Tesla’s $50 Billion Question Comes Down to the Wire

On Thursday, Tesla shareholders will face a difficult choice: approve Elon Musk’s massive pay package, the biggest ever given to a chief executive, or risk him taking the ball and going home.

Thursday’s shareholder meeting is a referendum on Musk’s tumultuous leadership, in which he took a relatively niche startup, ripped it from its founders and turned it into what is arguably one of the most important car companies in history Modern. To reward him for this achievement, shareholders are being asked to vote for the second time in an unprecedented vote on Musk’s compensation – worth $50 billion.

Last January, a Delaware court judge invalidated Musk’s pay package, first approved in 2018, arguing that the process was flawed because shareholders were unaware of its development and that Tesla’s board of directors was too friendly. of its already very rich CEO. Infuriated, Musk pulled some strings to schedule another vote, while also pushing for a proposal to reincorporate Tesla in Texas as a way to avoid scrutiny from Delaware’s shareholder-friendly court system.

Tesla’s board says the pay package is necessary to secure Musk’s attention — even as it becomes less clear that the money is what really motivates him.

“If I were a shareholder, I would be wondering, for starters, whether the $50 billion that Elon Musk is asking for in exchange for his undivided attention would actually guarantee that,” said Gregory Shill, a professor at the University of California School of Law. Iowa. “or whether, as some colleagues have argued, it would be unlikely.”

In a letter to shareholders last week, Robyn Denholm, Tesla’s chairman, argued that for Musk to receive his historic compensation, he needed to reach certain operating thresholds and increase the company’s shares and valuation – and he did. In 2020, the company became the most valuable car manufacturer in the world, with a market capitalization of more than $400 billion. In 2021, it briefly reached a valuation of $1 trillion.

The original proposal “had a simple purpose,” Denholm said, “to keep Elon focused on Tesla and motivated to achieve the company’s unparalleled ambitions.” Tesla must “retain Elon’s attention and motivate him to continue to dedicate his time, energy, ambition and vision to deliver comparable results in the future,” she added.

Musk has typically been more direct: Give me 25% of the company or I will spin off the AI ​​division into another company, he said on X.

The issue of CEO “attention” and “focus” is unique among Fortune 500 companies. No other company has a chief executive who seems so disinterested in the work for which he is best known. Musk spreads dangerously thin, overseeing SpaceX, The Boring Company, Neuralink, X Corp. and xAI, the AI ​​startup that just received $6 billion in funding. And while Tesla is the source of Musk’s wealth and popularity, it’s obvious that his attention has drifted considerably in recent years.

On Wednesday, Tesla posted a long list of its accomplishments under Musk, including the growth of vehicle delivery and milestones in the development of the company’s Full Self-Driving software, which Musk argued will ultimately lead to fully autonomous vehicles.

The company makes no mention of the past six months of turbulence, including multiple rounds of layoffs, a nearly 30% drop in share price and rampant price cuts, which have led to the lowest profit margins in six years. Many observers have noted that the recent slowdown in EV sales growth appears to be fully located inside the Tesla, which still dominates more than 50% of the market. Unsold Teslas are piling up in parking lots in such large numbers they can be seen from space.

Samantha Crispin, a partner at the Texas-based law firm Baker Botts and chair of the corporate department, said these difficulties could sway certain investors depending on how soon they buy into the Tesla story.

“A recent investor who hasn’t seen the kind of return on investment, like someone who would have invested before 2018, may well have a very different point of view,” Crispin said. On the edge.

The vote quickly emerged as a clash between institutional investors – large funds that include Tesla shares in their pooled investments – and retail investors, also known as family shareholders, who own individual shares.

Tesla has the largest share of retail investors in the S&P 500, according to Reuters, amounting to 43 percent. On X, Musk claims to have the vast majority of support, which is no surprise. Musk actively courts the favor of small investors by sparing them on Twitter, allowing them to ask questions during earnings calls and inviting them to lavish events at his factories. This time, Tesla is offering factory tours led by Musk himself to a select group of shareholders to encourage them to vote.

The only problem is that retail investors have historically shown apathy towards voting their shares. When they vote, they tend to favor management. But most of the time, they don’t even bother.

“Retail investors can be much more unpredictable,” Crispin said, “in terms of how they might end up voting on an issue [or] whether or not they actually show up to vote.”

Meanwhile, several leading proxy advisory firms have recommended voting against the proposal, arguing that it is too “excessive” and would dilute value for individual shareholders – which bodes poorly for Musk’s chances.

Even if Musk wins the vote, he will not automatically become $50 billion richer. This is because Tesla has not yet filed an appeal against the Delaware court’s decision, which would have to be done to allow Musk to receive his compensation. A positive result would have a prominent place in the appeal and could lead to the judge’s decision being overturned.

Tesla shareholders are also being asked to approve a proposal to reincorporate the company in Texas. This could work against Tesla’s effort to convince Delaware courts to reverse its decision. And it could sink its support among institutional investors, who have long preferred Delaware because of its predictability.

“It’s a known quantity with many decades of established legal precedent that people respect, and Texas is an unknown quantity in that regard,” said Stephen Diamond, a corporate governance expert at Santa Clara University School of Law. Diamond also noted that reincorporation into Texas requires a higher vote threshold than the makeup vote, which could also make it difficult to achieve.

All of these issues will be on display at Tesla’s Austin factory on Thursday. The fanboys will be there, as will the average shareholders, along with the big investors, the sovereign wealth funds and the money managers. Musk has long argued that Tesla is not just a car company – it is actually a technology company. In fact, it is an AI and robotics company trying to capture the zeitgeist alongside other big technology players.

He is clearly a true believer. Tomorrow’s vote will be the final decision on whether everyone else will buy it too.