May 19, 2024

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Tesla wants shareholders to return Musk's $56 billion pay package that was thrown out by a Delaware judge

Tesla wants shareholders to return Musk's $56 billion pay package that was thrown out by a Delaware judge

In a filing with federal regulators early Wednesday, the company said it would ask shareholders to vote on both issues during its annual meeting on June 13.

In January, counsel Kathleen St. Jude McCormick ruled that Musk was not entitled to a historic compensation package awarded by Tesla's board of directors that would likely be worth about $55.8 billion over 10 years starting in 2018.

Five years ago, a lawsuit filed by a Tesla shareholder claimed that the pay package should be voided because it was dictated by Musk and was the product of sham negotiations with directors who were not independent of him.

A month after the judge's ruling, Musk said he would try to move Tesla's listing to Texas, where he had already moved the company's headquarters.

Almost immediately after the judge's ruling, Musk did just that with Neuralink, his own brain implant company, moving its corporate headquarters from Delaware to Nevada.

In a letter to shareholders this week, Chairman Robyn Denholm said Musk had achieved the growth he was looking for in the automaker, with Tesla meeting all stock value and operational targets in the 2018 CEO pay package that were approved by shareholders.

“Because the Delaware court disagreed, Elon was not compensated for any of his work for Tesla over the past six years, which helped create significant growth and shareholder value,” Denholm wrote. “This strikes us — and many of the shareholders we have already heard from — as fundamentally unfair, and inconsistent with the will of the shareholders who voted for it.”

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Tesla has recorded record deliveries of more than 1.8 million electric vehicles worldwide in 2023, according to a regulatory filing. But the value of its shares has eroded rapidly this year as electric car sales have declined.

Future growth is in doubt and it may be difficult to convince shareholders to support a large pay package in an environment where competition is increasing around the world and demand for electric vehicle sales is fading.

Tesla shares have lost more than a third of their value this year, as massive price cuts failed to attract more buyers. The company said it delivered 386,810 vehicles from January to March, about 9% fewer than it sold in the same period last year.

Shareholders will also be required to cast a non-binding advisory vote on 2023 executive compensation.

In January, Musk challenged Tesla's board of directors in a post on X, the social media platform he now owns, to come up with a new compensation package. Unless he gets 25%, he wrote that he would prefer to build products outside of Tesla, apparently with another company.

Wedbush analyst Dan Ives, usually bullish on Tesla, said in an interview that the filing does not address multiple issues including Musk's future compensation.

“It's the elephant in the room because Musk threatened about X, and that was a huge drag” on Tesla shares, Ives said.

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He said Musk needs to commit to being Tesla CEO for three to five years and developing artificial intelligence with the company. When the company reports first-quarter earnings next week, Musk needs to clarify future growth plans, including the case of the Model 2, a small electric car that costs about $25,000, Ives said. Otherwise, he added, dark days lie ahead.

“Investors aren't just taking Musk's word for it,” he said. “There is a feeling that the plane is crashing into the ocean and that the painting focuses on the salted peanuts.”

Musk has less leverage than he did in January because of the decline in stocks this year. “He went from a Cinderella story to a nightmare on Elm Street in the space of six months,” Ives said.

At the time of the Delaware court's ruling, Musk's package was worth more than $55.8 billion, but the court may have cost the mercurial CEO more than $10 billion due to the company's stock decline this year. The file stated that Musk's compensation for 2018 amounted to $44.9 billion at the close of trading on April 12.

Since last year, Tesla has reduced prices by up to $20,000 on some models. Price cuts caused the value of used electric cars to decline and squeezed Tesla's profit margins.

Tesla said this week that it would let about 10% of its workers go, or about 14,000 people.

In the filing, Tesla's board wrote that the decision to seek shareholder approval for Musk's 2018 pay package was made by the board after it received a report from a special committee made up of one of the board members, Kathleen Wilson Thompson.

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If there is any significant vote against future executive pay packages, the board wrote, “we will take into account the concerns of our shareholders, and the Compensation Committee will evaluate whether any actions are necessary to address these concerns.”

Tesla shares, which fell another 8% this week, fell about 1% on Wednesday.


Chapman reported from New York. This story has been corrected to clarify that shareholder votes on future executive compensation are advisory only.