Explainer-What will happen to Tesla CEO Elon Musk’s $56 billion pay package?

By Rachael Levy and Hyunjoo Jin

(Reuters) – A Tesla shareholder vote on Thursday on whether to reinstate CEO Elon Musk’s $56 billion pay package, which was rejected by a Delaware judge, will not provide a quick resolution regardless of the results of the count.

Tesla’s board hopes shareholder approval will give the electric vehicle maker the legal ammunition it needs to reinstate the package, although that is far from certain. The company also said that if the compensation plan is rejected by shareholders, it expects Musk to accept only a similar-sized compensation package to the one voided.

Here’s what we know about the potential outcomes:

WHAT HAPPENS IF SHAREHOLDERS VOTE YES?

Musk’s pay package is not automatically reinstated. Tesla said it will seek to reverse Delaware Judge Kathaleen McCormick’s January ruling that invalidated the compensation package as unfair to the company’s shareholders.

McCormick found that Tesla shareholders who in 2018 voted in favor of granting the pay package were not fully informed about how much many directors were indebted to Musk and how this affected compensation negotiations.

Tesla included McCormick’s decision in its shareholder disclosures ahead of Thursday’s vote and said it plans to argue that an affirmative result would show shareholders support the package with full knowledge of McCormick’s criticism.

Zohar Goshen, a professor at Columbia Law School, said it was unclear whether such a move would convince McCormick. “It is difficult to estimate how the court will rule because there is a lot of noise surrounding this decision,” Goshen said.

If Tesla is unable to convince McCormick to change his decision, which has not yet become effective, Tesla plans to appeal all the way to the Delaware Supreme Court, a process that will take many months.

Tesla is also asking for shareholder approval at its annual meeting on Thursday to move its corporate domicile to Texas, beyond the reach of Delaware courts. He said he does not plan to use the measure to ignore McCormick’s decision and accepted those assurances.

Tesla could also face more litigation from some shareholders. One of them filed a lawsuit this month challenging the upcoming shareholder vote on Musk’s salary package and change of domicile.

WHAT HAPPENS IF SHAREHOLDERS VOTE NO?

Tesla said it is “determined” to pay Musk for his past work through the 2018 plan or a new one, to ensure he devotes his time and energy to the company.

It can still try to reverse McCormick’s decision in Delaware, but it will have a weaker hand if shareholders reject the package. Given that the appeal could take Tesla beyond next year’s annual shareholder meeting, it could give the board some breathing room before negotiating a new salary package with Musk.

The story continues

Tesla argues that the costs to shareholders will be significantly higher if the salary package is not reinstated. The company recorded a $2.3 billion accounting charge for issuing it in 2018. It estimates that to give Musk a new package with the same economic benefit, the accounting charge it would have to take would be more than $ 25 billion due to the increase in Tesla shares. since 2018. It stated that the new package would have to be less than 10% of the size of the 2018 plan to avoid a new charge.

Tesla also warned that if McCormick’s decision is upheld, shareholders will bear the cost of his legal fees. The legal team representing the Tesla investor who challenged Musk’s payment is seeking $5.6 billion of the Tesla shares Musk allegedly received as a fee, although the company is contesting that request.

WILL TESLA LOSE MUSK IF IT DOESN’T RECEIVE THE PAYMENT PACKAGE?

Board chairwoman Robyn Denholm said in a regulatory filing last week that reinstating the salary package was necessary to “retain Elon’s attention and motivate him.”

Skeptics say Musk’s 13% stake in Tesla, valued at about $75 billion and responsible for a large portion of his wealth, as well as his two decades with the company, make it unlikely that Musk will step aside. He could also face lawsuits from shareholders if he is shown to be neglecting his duties as CEO.

Samantha Crispin, a corporate lawyer at global law firm Baker Botts, said it would be difficult to predict how Musk, who does not receive a salary from Tesla, will respond. “That’s the $56 billion question,” she said.

(Reporting by Rachael Levy in Washington and Hyunjoo Jin in San Franscisco; Editing by Greg Roumeliotis and Jamie Freed)