What will happen to Musk’s return at Tesla after rejecting a $56 billion package? It’s Complicated – 01/31/2024 at 10:00 PM

By Hyunjoo Jin and Tom Hulse ((automatic translation by Reuters, please see disclaimer https://bit.ly/rtrsauto))

After a Delaware court on Tuesday rejected Elon Musk’s $56 billion compensation plan, Tesla’s chief executive and a board seen as captive to him must find a way to negotiate a replacement contract. The task will not be easy.

The move is a boost to investors who have worried about the independence of Tesla’s board of directors for years. That could be a turning point for Mr. Musk, who recently said he wasn’t comfortable making Tesla the artificial intelligence leader if his control didn’t increase with a new plan for remuneration.

“Tesla shareholder Ross Gerber said the court ruling required new independent members on the board who would provide oversight to the CEO. “Then the situation becomes very complicated, because Elon — it’s either that or the highway,” Mr. Gerber said. .publicly considered serving as an independent on the board last year.

Musk hasn’t said what he’ll do, though the call is almost certain. Tesla shares fell nearly 1% on Wednesday.

First, if there is a verdict, Musk will have to give back what he got. He met the terms of the 2018 contract and received 12 options worth about $51 billion.

As of Wednesday, Musk was worth $184 billion, according to Forbes, and has complex financial affairs, including loans using stock as collateral. Public records do not indicate whether he took out a loan secured by Options, salary research company Equilar said. He did not exercise the options in the shares, so it may not be technically difficult to give up his gain.

Deciding what to replace the offer with will be difficult, as it is unclear who will be negotiating on Tesla’s side. The judge who rejected the package called it an “inconceivable amount”, unfair to shareholders and questioning the board’s independence.

Equilar estimated in 2022 that Musk’s package was nearly six times the combined compensation of the 200 highest-paid executives in 2021.

Delaware Judge Kathleen McCormick said that several of Tesla’s current board directors, including James Murdoch, Chairman Robin Denholm and Ira Ehrenpreis, had demonstrated a lack of independence when making decisions about remuneration.

Denholm and Ehrenpreis are on Tesla’s compensation committee, as is Kathleen Wilson-Thompson, who joined the board in late 2018 after shareholders approved the compensation plan.

“They’re going to have to refresh the board. I mean, he might not like it, but it’s going to be very difficult to run this company the way he’s running it,” said Charles Elson, director of the University of Delaware Center. Corporate Governance.

Mr. Musk could decide to leave, he added, but doing so would torpedo the value of the 13% stake he holds, regardless of compensation terms.

Even before Tesla announces this year’s annual general meeting, several shareholders have already proposed resolutions aimed at giving investors more control by moving to the annual election of directors and eliminating the need for an absolute majority vote.

In a hearing before Tuesday’s ruling, a lawyer for a shareholder who filed a lawsuit against Mr. Musk ( ) told the court that there is precedent for Mr. Musk being paid by Tesla for his past performance, but that the remuneration must be fair. And go through the usual procedures that, according to the judge, were not applied during the 2018 negotiations.

Mr. McCormick questioned whether Mr. Musk needed to be paid, as his stake in the company has seen his fortunes grow with Tesla’s success.

“There are too many examples of people with pre-existing large holdings who have forgotten all about returns: Zuckerberg, Bezos, Gates, and others so familiar to the world that no first name is necessary,” Mr. McCormick writes. .

Musk has a strong track record in all negotiations.

When Musk’s package was approved in 2018, Tesla’s stock market value was $53 billion. The company was losing money and struggling to ramp up production of its Model 3 sedan. At the time Musk described Tesla as “production hell”.

In 2021, now profitable, after overcoming the pandemic and launching the small SUV Model Y, Tesla’s stock market value reached $1.2 trillion. According to Car and Driver estimates, the Model Y became the second best-selling car or SUV in the world last year.

Tesla’s valuation has fallen by about $600 billion, but it’s still more than 10 times what it was at the start of the process, and the company is still valued by most industry veterans at more than the value of automobiles combined.