In a surprising turn of events, Tesla is considering a new way to compensate CEO Elon Musk, one that would be subject to Texas law rather than Delaware law. This move comes as Tesla’s $56 billion-plus performance-based pay proposal for Musk has been tied up in court for seven years, pending an appeal from Musk and the company.
According to a report from the Financial Times, Tesla’s board has formed a special committee to evaluate a backup pay package for Musk in case the Delaware Supreme Court denies the original deal. In response to the Chancery Court’s decision to invalidate the pay proposal, Tesla has dissolved its incorporation in Delaware and reincorporated in Texas.
Musk, in a recent interview at the Qatar Economic Forum, expressed his frustration with the Delaware judge who invalidated his pay, calling her an “activist” playing a judge in a Halloween costume. He emphasized that his decision to remain at Tesla is not solely about pay but also about gaining more control over the company.
The move to Texas marks a shift from Delaware’s long-standing reputation as the dominant state for incorporation due to its corporate-friendly laws and specialized business courts. Other states have been competing for Tesla’s business following the company’s decision to reincorporate elsewhere.
Stavros Gadinis, a law professor at the University of California, Berkeley, believes that Tesla’s board’s next steps will shape the future of corporate law. Texas and Delaware courts may differ in their views on director independence, with Texas courts not being bound by Delaware law. Delaware’s strict interpretation of independence could clash with Texas’s more flexible approach.
The Delaware court’s concern about Musk’s influence over Tesla’s board led to the stricter scrutiny of the pay deal, ultimately resulting in the Chancery Court’s decision. Delaware has since amended its corporate law to clarify the definition of controlling shareholders, but the issue of board dominance remains a point of contention.
Kelsey Szamet, a partner at the law firm Kingsley Szamet, noted that Tesla’s case raises questions about corporate governance and executive compensation. Regardless of the outcome, the case is likely to impact how other boards approach compensation packages for executives.
Executive compensation attorney Dario Mendoza of Vinson & Elkins pointed out that while Texas law is flexible regarding C-suite pay arrangements, it cannot retroactively reinstate Musk’s disputed plan from 2018. Despite the challenges, Tesla’s stockholders approved Musk’s pay-performance-based package for a second time in June, following a recommendation from an independent director.
In conclusion, Tesla’s exploration of alternative ways to compensate Elon Musk under Texas law marks a significant development in the ongoing legal battle over his pay package. The outcome of this case could have far-reaching implications for corporate governance and executive compensation practices in the future. After a series of stock option grants triggered when Tesla’s market cap and operational goals reached escalating benchmarks, Elon Musk’s compensation plan has been a topic of much discussion and speculation. The original plan, which granted Musk a total of 304 million shares at $23.34 each, was worth roughly $56 billion at the time of issuance. However, due to an increase in Tesla’s stock price, the value of the plan has soared to over $100 billion, reaching a peak of $146 billion in 2024.
The options that cost Tesla $2.3 billion in 2018 would now carry an accounting charge of around $50 billion if reissued today. With Musk’s interests outside of Tesla and the uncertainty of the company’s future stock performance, experts believe a replacement compensation plan for Musk may involve a combination of outright payments, performance-based incentives, and potential investments or loans in outside enterprises by Tesla.
One possible method could involve granting Musk “in-the-money” options with an exercise price lower than the current fair market value of Tesla’s stock. These options would automatically vest on specific dates, ensuring compliance with tax regulations. Another approach could be to grant Musk full value stock or restricted stock units, which do not require an exercise price and can be vested based on certain conditions.
However, a recent lawsuit by a Tesla shareholder challenged Musk’s original pay plan, arguing that the board members had breached their fiduciary duties by approving the deal. Delaware Chancellor Kathaleen McCormick ruled in favor of the shareholder, deeming the plan invalid due to Musk’s significant influence as a controlling shareholder.
As Tesla’s new compensation committee, led by Wilson-Thompson and board chair Robyn Denholm, works on devising a new compensation plan for Musk, experts suggest that any alternate arrangement should incentivize long-term goals and restrict immediate selling of shares or options by Musk. This could ensure that Musk remains committed to leading the company and that his compensation is tied to maximizing long-term shareholder value.
Ultimately, the decision on whether to pursue a replacement compensation plan for Musk or appeal the court’s ruling lies with Tesla’s board and shareholders. It remains to be seen how the situation will unfold and what implications it may have for Tesla’s future performance and leadership structure. Elon Musk’s unconventional pay package at Tesla has been a hot topic of discussion among shareholders and legal experts. The CEO’s deal, which is entirely performance-based and offers no salary, has raised questions about fairness and transparency in corporate governance.
Legal expert Gadinis emphasized the importance of ensuring that CEO pay is tied to stock price performance to align incentives with shareholder interests. He noted that Musk had already met the targets set in his pay deal, which offered shareholders a glimpse into the structure and outcomes of the agreement.
In light of these developments, a new pay plan under Texas law would require Tesla to disclose its pay proposal to shareholders and gain their approval. However, a recent Texas law, SB29, has made it more challenging for shareholder disputes like the one against Tesla to proceed in the state. The law provides personal liability protection to officers and directors who act in good faith, while also setting stricter criteria for minority shareholders to bring derivative claims.
Tesla recently amended its bylaws to reflect these changes, stipulating that shareholders must own at least 3% of the company’s shares to maintain a derivative suit. This move aligns with Musk’s broader strategy of relocating his companies, including SpaceX and Neuralink, from Delaware to Texas and Nevada, respectively, in search of a more favorable legal environment.
The exodus of high-profile businesses from Delaware has prompted the state to amend its corporation laws, granting more leeway to board members in conflicted transactions and imposing stricter conditions for investors seeking company records. These changes aim to protect companies and their directors from frivolous lawsuits and enhance corporate governance practices in the state.
Despite these legal developments, some experts have expressed concerns about the impact on the US corporate governance system. Judge McCormick’s decision in the Tesla case has drawn criticism for potentially undermining investor confidence in the country’s governance standards. International investors, in particular, value the US system for its transparency and accountability, which could be jeopardized by recent legal changes.
As Tesla navigates these legal challenges, the company has delayed the filing of its proxy statement, potentially allowing more time to devise a backup pay plan for Musk. The CEO himself remains committed to leading Tesla in the future, despite acknowledging the uncertainties of life.
In conclusion, the debate over Elon Musk’s pay package at Tesla reflects broader issues of corporate governance and legal frameworks in the US. As companies and regulators grapple with these challenges, the integrity and transparency of the corporate governance system will continue to be a focal point for stakeholders and investors alike. The Importance of Mental Health in Today’s Society
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