When Elon Musk tries to make an argument, he holds a referendum on X, the social network he bought with his profits from Tesla. Now a Delaware judge has canceled the company's unprecedented multimillion-dollar compensation plan that awarded him up to $55 billion. In response, Musk considered moving Tesla's headquarters from Delaware to Texas. He organized an informal vote
“Should Tesla move its headquarters to Texas, where it has its physical headquarters?” was the question asked in a tweet by the company's first shareholder, who controls about 13% of the capital. Participation was 1.1 million tweeters, representing 0.6% of Musk's followers on the network, but after 87.1% supported the broadcast, the tycoon has seen it as a valid argument.
Delaware is the home and headquarters of Tesla, like the vast majority of large American companies, as it is considered the country that has the most flexible and useful legislation for companies, which comes with tax advantages and an entire business-friendly ecosystem of regulatory and dispute resolution mechanisms.
For Musk and his unorthodox way of doing business, a jurisdiction like Delaware isn't always the most convenient. For example, when he signed the agreement to buy Twitter and then tried to resign with baseless excuses, the company's lawsuit against him to enforce the signing showed every sign of success. Finally, Musk gave up and continued with the operation. After purchasing the company, he moved the company headquarters to Nevada.
After the ruling that nullified his compensation, Musk rebuked that jurisdiction: “Never incorporate your company in the state of Delaware. “I recommend incorporating in Nevada or Texas if you prefer shareholders to decide matters,” tweeted he. Elon Musk's compensation plan was approved by shareholders on the board with a majority of 80%.
After the vote on the social network, Musk announced the next step: “The public vote is clearly for Texas!” “Tesla will immediately initiate a shareholder vote on moving the founding state to Texas,” he announced, without respecting any corporate procedure, as if the board had nothing to say about this matter.
In part, it is this dependence of the board on Musk himself that led Judge Kathaleen McCormick to declare void the record $55,000 million in compensation disputed by a minority shareholder. “The process that led to the approval of Musk’s compensation plan was deeply flawed. “Musk had extensive connections to the people responsible for negotiating on behalf of Tesla,” the judge wrote in a 201-page ruling.
“She had a 15-year relationship with the chairman of the compensation committee, Ira Ehrenpreis. The other compensation committee member who served on the working group, Antonio Gracias, had business dealings with Musk for more than 20 years, as well as some sort of personal relationship that led him to regularly vacation with Musk's family. “The working group included members of management indebted to Musk, such as General Counsel Todd Maron, who was Musk's attorney in his divorce and whose admiration for Musk caused him to cry during his testimony,” the judge paraphrased to prove that Tesla's board lacked independence from Musk.
His lawyers said the package had to be large to incentivize Musk not to leave, an argument McCormick rejected. “Swept up by the 'everything is fine' rhetoric, or perhaps starry-eyed by Musk's superstar appeal, the board never asked the $55.8 billion question: 'Was the plan for Tesla even necessary to achieve this?'” “To keep Musk and achieve his goals?” the judge wrote in her ruling.
In 2018, Tesla estimated the value of Musk's compensation package at $2.28 billion, already a record, but the actual amount increased as the stock appreciated. Under the plan, Musk received a portion of stock options every time Tesla's market value increased by $50 billion. Ultimately, you would have the opportunity to purchase nearly 304 million shares for $23.34 each. Tesla has met all performance goals since receiving the package. Its shares are trading at about $191, down from $21 at the start of 2018.
The judge called the package “the largest potential compensation opportunity ever seen in the public markets by several orders of magnitude.” “In short, Musk started a process of autonomous driving, adjusting the speed and direction along the road to his liking. The process was unfairly priced,” he explained.
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