Tesla shareholders will decide late on Thursday whether to award its CEO, Elon Musk, a pay package worth about $45bn in what has become a referendum on the tech mogul’s leadership and a source of fierce legal contention at his electric car company.
Musk claimed on Wednesday night in a post on X, formerly Twitter, that shareholder votes on his record-breaking payout and a plan to move the electric carmaker’s legal headquarters to Texas were “currently passing by wide margins”.
However, it is unclear if a court that blocked the deal will accept the re-vote, which is not binding, and allow the company to restore the pay package and move its HQ.
A Delaware chancery court judge nullified Musk’s pay package in January. Chancellor Kathaleen McCormick ruled that the board’s process of reaching the dollar figure, which she called “unfathomable”, was illegitimate and that Musk’s ties with board members were too extensive for them to be considered independent.
McCormick’s ruling led Tesla’s board to put Musk’s compensation package to a shareholder vote, now scheduled for Thursday afternoon. The vote could negate the judge’s decision with a mandate from investors in Musk’s favor or reinforce it and force the company to renegotiate with its CEO.
Opponents of the deal cast the pay package as the undeserved and exorbitant gift of an overly sympathetic board, which includes Musk’s brother Kimbal and other close allies, going against shareholder interests.
Large institutional investors such as Norway’s sovereign wealth fund and California’s teacher retirement fund oppose Musk’s payment. The investors backing the package argue that Musk is responsible for growing the value of Tesla and hitting market targets set for him under the original terms of the agreement set in 2017 – essentially saying that a deal is a deal.
The consequences of the vote will be important not only to Musk’s net worth and Tesla’s share price but also to the company’s future. The board warned before the vote that Musk could focus his attention on other ventures if things don’t go his way. Regardless of its outcome, the vote itself is unlikely to immediately resolve the issue, though it will indicate what kind of corporate and legal battles to expect in its wake.
Why did a judge reject Musk’s Tesla pay package?
The shareholder vote this week has its origins in a 2017 deal to award Musk stock options in Tesla if the company hit revenue and share price milestones. Tesla investors overwhelmingly approved that agreement in a 2018 vote.
One 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 Delaware’s court of chancery, sided with the suit’s plaintiff in January and struck down Musk’s payment package, which was worth about $56bn at the time. McCormick found that Tesla’s board members who worked on negotiating the package, such as his former divorce attorney, had extensive, compromising ties to Musk and that the process of reaching a number for his compensation was “deeply flawed”.
“The issue really has to do less with the number $56bn and more to do with how the $56bn was reached. It was because it was being done by a board of directors that the judge found was inherently conflicted,” 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 decided to hold a shareholder vote in response to McCormick’s ruling, hoping that that package’s approval by shareholders would serve as a curative to the decision. Instead of making substantial changes to the compensation package or the makeup of the board, however, the company’s leadership have proposed essentially the same package as the one shareholders voted on in 2018 – though with Tesla’s current share price, it is now worth roughly $45bn.
“They just took the same thing and slapped it in front of shareholders and said: ‘Now you guys 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 ruling in Delaware, but legal experts said such an outcome will probably not be a definitive end to the dispute. What’s more likely is that opponents of the deal issue another legal challenge, claiming that the process of deciding Musk’s payment remains flawed, they said.
There are a number of arguments that critics of the deal could still bring up. Displeased shareholders may say that Tesla made no changes to the agreement the judge ruled unfair, that threats Musk may leave the company could be seen as coercive and that the board’s chair, Robyn Denholm, can’t truly be considered independent.
“I’m sure all these arguments are going to be raised,” Lund said. “The company didn’t put themselves in a great litigation position again.”
The pay-package dispute would then head back to chancery court for another trial, where the process would once again be assessed along similar lines of process and fairness. Musk and Tesla are also likely to appeal McCormick’s January ruling but must first wrap up a fight with the plaintiff in that case over how much money they owe in legal fees.
Despite the high-profile nature of the battle over Musk’s payment, legal experts say much of the case actually falls back on well-worn issues of obligations to investors and corporate governance.
“The case law in this area goes back decades,” Whitehead said. “This is not new law. But it happens to have an unusual twist, because how many CEOs get $56bn?”
What happens if Musk’s pay package gets rejected?
Musk and Tesla’s board intensely campaigned for the package’s approval in the lead-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 its factory led by Musk as an incentive for investors to cast their votes for him.
Several major investors and advisory firms have come out against the deal in recent weeks, however, putting it in danger and leading the board to warn that Musk could lose interest in the company if it doesn’t pass. If shareholders vote no on the payment package, it would reinforce McCormick’s ruling and render the board unable to award Musk the money.
A rejection of the pay package could force the board to address the many issues that McCormick raised in her ruling. Board members would be tasked with drawing up a new compensation package, which would require holding yet 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 say was fair compensation,” Lund said.
