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A Delaware judge’s decision to overturn the pay package that helped make Elon Musk the world’s richest person leaves Tesla’s board with some tough decisions to make.
Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery on Tuesday ordered Tesla to cancel stock options granted to Mr. Musk, the electric car maker’s chief executive, for a worth around $50 billion. The company’s directors must now find a new compensation plan that can meet legal requirements and satisfy Mr. Musk, who recently demanded that the board significantly increase its stake in Tesla.
Tesla and Mr. Musk could appeal the court’s decision. Mr. Musk also indicated that he might look to incorporate the company in another state that he believes might be more business-friendly, such as Texas.
What happens to Mr. Musk’s stock options?
As part of a compensation package finalized by Tesla in 2018, Mr. Musk received options to buy 304 million shares that are now worth more than $50 billion. Although he met the goals necessary to receive these options, Mr. Musk does not appear to have converted them into Tesla stock. If he did, he would be 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 shares in this package, Tesla has made Mr. Musk incredibly rich. He owns about 411 million Tesla shares, worth about $78 billion. A securities filing last year said he pledged 238 million shares for personal loans.
Can Tesla just pack up and leave Delaware?
Mr. Musk, visibly angry, threatened to reincorporate Tesla in another state. On X, the social media platform he owns, he asked his followers to vote on whether Tesla should incorporate in Texas, where the company has its offices and a large factory.
“I recommend incorporating in Nevada or Texas if you prefer to have shareholders decide the issues,” he said.
Delaware is a popular place for businesses to incorporate because of its simplified legal system. Cases are heard by judges rather than juries, and there is only one level of appeal: to the Delaware Supreme Court.
Mr. Musk incorporated his X in Nevada, whose laws make it much more difficult to sue directors. But getting there would require a vote from shareholders, some of whom might not want the company to move to a state where they have less power.
The relocation “doesn’t give him a magic ticket,” said Gregory Varallo, a Wilmington, Del., lawyer who has argued against Mr. Musk’s proposed shareholder compensation plan.
How might Tesla stock react?
If the stock options that Tesla had granted to Mr. Musk under the 2018 plan were canceled, the company would have fewer shares outstanding. In theory, this would increase the value of shares held by other people or companies.
But any boost that would bring to the stock price could be offset by investors’ fears that Mr. Musk might leave the company or focus less on its operations. Tesla’s stock price fell about 2% on Wednesday after Ms. McCormick’s decision, made public after the stock market closed on Tuesday.
Over the long term, a company’s stock price depends on its earnings and cash flow. Tesla has fallen more than half from its peak and is down more than 20% this year, largely because its profit margins have fallen and the company expects much slower revenue growth. sales this year.
What can Tesla’s board of directors do?
Chancellor McCormick said Mr Musk had played too big a role in crafting the terms of his pay deal and that the board, which is legally required to serve the best interests of all shareholders, was not not sufficiently independent of him. One of the directors is his brother, Kimbal, and several others are longtime friends and associates. She also said the salary was excessive and paid him far more than was necessary to motivate him to do a good job.
As a result, the directors may have to make changes that will convince a judge that any new compensation they grant him was developed in an arm’s-length negotiation between them and Mr. Musk. Any revamped salary deal could also have to pay him significantly less.
Tesla’s board must find a way to keep Mr. Musk focused on the company while exerting 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,” Dr. Hull said, but added: “There have to be checks and balances and that’s the goal of this decision.” The fund owns a small number of shares.
Robyn Denholm, chairman of Tesla’s board of directors, did not respond to a request for comment. Neither did the other seven members of the board of directors.
Can Mr. Musk challenge this decision?
Tesla and Mr. Musk can appeal to the Delaware Supreme Court, which some legal experts say 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 majority shareholder as Chancellor McCormick suggested. He owned about 22% of Tesla at the time the plan was developed, which didn’t give him enough voice 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 appeal to the U.S. Supreme Court, but may have difficulty convincing the high court to take up the case because it raises no obvious constitutional or federal questions.
The lawyers who represented Mr. Musk in the case did not respond to requests for comment.
What does this mean for Tesla as a company?
The move would only change Tesla’s approach to designing, manufacturing and selling cars if it prompts Mr. Musk to leave the company or take a less active role. Mr. Musk has shown signs of responsiveness. Prior to the move, Mr. Musk had demanded that Tesla’s board increase its stake in the company from 13 percent to 25 percent.
If he didn’t get what he asked for, he said, he would work elsewhere on robotics and artificial intelligence products. Mr. Musk has already created an independent artificial intelligence company called xAI. He also runs SpaceX and is the founder of Neuralink, which develops implants that allow humans to control computers with their brains.
It’s hard to imagine how Tesla’s board could respond to his demand for a much larger stake in the automaker, in light of the Delaware ruling.
Few, if any, executives are as closely identified with their products, or considered as essential to their companies’ success, as Mr. Musk. In her ruling, Ms McCormick suggested there was a downside to her status as a “superstar” chief executive. This “creates a ‘distortion field’ that interferes with board oversight,” she said.