Elon Musk’s compensation package case will haunt Tesla for years

I believe that Elon Musk’s compensation package will haunt Tesla for years as lawsuits are already piling up.

Everyone is pointing fingers at who they think is responsible for this situation. Here’s my take.

We are less than two weeks away from Tesla’s annual shareholders meeting during which we will know the results of the shareholder vote on Musk’s compensation package and incorporation move to Texas.

Many shareholders falsely believe that the issue will end there.

Shareholders will vote either for or against these two proposals. The truth is that not much will change after June 13th.

If shareholders vote yes again on the package, at best, it will be used as evidence that shareholders still support the deal for the appeal process in the case, which is still months away.

As for the incorporation move to Texas, many shareholders believe that this would allow Tesla to circumvent the judge’s decision in Delaware. However, Tesla and the judge recently had communications over that concern, and Tesla reassured the judge that they will continue to litigate the case in its proper jurisdiction: Delaware.

The next step is a hearing over the compensation that the lawyers for the shareholder who sued Musk and Tesla are asking for, which is a ridiculous $6 billion.

The compensation will likely be greatly reduced by the judge, but they will likely still get a nice payday, and the vultures are already circling to get more.

A new lawsuit was filed last week against Musk and Tesla directors over alleged insider trading by the CEO and breach of fiduciary duty by board members.

Regardless of the results of the votes later this month, Tesla will likely face other lawsuits regarding its corporate governance, which is being increasingly exposed by Tesla and Musk’s reaction to the judge’s decision over his compensation package.

For example, Musk has threatened not to work on AI products at Tesla if he doesn’t get 25% control over the company despite saying that Tesla is worthless without AI.

Electrek’s Take

I think I managed to distill my thoughts on Elon’s compensation package at Tesla into something a little clearer. I have been reporting on this for months, and I’m tired of it, but unfortunately, I think it will be a story for months, if not years, to come

Like many Tesla shareholders, I wasn’t happy about Elon selling shares from his previous CEO compensation package to buy Twitter.

But I understand that it is his right to do so.

He can do what he wants with his money, but he did lose credibility in my eyes because I remember him saying this:

He got a lot of people to believe in Tesla through commitments like this and then he broke it to buy Twitter of all things.

But Fred, that’s old.

OK, he also said this:

And then sold billions of dollars worth of Tesla shares in the following months.

All good. It’s not great for his credibility, but again, his money.

Now, what about this new 2018 compensation plan?

Do I really believe Elon is looking for 25% control of Tesla because he is scared of what Tesla’s AI will do if he has less control? No. I don’t buy that for a second.

Am I worried that he will dump his shares in a very poorly planned manner like he did the first time? Yes, I am.

But once again, it is his money, sort of, and he can do whatever he wants with it. I think he did incredible work at Tesla, especially between 2018 and 2021. He deserves it.

However, I can believe all that and still understand why Judge McCormick had to invalidate the package in her decision.

There’s no doubt that this litigation started because lawyers saw an opportunity to make money. They enlisted a willing Tesla shareholder with just 9 shares. But you have to ask yourself, why was there an opportunity?

And that’s because of Elon and Tesla’s board. They saw that Tesla’s board presented the package as being negotiated between independent board members and Elon. They looked into those directors and saw that they were anything but independent.

The only board member on the compensation committee who could have been described as independent would have been Robin Denholm. She became Tesla’s chairwoman after Musk had to give up the seat as part of a settlement with the SEC over his botched attempt to take Tesla private, but she was also getting a juicy compensation package worth tens of millions of dollars for a job that Elon himself said was worthless.

Suspicious.

The lawyers made a bet that, based on this situation, they would find a lot more problems with how this historic compensation package came about, and they were right.

They found problems like the board not negotiating the package beyond aligning the tranches with Tesla’s own projections, Elon’s point person on the package being his own divorce lawyer who was also Tesla’s general counsel at the time—blurring the lines as to who he was actually working for, and more.

These are all things that could have affected shareholders’ decisions on whether to vote for or against the package. The judge had to rescind it.

But instead of addressing the governance issues highlighted by the judge and that led to this situation in the first place, Tesla, evidently led by Elon, decided to push a narrative that there’s no issue and that the only reason we shareholders are in this situation is that a politically motivated judge decided to take away our right to decide for ourselves what Elon should get for compensation.

Massive claims like that need strong evidence and as far as I can tell, there’s no strong evidence that the judge did anything other than follow the law. The only thing I’ve seen posted by Elon and his fans is the fact that the judge used to work for a firm that represented President Biden in the past, but it was one of the biggest firms in Delaware, which is where Biden is from so it’s not surprising and doesn’t prove any wrongdoing.

This narrative about the situation being politically motivated is simply an attempt to ignore and divert attention from Tesla’s governance issues.

At this point, I think Tesla and its shareholders would be way better off addressing these issues, going back to the drawing table on a compensation deal that is negotiated in good faith, and then going back to shareholders for a vote.

I even think that the deal could be the same amount minus all the costs that Tesla incurred related to this issue, like the legal costs and all the advertising that the company is spending on this vote.

The alternative is, more likely than not, years of costly litigation and this dark cloud over Tesla.

But a big part of the problem is that it doesn’t seem that Elon is interested in establishing proper governance at Tesla because he is not well suited to be an officer in a public company. That’s partly why he tried to take Tesla private – poorly, I might add.

Based on the rumors he is choosing not to deny, he seems to be happy leaving this choice to shareholders: proper corporate governance at Tesla or Elon. You can’t have both.