© Reuters. Tesla and SpaceX CEO Elon Musk gestures during a talk event with British Prime Minister Rishi Sunak in London, Britain, Thursday, November 2, 2023. Kirsty Wigglesworth/Pool via REUTERS/Photo by archive
By Hyunjoo Jin and Tom Hals
(Reuters) – After a Delaware court on Tuesday threw out Elon Musk's $56 billion pay package, the Tesla (NASDAQ ) CEO and a board of directors considered captive to him must find a way to negotiate a contract replacement. It won't be easy.
The ruling is heartening investors who for years have expressed concerns about the independence of Tesla's board of directors. This could be a turning point for Musk, who recently said he was uncomfortable transforming Tesla into a leader in artificial intelligence if his control did not increase with a new pay package.
“This throws Tesla into kind of a tailspin from an executive perspective,” said Tesla shareholder Ross Gerber, who said the court decision essentially required new independent board members who would provide oversight to the CEO. “Then it gets really complicated because Elon … it's either his way or the highway,” said Gerber, who last year publicly considered running as an independent on the board.
Musk has not said what he will do, although there will almost certainly be an appeal. Tesla shares fell 2.2% on Wednesday.
First of all, Musk will have to return what he received if the ruling stands. He fulfilled the terms of the 2018 contract and received 12 tranches of options worth about $51 billion.
However, the option grant “remains unexercised and unaltered,” according to the court ruling, so giving up your gains may not be complicated.
Deciding what to replace the package with will be a difficult process, as it is unclear who will negotiate on Tesla's side. The judge who threw out the package called it an “unfathomable sum” that was unfair to shareholders and questioned the board's independence.
Equilar estimated in 2022 that Musk's package was about six times greater than the combined salary of the 200 highest-paid executives in 2021. Musk was the second-richest person in the world, worth $184 billion as of Wednesday, Forbes calculated.
TEARS OF ADMIRATION
Delaware Judge Kathaleen McCormick (NYSE said many current board directors classified as independent by Tesla, including James Murdoch, Chairman Robyn Denholm and Ira Ehrenpreis, showed a lack of independence in the pay decision.
The judge's ruling described a board with little control over its chaotic chief executive. After a settlement with the US securities regulator required Musk to get approval from a Tesla lawyer for some tweets, Denholm described Musk's tweeting process as “self-regulatory.”
The chairwoman said the sales of $280 million in stock received for her service as director were “life-changing,” and the judge described board members and executives as advisers to Musk. The process of setting compensation was “me negotiating against myself,” Musk testified.
“They're going to have to revamp the board,” said Charles Elson, director of the corporate governance center at the University of Delaware. “I mean, you may not like it, but it's going to be very difficult to run this company the way you did.”
Musk could decide to leave, a possibility raised by JP Morgan, but Elson said that would ruin the value of the 13% stake Musk owns, regardless of the pay package. Even before Tesla has announced this year's annual meeting, several shareholders are already promoting resolutions to give investors more control by moving to annual director elections and eliminating the supermajority voting requirement.
McCormick questioned whether any payment to Musk was necessary, given that his fortune rose alongside Tesla's success, through his stake in the company.
“There are many examples of visionaries with large pre-existing shareholdings who forego compensation entirely: Zuckerberg, Bezos, Gates, and others so familiar to the world that no names are required,” McCormick wrote.
Musk brings a strong track record to any negotiation.
Tesla's stock market value was $53 billion when Musk's package was approved in 2018. It was a company that was losing money and struggling to ramp up production of its Model 3 sedan. That's when Musk described Tesla as being in trouble. a “production hell.”
By 2021, now profitable, having weathered the pandemic and launched the Model Y small SUV, Tesla's market value reached $1.2 trillion. It became the world's second-best-selling car or SUV last year, Car and Driver estimated.
Tesla's valuation has fallen to around $600 billion, but that's still more than 10 times what it was when the process began, and the company is still worth more than most auto industry veterans combined.
