla's CEO compensation plan. As of the end of 2023, NBIM holds 0.98% of Tesla's shares, making it the eighth largest shareholder of Tesla. NBIM opposed the compensation plan when it first voted in 2018.

Yuan Yuwei, a senior hedge fund manager, explained to Southern Weekend that similar large funds do not agree with the plan, because the oversized share increase is likely to dilute the value of stocks, and such pension and sovereign wealth funds pay great attention to the stability of assets, and it took only three years for Tesla's stock price to go from 2018 to its all-time high in 2021, and it took only three years to fall back to the recent market value of more than $500 billion.

The $56 billion bonus is an incentive for the company's short-term business growth, but in the long run, the company's sustained profitability has not improved significantly. The company's market value has fallen by more than half from its peak in 2021, and if nearly one-tenth of its market value were used to reward executives, it could hurt the interests of other shareholders. Yuan Yuwei said.

A company's executive compensation package is a typical commercial issue that the court should not interfere with lightly, but the court's scrutiny of fiduciary duty is essentially to protect shareholders, especially small and medium-sized shareholders.

In his ruling, the Delaware judge pointed out that the real reason for Musk's intention to get a large amount of compensation from Tesla is not that he needs incentives to improve the company's performance, but that he wants to get enough money from Tesla to realize his ambition of creating a "better future for mankind."

According to Tang's observations, Musk has recently shifted the focus of Tesla's business to autonomous driving and AI, thus shelving more affordable mass-market electric vehicles. Tang Feng is the QDII fund investment manager of a public fund in Shenzhen.

Since the compensation package was approved by the board of directors in 2018, Musk's companies have added two more. He currently runs or owns companies such as SpaceX, social media giant X, brain-computer interface Neural Connect, artificial intelligence company xAI, SolarCity, Tesla, and others.

Before the vote, Musk had publicly stated that if he could not obtain more than 25% of the voting rights for Tesla through the compensation package, he would move Tesla's ongoing AI development projects outside the company, that is, by other companies controlled by him. In addition, Musk also asked AI chip suppliers to switch their supply from Tesla to other companies controlled by Musk.

"This is equivalent to a threat, if the plan is not passed, Musk will divest the most promising AI business in the market, then Tesla is just a good electric car company, far from the current high valuation." Tang Feng said.

Tesla's current situation is not optimistic, the price war in the new energy vehicle market is intensifying, and Tesla's gross profit margin has been declining. According to the company's annual report, in 2023, Tesla will deliver 1.8086 million vehicles throughout the year, which can be "stepped on the line" to achieve the delivery target of 1.8 million vehicles.

"Under Delaware law, a shareholder's vote under threat may be invalidated." Zhang Wei said.

The Delaware Supreme Court accepted Musk's appeal request in April 2024, and if the Supreme Court finally upholds the previous claims of the Court of Chancery, then Musk will not only not receive a reward, but the motion to change the company's location may also be far away.

(At the request of the interviewee, Tang Feng is a pseudonym)

Southern Weekly reporter Xu Tingfang

Editor-in-charge: Gu Ce

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