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Tesla plan to re-run vote on Elon Musk’s record pay deal—now worth $45bn—has a fatal flaw, warns Tulane law professor

In Business
April 18, 2024

Tesla could be setting itself up for a new legal challenge over Elon Musk’s record compensation deal, a law professor at Tulane University warned.

On Wednesday, the company urged investors to “restore Tesla’s stockholder democracy” by ratifying in June the 2018 vote that awarded Musk the largest pay package in human history after a Delaware court ruled the approval from six years ago null and void over governance failings.

By framing it as a moral obligation to ensure Musk gets what he had already earned rather than illustrating exactly how it will benefit the company, however, Tulane’s Ann Lipton told CNBC this re-run could end up backfiring on Tesla. U.S. corporations do not exist to be fair to their CEO, but rather to enrich their shareholders.

“They don’t actually have to pay him for past work, and that’s exactly the issue,” Lipton said on Wednesday. “That kind of generosity that is unnecessary could easily be considered waste, legally, and therefore can only be approved by a unanimous shareholder vote.”

In other words, awarding him a $45 billion comp deal—down from $56 billion previously due to the drop in Tesla’s share price—risks running afoul of laws prohibiting boardrooms from gifting away assets that belong to their investors.

A Delaware ruling in the case of Saxe v. Brady from the 1960s sets standards for what reasonably constitutes excessive and unreasonable waste and spoilation, an act that is only legal if approved by every single shareholder.

“Let’s say a company decides ‘I want to light my assets on fire, there’s no benefit to the company, I just want to do it cause it’s fun’,” she continued. “You would need a unanimous shareholder vote for that.”

Tesla’s fan base fracturing into two warring camps

The board could make a case that restoring Musk’s pay package would ensure the totemic entrepreneur doesn’t quit as its CEO. Yet that has become a tougher sell, not just because the Tesla investor base has split into pro-Musk and anti-Musk factions.

One issue is that Musk divides his time between running Tesla and his myriad other business interests. These now includes serving as chief technology officer at his social media company X since late 2022, as well as CEO of Grok chatbot creator x.AI Corp, his latest endeavor, since March of last year.

With Musk’s full attention not focused on Tesla, the wheels have begun to come off the carmaker’s growth story. Vehicle sales are declining on a year-on-year basis for the first time since the COVID pandemic erupted, and like-for-like earnings are expected to shrink 40% when Tesla reports on Tuesday. The company also said goodbye this week to over a tenth of its staff, including veteran executive Drew Baglino.

Pointing to the share price plumbing 52-week lows this week, Bloomberg columnist Matt Levine said it was “a bit of an odder ask” to grant Musk billions in retrospect for having achieved market cap milestones in the past that no longer apply following a slump in the stock.

“As I previously wrote: ‘it is possible that the rule of this case is that Tesla is not allowed to pay Musk $55.8 billion, no matter what its shareholders think, no matter how many of them vote to approve it in a fully informed vote,” he argued on Wednesday.

This story was originally featured on Fortune.com

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