Tesla asks shareholders to restore $56B Elon Musk pay package that was voided by Delaware judge

DETROIT (AP) — Tesla is asking shareholders to restore the $56 billion pay package for CEO Elon Musk that was thrown out by a Delaware judge this year, and to move the company’s headquarters to Texas.

The changes, which will be voted on by shareholders at the June 13 annual meeting, may be a tougher sell than when they were first approved in 2018. The Austin, Texas-based electric vehicle maker is grappling with declining global sales, slowing demand for electric vehicles, an aging model lineup and a stock price that has fallen 37% so far this year.

In January, Chancellor Kathaleen St. Jude McCormick ruled that Musk was not entitled to the historic stock compensation that was to be awarded over 10 years.

Ruling on a shareholder lawsuit, she struck down the pay package, saying Musk essentially controlled the board, making the process of enacting compensation unfair to stakeholders. “Musk had extensive ties to those responsible for negotiating on behalf of Tesla,” she wrote in her ruling.

But in a letter to shareholders released in a regulatory filing Wednesday, Chairman Robyn Denholm said Musk had achieved the growth he sought at the automaker, with Tesla meeting all stock value and operational targets in the 2018 package that was approved. by the shareholders. Shares are up 571% since the pay package began.

“Because the Delaware court questioned your decision, Elon has not been paid for any of his work for Tesla over the past six years, which has helped drive significant growth and shareholder value” , wrote Denholm. “This seems to us – and to the many shareholders we have already heard from – as fundamentally unfair and inconsistent with the will of the shareholders who voted for this.”

In the filing, Tesla said it intends to appeal the decision. If shareholders approve the new package, the disclosure and procedural deficiencies as well as the board’s fiduciary duty violations detailed by McCormick are expected to be corrected, the filing says.

But Tesla said shareholders could still challenge the ratification vote. Even if the bill passes, Tesla said it may not completely solve the problem and a Delaware court could rule that ratification itself is not fair to shareholders.

If shareholders don’t ratify the plan, Tesla said it may have to negotiate a replacement with Musk. That could take a lot of time and money “in light of the criticisms” detailed in the Delaware lawsuit.

Tesla is taking the ratification route, instead of trying to negotiate a new package with Musk, which the company says would likely need to be similar in magnitude to the previous package in order to keep it.

The story continues

Because it is seeking ratification rather than a new plan, Tesla said it “has not substantially reassessed the amount or duration” of the package and has not hired another consultant in remuneration for giving his opinion.

In the 2018 plan, Musk would receive no salary or cash bonuses. Instead, he was only to receive stock options, and only if the company reached certain thresholds. It would need to increase its total market value by a certain amount, while still meeting its revenue and pre-tax profit targets, among other items.

Many CEOs of large companies must meet their goals to get much of their possible compensation. It’s about encouraging decisions that benefit the company and shareholders as a whole. But Musk was unusual in that his entire salary depended on such measures.

When the company’s board developed the compensation plan, it said it thought the hurdles would be difficult to overcome. Some foreigners agreed.

But the plaintiff shareholder in the Delaware lawsuit alleged that the company’s attorney mischaracterized all of the milestones that triggered the vesting of the stock options as “extension” goals, even though the Internal projections indicated that three operational milestones were likely to be achieved within 18 months of the shareholder action. vote.

The board said it believed in 2018 that “many of Tesla’s past successes were largely due to Mr. Musk’s leadership.” And this was to motivate Musk to “dedicate his time and energy” to the company when he also had interests in other companies.

Erik Gordon, an attorney and business professor at the University of Michigan, said that because Tesla would still be a Delaware corporation when the package was voted on, shareholders could still challenge it in Delaware courts.

But because Tesla disclosed facts in the proxy statement about the board’s ties to Musk, he would expect Tesla to win. “If the uninterested shareholders are properly informed and vote in favor, the court actually doesn’t need to do anything,” Gordon said. Delaware courts, he said, “want corporations to disclose and let shareholders decide.”

Musk may not see much legal benefit in moving Tesla’s headquarters to Texas because the law governing executive compensation is similar to Delaware’s, Gordon said. “No case in Texas tells you that if this had happened in Texas you would have gotten a different result.”

Tesla posted record deliveries of more than 1.8 million electric vehicles worldwide in 2023, but its stock value has rapidly eroded this year as electric vehicle sales slow.

The company said it delivered 386,810 vehicles from January to March, almost 9% fewer than what it sold during the same period last year. Future growth is uncertain and it may prove difficult to get shareholders to support high wages in an environment where competition has increased globally.

The proxy statement filed with the Securities and Exchange Commission does not address Musk’s request to own 25% of Tesla’s stock so he can develop artificial intelligence and robotics within the company. He currently owns 20.5% of the company.

In January, Musk challenged Tesla’s board of directors in a post on X, the social media platform he now owns, to come up with a new compensation package. Unless he gets 25%, he wrote that he would prefer to make products outside of Tesla, apparently with another company.

Wedbush analyst Dan Ives, who is normally bullish on Tesla, said in an interview that the filing did not answer several questions, including Musk’s future compensation.

“It’s the elephant in the room because Musk made a threat about X, and that was a huge overhang” for Tesla stock, Ives said.

Musk, he said, must commit to being CEO of Tesla for three to five years and developing artificial intelligence with the company. When Tesla reports its first-quarter results next week, Musk will need to clarify his growth plans, including the status of the Model 2, a small electric vehicle that costs about $25,000, Ives said. Otherwise, dark days lie ahead, he said.

“It feels like the plane is crashing into the ocean and the board is focusing on its own salty peanuts,” he said.

At the time of the Delaware court’s ruling, Musk’s package was worth more than $55.8 billion, but falling stocks reduced that amount to $44.9 billion as of Friday’s market close, according to the filing. of Tesla.

Since last year, Tesla has slashed prices by up to $20,000 on some models. The price cuts have driven down the value of used electric vehicles and reduced Tesla’s profit margins.

This week, Tesla announced that it was laying off about 10% of its employees, or about 14,000 people.

Shares of Tesla Inc. closed down about 1% on Wednesday.

____

Choe and Chapman reported from New York.