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Tesla shareholders will decide Thursday night whether to give CEO Elon Musk a pay package worth about $45 billion in what has become a referendum on the tech mogul’s leadership and a source of fierce legal dispute in your electric car company.
Musk claimed late Wednesday in a post on X, formerly Twitter, that shareholder votes on his record payout and a plan to move the electric car maker’s legal headquarters to Texas were “currently passing by wide margins.”
However, it is unclear whether a court that blocked the deal will accept the new vote, which is not binding, and allow the company to reinstate the pay package and move its headquarters.
A Delaware Chancery Court Judge annulled Musk’s salary package in January. Chancellor Kathaleen McCormick ruled that the board’s process to reach the dollar figure, which she called “unfathomable,” was illegitimate and that Musk’s ties to board members were too extensive for them to be considered independent.
McCormick’s ruling prompted Tesla’s board to put Musk’s compensation package to a shareholder vote, now scheduled for Thursday afternoon. The vote could overturn the judge’s decision with an investor mandate in favor of Musk or reinforce it and force the company to renegotiate with its CEO.
Opponents of the deal see the pay package as an undeserved and exorbitant gift from an overly sympathetic board, which includes Musk’s brother Kimbal and other close allies, that runs counter to shareholders’ interests.
Large institutional investors, such as Norway’s sovereign wealth fund and California’s teachers’ retirement fund, oppose Musk’s payout. Investors backing the package argue that Musk is responsible for growing Tesla’s value and achieving the market goals set for it under the original terms of the deal established in 2017, essentially saying that a deal is a deal.
The consequences of the vote will be important not only for Musk’s net worth and Tesla’s stock price, but also for the future of the company. The board warned before the vote that Musk could turn his attention to other companies if things don’t go his way. Regardless of its outcome, the vote itself is unlikely to immediately resolve the issue, although it will indicate what kind of corporate and legal battles are expected in its wake.
Why did a judge reject Musk’s Tesla pay package?
This week’s shareholder vote stems from a 2017 deal to give Musk stock options in Tesla if the company reached milestones in revenue and stock price. Tesla investors overwhelmingly approved that deal in a 2018 vote.
A shareholder filed a lawsuit, however, arguing that Musk exerted too much control over the company’s board and that he misled board members about the deal. Judge McCormick, who oversees the Delaware Chancery Court, sided with the plaintiff in the lawsuit in January and voided Musk’s pay package, which at the time was worth about $56 billion. McCormick found that Tesla board members who worked on negotiating the package, such as his former divorce lawyer, had extensive and compromising ties to Musk and that the process for reaching a figure for his compensation was “deeply flawed.” “.
“The issue really has less to do with the $56 billion figure and more to do with how that figure was reached. It was because it was being done by a board of directors that the judge found inherently conflictual,” said Charles Whitehead, a law professor at Cornell University. “It’s because of the nature of the relationships the board had with Elon Musk.”
Tesla’s board of directors decided to hold a shareholder vote in response to McCormick’s ruling, hoping that shareholder approval of that package would serve as a remedy to the decision. However, instead of making substantial changes to the compensation package or board composition, company leaders have proposed essentially the same package that shareholders voted on in 2018, albeit at the current stock price of Tesla, are now worth approximately $45 billion. .
“They just took the same thing and threw it in front of shareholders and said, ‘Now you approve it,’” said Dorothy Lund, a law professor at Columbia University.
What happens if Musk’s pay package is approved?
Investor approval of Musk’s pay package would be a victory for Tesla’s board and a rebuke to the Delaware ruling, but legal experts said such an outcome would likely not spell a definitive end to the dispute. What’s more likely is that opponents of the deal will file another legal challenge, alleging that the process for deciding Musk’s payment remains flawed, they said.
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There are a number of arguments that critics of the deal could still raise. Disgruntled shareholders may say that Tesla made no changes to the deal that the judge found unfair, that threats that Musk could leave the company could be seen as coercive, and that board chairman Robyn Denholm cannot be considered truly independent.
“I’m sure all of these arguments will be made,” Lund said. “The company did not put itself in a great litigation position again.”
The dispute over the pay package would then return to the chancery court for another trial, where the process would be evaluated once again along similar lines of process and fairness. Musk and Tesla are also likely to appeal McCormick’s January ruling, but they must conclude first. a fight with the plaintiff in that case, about how much money they owe in legal fees.
Despite the high-profile nature of the battle over Musk’s pay, legal experts say much of the case actually hinges on well-worn issues of obligations to investors and corporate governance.
“Case law in this area goes back decades,” Whitehead said. “This is not a new law. But it turns out there’s an unusual twist, because how many CEOs get $56 billion?
What happens if Musk’s pay package is rejected?
Musk and Tesla’s board of directors campaigned heavily for approval of the package in the run-up to the vote, deploying a series of carrots and sticks to cajole shareholders into voting in favor of the deal. Tesla even raffled off a tour of their factory led by Musk as an incentive for investors to cast their votes for him.
Several major investors and advisory companies However, they have spoken out against the deal in recent weeks, putting it in jeopardy and leading the board of directors to warn that Musk could lose interest in the company if it is not approved. If shareholders vote no on the pay package, it would reinforce McCormick’s ruling and make the board unable to give the money to Musk.
A rejection of the pay package could force the board to address the many issues McCormick raised in his ruling. Board members would be tasked with crafting a new compensation package, which would require another vote.
“They would have to go back and negotiate against Elon, try to come up with a pay package that shareholders would accept or that the court would consider fair compensation,” Lund said.