Elon Musk’s long-term compensation package includes shares worth $56 billion. A Delaware judge ruled that Musk must forfeit the shares. This has caused a stir at Tesla and threatens to distract the boss from the problems at his company and other business ventures.
Musk commented on X, his social media platform.
If the ruling is upheld, here’s what it means for the billionaire, his empire, and the ruling.
Many people thought it was a bit fanciful when Tesla laid out the pay incentives scheme for Musk in early 2018. The board wanted to keep Musk in the company at a point when they were worried that he would turn to SpaceX and other ventures instead.
Musk received stock equivalent to about 10% of the company. The plan set 16 financial targets, including profits, revenue and market capitalisation. If Musk were to achieve 12 out of 16 targets, he could receive shares worth up to $50 billion — the biggest pay package ever.
The most ambitious target was $175bn in revenues, $14bn in adjusted earnings and $650bn market capitalisation.
Musk, who does not receive a salary from Tesla, would have received nothing if Tesla’s valuation didn’t reach $100bn.
The future was far from certain: Tesla was in ” Production Hell”, where it built cars in tents in its parking lot, and made some models without computer modules or seats due to supply chain failures.
The company’s target of surpassing General Motors and Microsoft in terms of valuation and revenues seemed impossible to achieve.
A former Tesla insider said, “Nobody took it seriously.”
The company’s output increased, its sales skyrocketed, and its shares surpassed those of Toyota in terms of market value, surpassing $1tn. The Model Y launched in 2020 was the most popular car on the planet last year.
Former Tesla executive: “He did it and no one in the world would have been able to do it. If the price is $56bn then that’s what it costs.” “He’s Ronaldo, he’s Messi. “He can ask for whatever he wants.”
Richard J. Tornetta is the lead plaintiff. He attested to this in an affidavit in Pennsylvania filed in 2018 that he had been a “continuous owner” of Tesla stock during the period of Musk’s stock grant.
Delaware court documents show that Tornetta had filed a lawsuit against Sirius XM and Pandora in 2019 over the merger whose terms he felt shortchanged Pandora shareholders.
Tornetta filed a complaint against Tesla on behalf of the entire shareholder base. This is known as a ‘derivative action’, which is a lawsuit brought forth by an individual or group of individuals.
Musk returned the shares back to Tesla. The ruling, however, imposed the penalty of “revocation”, which was Musk’s return to the company.
The Delaware court agreed that Musk “controlled Tesla” even though he only held a 20% stake in 2018. The board was required to prove that it had negotiated the package in a fair process at a fair price.
Dan Ives is an analyst with Wedbush. He believes that the board of Tesla will either appeal the ruling or create a new package.
Tesla has struggled with independence for a long time, and past attempts to increase oversight by the board of directors have not yielded much fruit.
Tesla directors include Musk’s brother Kimbal and longtime associate James Murdoch. JB Straubel is one of Tesla’s co-founders. Robyn Denholm has been on the board for 10 years. She is currently chair.
Musk’s tweet that he was “funding secured” for Tesla to go private in 2018 prompted the US Securities Exchange Commission (SEC) to charge him with securities Fraud. The board then tried to limit his use of the platform.
These efforts have failed. Recent messages by Musk, who purchased Twitter for $44bn and rebranded as X in last year include opinions about US immigration, handwriting, and chickens.
Former Tesla executives claim that Musk faces little resistance from those who want to rein him in.
Is there anyone in the [Tesla] Board who is even showing the slightest amount of pushback?
Philippe Houchois is an auto analyst with Jefferies. He said that the latest scandal could lead to changes in governance. He said that the board cannot continue as is. It is “too risky”. “I don’t think they’ll be rubber-stamping [Elon’s wishes] anymore.”
But if it is the job of the board to increase shareholder wealth, then those who bought shares in 2018 and earlier are well-rewarded.
Tesla’s stock market value grew 20-fold last year to $1.2tn. Investors are still sitting on a 10 fold return even with the recent drop to about $600bn. This is better than investing in Amazon, Meta, or Netflix during the same time period.
Former Tesla director: “The board of directors and investors have made such a lot of money that they look the other side.”
After dominating the EV market for a decade, Tesla is now facing stiff competition: China’s BYD surpassed the company in late 2017 to become the largest manufacturer of battery-only cars. Tesla is working on a low cost model that will be produced in 2025. It is also increasing the deliveries of its Cybertruck while battling a slowing market.
Former executive and car industry veteran, “Tesla is an anomaly within the auto industry.” Today, it behaves more like a traditional car company. It is falling behind, because the market says that there are now other options.
Tesla cut prices as EV demand slowed, angering existing owners whose cars were depreciating.
Musk’s recent actions have been questioned, especially since some of the company’s strongest executives are leaving.
Houchois, a Jefferies analyst, recently criticized Musk for his “cavalier approach towards governance and fiduciary duty”, “his record of misallocating his capital” and Tesla’s “questionable product and strategic priorities that have undermined the growth, returns, and management cohesion”.
The Delaware ruling could curtail Musk’s plans to borrow against his Tesla stock to fund his expanding business empire.
Musk stated on X in this month that he wished to increase his Tesla stake to 25% — up from the current 13 percent, as per regulatory filings. — to help develop Tesla’s AI products. Musk’s 2018 plan included 304mn share options that, if they were exercised, could have increased his stake in Tesla to around 20 per cent.
He said that he hoped to transform Tesla into an AI juggernaut when the company reported its quarterly results. However, he also added, “if I had so little influence, I could have been voted out at that point by a random advisory firm”.
Musk has a long list of investments that he has made before Twitter. SpaceX is his rocket company, Neuralink is a brain implant developer, xAI is an artificial intelligence venture that competes with OpenAI and the Boring Company is digging tunnels for transportation under Las Vegas, Los Angeles and other cities.
The billionaire has claimed for years that he is cash-poor, and the majority of his wealth is tied to Tesla and SpaceX stock. Analysts estimate that he’s pledged stock worth tens or hundreds of millions of dollars as collateral to secure loans.
Musk pledged to lend $12.5bn for a margin loan in 2022. However, the loan was never made.
Tesla’s latest annual proxy filing showed that Musk pledged around a third (or roughly $49bn) of his shares as of March 31. This included stock he received from the award in Delaware for 2018. Musk’s stock would be secured if the 2018 award was forfeited.
Corporate governance advisors have expressed concern about the level of borrowing. The large number of shares pledged raises questions about the ability of the audit committee to oversee risks at the company, warned Institutional Shareholder Services before last year’s shareholder meeting.
Musk could easily shore up his finances by selling shares in SpaceX without having to sell more of the company’s stock. SpaceX, a privately-held rocket company, was valued at $180bn by a December share sale and is considered ripe for an IPO.