Elon Musk’s big payday

0:05Pushkin.

0:09Shareholders in Tesla have just awarded the company's CEO, Elon Musk, one of the largest pay packages ever. $56 billion worth of the company's shares. Is he worth it? This is Unhedged, the market and finance podcast from the Financial Times. And Pushkin, I'm Rob Armstrong, coming to you from Unhedged World headquarters in New York City, joined by Sujit Indap, the FT's Wall Street editor and the world's preeminent journalistic expert on the chancellery court of Delaware. Sujit, welcome. Well, as the world's leading expert and only person following Delaware courts, I will correct you and point out it is the Delaware court of chancery.

0:56I stand corrected. Chancery court. So why, if the shareholders way back in 2018 approved this immense pay package for Elon Musk, how did it end up becoming controversial in 2024? Well, the thing that happened most immediately or most shockingly was, in fact, he hit all these outlandish targets that were set out for him in 2018. There was 12 different tranches, if you will, and they were increasingly far-fetched or unrealizable. So the idea was that the more the value of the company, its market cap, rises, the more shares he will be awarded by the board. It was that and some operating targets like revenue and EBITDA.

1:47And they were increasingly more difficult. But to hit them all just seemed virtually impossible at the time. And that ultimately happened. And at the same time, there happened to be a single shareholder who filed a lawsuit about this award. Yeah. So it was almost like back at the time, what was the market cap of Tesla in 2018? It was like$100 billion or less. and the targets were up to 650. So it seemed like almost the board was just writing numbers in the air. Like, and if Tesla becomes the biggest company in the world and Elon Musk is king of the universe and everything we touch turns to gold, then of course we'll give Elon Musk$56 billion or what has turned out to be$56 billion at the current share price.

2:32Yeah, so there's two ways to think about it. One is these will never be reached, so it's totally hypothetical. Or two, if he does hit them, that's an amazing result for all of us. Everybody got so rich that who cares? Now, if that was approved back in 2018, I can't, you know, my basically libertarian instincts say, look, you had a contract back in 2018. It had these slightly bonkers targets in them. He hit them. Give them the money. Everybody said no givesies, no backsies. And there was a shareholder vote in 2018 and roughly three quarters of Tesla shareholders agreed with you. and said, hey, if you can hit these targets, we're happy giving them the shares.

3:12Because we're going to be rich. But you only need one shareholder to file a lawsuit. Okay. It's a relevant fact that the lawsuit succeeded, at least initially. It did. So there was this decision earlier this year. The plaintiff is a gentleman named Richard Tornetta. And in this lawsuit, he focused on how exactly did the board of directors of Tesla at the time come up with this pay package and this decision to award Elon Musk these shares and said, you know what, this was a breach of fiduciary duty. And because there's a breach of duty, it taints the entire process. So what's the idea that Elon Musk held the board members at gunpoint and dictated to them this pay package that they were going to sign off on?

3:57Well, the board of Tesla has always been a polarizing group of people in that they are people deemed to be independent directors who have all these ties to Elon Musk from Silicon Valley. You know, they're co-investors in other businesses and they were investing with Elon Musk and vice versa. And so the idea that your typical board of directors have people who are kind of arm's length from the CEO, that just didn't really manifest itself. So that was the core of the lawsuit. You know, to exaggerate slightly, the contract doesn't count between the CEO and the board when the board is like your mom, your pool cleaner, and brother-in-law or something like that.

4:41Obviously, those are not the case here, but something similar. Or venture capitalists. They have close relationships. Right, or venture capitalists that you are tight with and tight with you and you have close relationships with. And when, in fact, their job as a director is to oversee you as a CEO. But there was another aspect to the judge's decision in the case. She also said, this is just plain too much money. This is crazy. Right. And so there's two aspects of the review here. And we're going to maybe get into Delaware law in a second. But there is this famous idea of the so-called business judgment rule in Delaware that says, if you are a director of a company, you almost never will be second-guessed in a decision you make, even if it's a bad decision, because that's just not something a judge should do.

5:24And no one would be a director if you had someone after the fact saying you made a bad call. But there are instances where the business judgment rule does not apply. And that scenario is when the directors themselves are not independent. So in the Tesla scenario, what happened was there was this review about how independent were these directors. And once the judge determined they, in fact, were too intertwined with Elon, then their decisions got second-guessed. And the judge decided, based on her view of the evidence, the$56 billion, the 304 million shares that were awarded, was in fact beyond the pale.

5:58She looked at compensation consultant reports and just how did – where did Tesla come up with these targets and numbers? And there was no real basis she could find that this was pegged to anything that was defensible. So now we have before us a meaty philosophical question, Suji, which is, is anybody worth this amount of money? Tesla shares have gone bananas. Everybody who has owned them for six years has made a lot of money. The company has changed the car industry in the United States. There's a crazy way in which Elon Musk is the model of the modern CEO, whether you like it or not. On what grounds would you say it's too much money?

6:41I mean, other people don't get paid that much, but most other companies don't go up in value this much. I think the most interesting thing, the judge, her name is Kathleen McCormick. She's the chancellor of the Delaware Court of Chancery, the lead judge on that court. She said, Elon Musk already owns$200 billion of Tesla stock. That alone should be enough of a motivation to make the stock price keep going up. and look at all these other CEOs out there, Bill Gates and others. They had huge stakes and they were never taking more shares along the way. So he's already the richest man in the world.

7:17And this grant can't be tethered to any compensation consultant report or any precedent transaction. And in my judgment, it's just too much. Right. So there's two aspects to an award like this for an executive. There's rewarding them for what they've done. And there's also motivating them to look out for the company and for the interests of shareholders. And the judge seems to have decided, you know what? This guy's motivated enough. Yeah. And so the shares that are being awarded, that is like dilution to existing shareholders. And that's the – if you oppose it, that's what you're thinking. That, in fact, we're giving this guy all these shares.

7:59But, in fact, those shares belong to me or the company. They don't come out of nowhere. Yeah, they don't come out of nowhere. They come out of somebody's pocket. You talk about all the time and you write about all the time. This is the most egregious example of stock being granted that there is. OK, well, as it turns out, Tesla asked the shareholders. Elon Musk asked the shareholders. And that was the point of this recertification vote that we had just a few days ago. Right. Is this OK with you guys who are getting diluted? And 70 percent of them said, yeah, go for it. Dilute away. So case closed.

8:35Who's to tell them no? And that was the motivation of this very clever idea of ratification. So after this decision came down early this year, Tesla put out its annual proxy and in it were two proposals. One was this ratification idea saying, you know what? What we're going to do is we're going to cure all those process deficiencies that the judge said last time. We have a new independent director who will be a special committee. She's going to hire her own advisors. We know what the ruling was. We'll attach that to the back of the proxy. And so there can be no doubt as to the new process that we've implemented and what happened last time.

9:12And the shareholders can decide again, do they really want to give Elon Musk the 304 million shares? And they said, yeah, we actually do. So is he going to get the money? It's not so simple. So where we left the existing court case, and recall, again, the judge had overturned the original package in January or February of this year. Where that case lies right now is Elon was planning to appeal that to the Delaware Supreme Court and have it overturned. But before we could get to that phase, the plaintiffs have argued that they should be awarded$5 billion in Tesla shares for saving the Tesla shareholders$56 billion.

9:57There is an irony there that some lawyer and some client of that lawyer are saying, Elon Musk is diluting you shareholders massively. I have pointed this out. Therefore, I should dilute you somewhat. Yeah. And instead of getting 304 million shares, they want 29 million shares. So you can imagine how lawyers reviewed, plaintiff lawyers reviewed in this country that has not gone over very well. So in the middle of all this was this idea of the ratification vote. So there's a bunch of things that are in the soup right now. Which is A, this lawyer fee. B, does this new vote, does it override either substantively or legally the decision overturning the pay package?

10:45So the judge now has to evaluate all these things. So that last point is important. So it is contested whether the recent shareholder vote re-ratifying the pay package even counts. Can you do that? Yes. Is re-ratification a thing? Yeah, is it a thing? And it's completely novel. Again, they're trying to cure something that happened already in a ruling already. And whether you can do that after the fact is, in fact, a contested legal question. And the plaintiff's lawyers are squawking for money. and there's a Supreme Court case and appeal to the Supreme Court. So there's a lot of balls still in the air.

11:24Right, and so, yeah, so it's kind of a mess. But the big picture question, I think, is this. Is a Delaware court, whether it's the trial court, court of chancery, or the Delaware Supreme Court, are they really going to cross the shareholders of Tesla who have voted for this pay package now twice, six years apart? Do they really have the guts to do that? Well, I'm going to turn you from a reporter into a commentary writer. I know you also write commentary. And my instincts about this are very clear. The company belongs to the shareholders. If they want to do stupid things with it, and I would argue they have done stupid things with it in the case of this pay package.

12:06If they want to do stupid things with it, it's their property. They get to do that. And the Delaware court should stay out of it. Do you disagree? Agree? And I think that generally has been Delaware's posture. It's only tricky, though, when you have a controlling shareholder or a dominant shareholder and how minority rights and may just be that 28 percent who didn't vote in favor of this. How are their rights represented and vindicated? And that's a really hard, meaty question. But your point is correct, that ultimately there's a huge majority of shareholders who have twice supported this pay.

12:44Does a court really want to get in the way of that? Well, this issue about the dominant founding shareholder seems likely to come up again. We have a whole class of big tech companies. Google is one. Meta is one where these founding shareholders have massive economic control and even greater voting control than they have economic control thanks to dual class voting structures. And they sort of tower over these companies. And in the case of a Google or a Meta, things have gone so smoothly so far that it hasn't become an issue. But what's happened with the massively powerful Elon Musk, who's kind of done this unconventional and wild stuff, is it's brought this issue to a head, is how to handle these supremely powerful founding shareholders.

13:34That's right. And so the counterpoint to all this is the drama at Paramount, which has this dual-class share structure, and the shareholders want to sell the company, but the founding family doesn't want to. We've had a crazy few weeks in that situation, and people are tearing their hairs out because someone who owns 5 % to 10 % of the company has decided for themselves what they want to do in conflict with what everyone else wants to do. Even if Elon Musk gets the shares in this case, he'll own 25 % of the shares. Is that right? So he won't be – he won't have the magical 51 % voting power over Tesla.

14:09So that makes this a slightly different case. It does. And so this has been a big theme in Delaware of late where you have these shareholders who don't quite have 50%, something below. But in fact, the board members are all somehow tied to that dominant CEO through relationships and what exactly counts as too close a relationship. The one thing I think is important just as an overlay here is talk about like why is Delaware like a dominant venue? Yeah. Well, we can put that in context of a question, right? Elon Musk has threatened to take his ball and take it back to Texas and move the company's operations, Tesla's operations already based in Texas.

14:48He's threatened to take its legal as it what's the term jurisdiction or its domicile, domicile, move its corporate domicile to Texas. Well, he's done it. So he won that vote last week and they've already filed the paper. So I think it is a Texas corporation by now. And why does everybody else seem to want to be in Delaware? And is it good for Tesla to be in Texas all of a sudden? So Delaware has been dominant now for close to 100 years. Actually, New Jersey before that was the place to be. But in fact, they made changes. I think Woodrow Wilson was behind them when he was the governor of New Jersey that led to this exodus to Delaware.

15:28So Delaware has a couple of things going for it. One, it does have this really sophisticated corporate law. And that's developed over decades and created precedent and really sophisticated judges who are seen as nonpartisan and not really on one side or the other and the sophisticated legal community. And so what that's done is made Delaware popular for two constituencies in balance. One is companies who get predictability and they understand the rules of the road. And then two, shareholders like Delaware for the same reason. And if you look at the court and their decisions, they have a very harmonious balance between vindicating shareholder rights and then also prerogatives of CEOs and boards.

16:09And that balance works for both sides. And what is the externality from that? The externality is that theoretically a Delaware corporation should have a greater value because shareholders value it and then companies respond to that. And so now there's an incredible academic debate and there's a real kind of fight going on whether there is a premium to being a Delaware corporation. So has Elon Musk just given up the Delaware premium? In other words, does the move to Texas make Tesla's shares riskier and therefore less valuable? So for now, shareholders based on the stock price, obviously, A, they approved the vote or approved the move.

16:55And B, the stock price reacted neutrally or favorably. So they seem to like the idea of Elon having seemingly a freer reign in Texas and believe that's now a good idea. And he'll be motivated and all these things he's threatened about taking AI elsewhere or spending his time elsewhere. now he's focused again between Texas and the pay package being approved. The question is down the road, as Elon gets older and maybe he gets even more eccentric, have they ceded too much power to him? And do they have shareholders any redress like they once had in Delaware? And that will be the question. The proof in the pudding will be in the eating, the Texas pudding, as it were.

17:42Thank you, Sajid. Up next, Long and Short.

17:57Listeners, welcome back. This is Long and Short, that part of the show where we go long things we like and short things we don't like. I'm going to go short stars. Not only star CEOs, but star players. The big rap against my Boston Celtics was they didn't have a big star, and so they couldn't win a championship. Well, last night, their five non-stars won a championship. Just like the Detroit Pistons of 2004, they proved once again, it's about the team, not the individual, in sports as in corporate finance. Sujit, do you have a long or a short? I am short on climate change this week because we're going to have some hot weather.

18:39in New York, and I am just not ready for it. Doesn't that mean you're long climate change? Like, it's happening. It's happening. I'm shorted. Enjoyed it. You're against it. Yeah, yeah, yeah. All right, yeah. I think we can all pile into your short against climate change. With that, listeners, we'll be back in your feed on Thursday. Unhedged is produced by Jake Harper and edited by Bryant Erstat. Our executive producer is Jacob Goldstein. we had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler.

19:17FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Rob Armstrong. Thanks for listening.

19:44We'll see you next time.