It’s a tough gig portraying the world’s third-richest person as a victim, but Tesla Inc.’s board of directors are giving it a go.1 The question is whether the company’s institutional shareholders will be intimidated into buying that story at a pivotal vote on June 13.
Chief Executive Elon Musk had a vast options grant, awarded by the board and ratified by a 73% shareholder vote in 2018, voided by the Delaware Court of Chancery in January. Despite Tesla having hit the milestones attached to it, the court sided with a shareholder who alleged that the award, worth a nominal $56 billion when granted, was excessive. Now the board is urging shareholders to re-ratify the grant, saying it’s unfair that “Elon has not been paid for any of his work for Tesla for the past six years.” The options, if exercised, would dilute the rest of the shareholder base by a lot, about 8 percentage points, all else equal. In addition, shareholders are being urged to approve reincorporating Tesla in Texas, to which it moved its head office in late 2021, thereby subjecting it to the corporate laws of that state, rather than Delaware’s.
The fairness issue is misdirection. Yes, Tesla hit its milestones on revenue, profit and market capitalization, the latter surging from $53 billion when shareholders originally approved the award to a peak of $1.24 trillion in November 2021. Everyone got rich and a deal’s a deal, essentially. Except, in the eyes of the Delaware court, that deal was — using language every Tesla investor surely understands — “a self-driving process” launched by Musk himself and tainted by a conflicted process that left shareholders ill-informed and disadvantaged when they voted. Besides Musk, the vaunted victim, that fundamental flaw is on the board itself.
What counts as excessive for CEO pay is subjective. Still, even at the lower current nominal value of $46 billion, the award equates to 136% of the entire cumulative net profit Tesla has made since shareholders approved it. Plus, the value of Musk’s existing stake in Tesla (absent the options) has increased almost sevenfold, or by about $61 billion, since March 2018 — and that’s not counting the tens of billions he made from selling about a fifth of his stake along the way.
The counterargument is that he only made that money because the market cap soared so much on his watch, to everyone’s benefit. Part of that was just luck, though, with every major cleantech sector soaring in 2020 and 2021 as a green bubble inflated, juiced in part by the election of President Joe Biden.
If, instead, one argues that luck played no part, then surely Musk also owns the subsequent collapse in Tesla’s market cap; wiping out about $678 billion. Indeed, Musk’s heavy selling of his own stock in 2022, when he was engaged in his expensive takeover of Twitter Inc., coincided with a sharp drop in Tesla’s price. The current market cap, $557 billion, is now back below the $650 billion target at the high end of the options-award milestones.
There is a mercenary aspect to this for institutional shareholders, who are tasked with maximizing their clients’ profits rather than their sense of fairness. If they sold stock during Tesla’s epic rally in 2020 and 2021, then the Delaware decision essentially gave them a freebie: All the gains without dilution from re-ratifying Musk’s options. In addition, those shareholders also account for less of the vote anyway.2 Meanwhile, if you were instead from the school of diamond hands or raised your stake, you have even less reason to re-ratify. Calpers, one of Tesla’s top 30 shareholders and whose CEO recently indicated opposition to the options package, has doubled its position since the end of 2019, according to data compiled by Bloomberg.
Moreover, the original rationale for the award — to keep Musk engaged with Tesla’s success — is somewhat absurd: How can a business owner with a stake valued at roughly $72 billion be feeling unmotivated? Moreover, Musk has undermined the rationale here further with his own actions, not least the painfully visible distraction of buying, reshaping and, let’s not forget, using Twitter, now X. Only a week or so ago, Musk raised $6 billion for a new artificial intelligence startup, xAI. That is despite tweeting only five months ago that he wasn’t even discussing such a move and having also recently doubled down on the narrative that Tesla is an AI company rather than just a carmaker. To cap it off, CNBC reported Tuesday that emails obtained from Nvidia Corp. show Musk diverting chips intended for Tesla to X and xAI first (Musk offered this explanation, citing logistical reasons).
You could argue that Musk is making the case — in a very Muskian way — for why he needs a bigger incentive in order not to damage his EV company’s prospects. Back in January, he raised the prospect of taking his AI ideas elsewhere unless he got 25% control of Tesla. In resisting such bullying tactics, however, institutional shareholders should think about the hollowness of this threat. Musk’s existing Tesla stake, of which 57% was pledged as collateral for his personal debts as of the end of March, remains his single largest and most liquid pool of wealth. Its value rests increasingly on his own narrative of AI-related breakthroughs and if he purposely undercuts that, his ranking among the world’s billionaires will surely suffer.
On the other hand, Musk’s tweet serves to highlight the tawdriness of a board pushing this grant even as it fails to address the holes in Tesla’s governance that both saw the original award struck down and also enable the CEO to blithely threaten the shareholders the board is nominally charged with representing. Compounding this is the call to change Tesla’s state of incorporation; a move the board says follows years of deliberation and a rigorous analysis, involving a special committee of one, but which also definitely follows Musk losing out in Delaware, denouncing incorporation there and then polling his followers on X about it.3
To re-ratify this award would be not only to unnecessarily give away a chunk of the company, it would be to allow a board to get away with its own failings. Tesla’s retail investors may be fine with this, but institutional shareholders — 54% of the float, according to data compiled by Bloomberg — should not be. By all means, the board could come up with a new package with updated targets that look forward rather than back. My humble suggestion is to take Musk at his word on a prior claim. Back in October 2022, while in the middle of selling a chunk of his own stake, Musk speculated that Tesla could one day be worth double the market cap of Saudi Arabian Oil Co., currently implying something like $3.6 trillion. A stretch goal, obviously. Maybe make it just half that — to be fair.
1. Tesla's Chief Executive Elon Musk was worth $201 billion as of June 4, 2024, according to the Bloomberg Billionaires Index, putting him in third position. However, $46 billion of that relates to the Tesla options he holds that are now in doubt following a court judgment and which are a big theme of this particular column. Subtract those, and Musk falls to fifth position. Still seems like a big ask to play the victim card, but perhaps easier than when you're in the top three?
2. A useful example of this is Baillie Gifford & Co., a notable backer of Tesla which held more than 200 million shares at the end of 2019, making it then the second-largest shareholder in the company behind Musk himself. It sold heavily through the rally of 2020 and 2021, though still suffered heavy losses on its remaining stake in 2022. As of the end of March, it held 17.8 million shares across various funds.
3. One interesting facet of this particular proposal is that the board justifies it in part because Tesla’s identity is becoming “inextricably tied” with Texas. I ran a screen on the Bloomberg Terminal of companies headquartered in Texas, returning 908 results. Of those, 872 had information on their state of incorporation. Of those, 84, or a little less than 10%, were incorporated in Texas. That made Texas the third largest state in the sample. The second largest was Nevada, with 172 companies, or a fifth, while the largest was Delaware, with 507 companies, or 58%. If there is value in aligning geographic identity with incorporation, very few companies domiciled in Texas appear to see it as yet.
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