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Tesla revives Musk’s multibillion-dollar pay proposal despite court ruling

1 month ago 41

Electric-vehicle maker Tesla is asking shareholders to ratify a pay package for CEO Elon Musk worth tens of billions of dollars — the same agreement that was thrown out by a Delaware court this year.

“We are coming to you now so you can help fix this issue — which is a matter of fundamental fairness and respect to our CEO,” Robyn Denholm, chair of Tesla’s board, wrote in a Securities and Exchange Commission filing Wednesday.

The request sets up another battle over the compensation package for Musk, one of the world’s richest men. Shareholders and corporate governance experts are likely to clash before the upcoming meeting where investors will decide whether to greenlight another exorbitant agreement rewarding Musk — at a moment when he and Tesla are grappling with stagnating revenue and slumping stock prices.

After the Delaware ruling voiding the 2018 package, Musk started publicly pushing to move the company’s incorporation to Texas, which he hopes will be friendlier to his businesses. (In February, he moved his rocket company SpaceX from Delaware to Texas.) Shareholders are slated to vote on whether to move Tesla, and whether to ratify the pay package, at a meeting in June.

Tesla declined to provide additional comment to The Washington Post.

Should shareholders ratify the new package, Musk will still have to appeal the Delaware decision voiding the agreement, said Anat Alon-Beck, associate professor of law at Case Western Reserve University.

“Even if shareholders approve this, they’re going to move the company and face more litigation — that’s for sure,” Alon-Beck said.

Tesla’s stock price has plunged 37 percent so far this year, which has dented the pay package’s value. But it was still worth nearly $45 billion based on the stock’s closing price on April 12, Tesla said in the filing, down from $56 billion when the Delaware court issued its ruling in January. It would still be the most valuable compensation agreement in corporate America, at least on paper.

Tesla closed at $155.45 a share on Wednesday, down 1.1 percent.

In a letter to shareholders, the company said the package was “100% at-risk” because Musk was “entitled to receive NO salary, NO cash bonuses, and NO equity that would vest simply by the passage of time; instead, he was asked to deliver results that most thought were impossible.”

Tesla argued that giving Musk such a massive compensation package is justified because he has led the company during a period of “transformative and unprecedented growth.” The company also argued that the Delaware court decision is unfair to shareholders because 73 percent of them had voted for the pay agreement in 2018.

Ann Lipton, associate professor of law at Tulane University, said it’s “inaccurate” for Tesla to argue that Musk hasn’t been compensated for his work with the company.

“Even at the time this pay package was awarded, he already had a big slice of Tesla, which meant he had plenty of motivation to increase the stock price,” Lipton said.

Plaintiffs in the Delaware case alleged that the compensation committee and board of directors’ process for the 2018 approval was “deeply flawed.” Chancellor Kathaleen McCormick said Musk used his “enormous influence over Tesla” to shape the package, leveraging his personal relationships with the board members who approved it, including longtime friends and his former divorce lawyer.

“We’re only here because Elon Musk and Tesla do not adhere to the most basic practices of corporate governance,” Lipton said. “A normal company would take the L if necessary, but Musk wants to continue with this very public feud.”

One wrinkle for Tesla is that “a basic of contract law is that you can’t make a contract for something you’ve already done,” said Brian Quinn, a professor at Boston College Law School. The company is trying to get around that by using a section of Delaware law that lets investors “ratify” actions that are otherwise improper. But the stage is still set for further litigation, Quinn said.

Musk has said he hopes for more favorable treatment should Tesla reincorporate in Texas, and Quinn said he has no doubt shareholders will approve the move. But he says Musk might be mistaken about Texas being kinder to Tesla, noting that the state is “notorious” for having a “very aggressive plaintiff’s bar.”

“If you move to Texas hoping you’re not going to get sued, good luck with that,” Quinn said.

Dan Ives, an analyst at Wedbush Securities, said he believes the company will win shareholder support for both measures.

“On the [compensation] package which was already approved by shareholders at the time in 2018, this has been an area of contention among some investors but we would expect the 2018 package will be reapproved and the Delaware court ruling would be moot in essence as Tesla will now be moving to Texas,” Ives wrote Wednesday in a note to investors.

In its Wednesday proxy statement, the board said a new vote to “re-approve” the compensation package is needed in light of the Delaware court decision.

The new proxy proposal has more details about how the board devised the pay package. A special committee of the board argued for “subjecting the original 2018 package to a new shareholder vote, accompanied by expansive disclosure” about the process that was undertaken and possible conflicts of interest for directors.

“This will give all of Tesla’s stockholders their voice back,” the special committee wrote. “They will get to decide Musk’s compensation, with full knowledge of everything criticized in” the Delaware case.

Lipton noted that the “special committee” was composed of a single board member, which is unusual. Based on the proxy filing, she said, it seems like the committee’s goal was to alleviate “uncertainty” around Musk’s compensation rather than to reevaluate the deal.

“The special committee disclosures explicitly say that she didn’t reconsider whether the package was fair to shareholders,” Lipton said. “There was no attempt to revisit the pay package.”

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