Musk's $56B Tesla Pay Vote Continues Amid Legal Battles

Key Takeaway

• Tesla shareholders will vote on reinstating Elon Musk's $56 billion pay package, previously nullified by a Delaware judge.
• Major proxy advisers recommend voting against the package, while large shareholders show support; legal implications remain uncertain.
• Norway's $1.7 trillion oil fund opposes the pay award, citing corporate greed and dilution concerns.

Shareholder Vote on Musk's Pay Package

Tesla shareholders are set to vote on Thursday regarding the reinstatement of CEO Elon Musk's substantial pay package, which was previously nullified by a Delaware judge earlier this year. The company is seeking to leverage a legal principle known as "ratification," where a shareholder vote can validate a corporate action. Tesla's proxy note to shareholders emphasized that ratification "will restore Tesla’s stockholder democracy." This is the first instance of a company attempting to use this principle after its board was found to have breached its fiduciary duty in approving the deal initially.

The outcome of the vote remains uncertain. Major proxy advisers, Institutional Shareholder Services (ISS) and Glass Lewis, have recommended voting against the pay package, while many large shareholders have expressed support. The result will be a significant indicator of investor sentiment towards rewarding successful CEOs, even those with controversial reputations. Tesla has acknowledged the unpredictability of the vote's legal implications, stating, "The [Tesla board] special committee and its advisers noted that they could not predict with certainty how a stockholder vote to ratify the 2018 CEO performance award would be treated under Delaware law in these novel circumstances."

Legal and Corporate Governance Implications

If the vote passes, dissident shareholders could potentially sue again or amend their original case to challenge the new pay vote. They might argue that compensating Musk for past performance constitutes a "waste" of corporate resources and another breach of fiduciary duty. To avoid a repeat of the 2018 situation, Tesla has taken steps to ensure greater independence in its board's decision-making. A new independent director, Kathleen Wilson-Thompson, has approved the same terms as in 2018, which include 304 million shares, equating to roughly a tenth of Tesla's outstanding shares if certain stock price and performance targets are met. Wilson-Thompson spent over 200 hours on her deliberations, consulting her own legal, financial, and academic advisers.

Tesla has argued that a substantial pay package is necessary to keep Musk focused on the carmaker, given his involvement in other ventures such as SpaceX, social media platform X, and his AI start-up, xAI. The proxy note to shareholders highlighted that Musk found the pay deal "motivating" and confirmed that its ratification would encourage him to continue dedicating his time and energy to Tesla.

Opposition and Broader Context

Norway's $1.7 trillion oil fund, the world's largest sovereign wealth fund and Tesla's eighth-largest shareholder, has announced it will vote against Musk's $56 billion pay award. The fund cited concerns about the size and structure of the pay package and its failure to mitigate "key person risk." The Norwegian fund, which owns about 1% of Tesla, worth approximately $8 billion at the end of 2023, had also voted against the pay package when it was first proposed in 2018. The fund's CEO, Nicolai Tangen, has been vocal about corporate greed, stating, "We are seeing corporate greed reaching a level that we haven’t seen before and it’s really becoming very costly for shareholders in terms of dilution."

The Norwegian fund also plans to vote in favor of Tesla moving its incorporation from Delaware to Texas, a proposal that emerged following Musk's dissatisfaction with the Delaware court's decision. Additionally, the fund supports a shareholder proposal backing trade union rights, which Tesla opposes. Tesla has been involved in a prolonged dispute with trade unions in Sweden over its refusal to recognize collective bargaining.

Street Views

• Lawrence Hamermesh, Widener University (Neutral on Tesla's pay package ratification):

  "In theory, the chancellor could say that with the stockholders having approved it on a fully informed basis that is an effective ratification, and the product of appropriate stockholder action, and in a way my previous ruling is moot."

• Rick Horvath, Dechert (Bearish on Delaware courts' impact on companies):

  "Both public and private companies have expressed concerns over perceived uncertainty from the Delaware courts. There is a growing perception that decisions are results-based, and a minor mis-step could result in significant legal exposure. The discussion around alternative domiciles is at its highest point in a generation."

• Ann Lipton, Tulane University (Bearish on Delaware court rulings for large shareholders):

  "These companies went public with these existing stockholder agreements [giving power to large shareholders] and for the first time were tested legally, the court said not they are not OK. It has scared a lot of companies."