Tesla shareholders face a crucial decision regarding Elon Musk in the coming month. On June 13, they will vote on whether to reinstate stock options valued at $46 billion for Musk, Tesla's CEO and one of the wealthiest individuals globally. This decision follows a judge's ruling in January that invalidated the award.
This revote on such a substantial pay package is unprecedented, with significant implications for Tesla. The company is pursuing ambitious plans that its board believes Musk is crucial to achieving. Approval of the stock options could alleviate concerns among investors that Musk might depart if not compensated adequately, a fear that some believe has been depressing Tesla's stock price. Additionally, Tesla hopes that a fresh vote will avoid a protracted appeals process in court.
To secure support, Tesla board chair Robyn Denholm and others are embarking on a global campaign to rally shareholders. Their challenge is to return shareholders to the mindset of 2018 when they initially approved Musk's pay package and to separate these original intentions from current concerns.
In 2018, when Tesla had a market value of approximately $50 billion and was experiencing financial losses, shareholders approved Musk's pay package. Since then, Tesla's valuation has soared to nearly $570 billion. Denholm and Tesla argue that Musk deserves this compensation for achieving the ambitious goals set in 2018, stating that he has earned it and should receive it.
However, current circumstances pose challenges. Tesla's stock has declined about 30% this year amid lower sales and margins. Musk's various ventures, such as his ownership of the social media platform X and his alterations to Tesla's plans, as well as controversies surrounding his drug use, have raised concerns. Musk has dismissed claims of being distracted and has denied failing drug tests.
Moreover, in recent years, individual investors, who are more difficult to sway, have acquired a significant portion of Tesla's shares. In 2018, shareholders voted 73% in favor of the pay package, but Tesla anticipates a tighter vote this time.
The 2018 pay package was unique, offering Musk the opportunity to purchase a significant stake in Tesla at low prices if the company's shares surged by more than 10 times and it met several operational targets. If he failed, he would receive nothing. Musk planned to use the money for his Mars colonization project.
Although Tesla achieved all targets within five years, a Delaware judge earlier this year ruled that the board's negotiation process for the pay package was flawed due to directors' close ties to Musk. The judge invalidated the shareholder vote and ordered the pay package to be rescinded. Musk criticized this decision on X, a platform he owns, and the board has proposed a fresh shareholder vote to address the judge's concerns.
However, the shareholder who sued over the pay is contesting this idea, and appeals are likely to continue.
The board is also proposing moving Tesla's incorporation from Delaware to Texas, where its corporate headquarters are located.
Denholm, who was involved in negotiating the pay package and succeeded Musk as chair, is leading efforts to persuade shareholders. She is engaging with shareholders and proxy advisers whose opinions carry weight.
Some major shareholders are reevaluating their positions, and T. Rowe Price, which supported the pay package in 2018, is pushing for a vote. Others argue that Musk has already been generously rewarded by Tesla's stock price rise. Denholm and Tesla are presenting several arguments, including shareholder rights and Musk's commitment to Tesla, to persuade shareholders to ratify the original vote, regardless of their stance on the package.
Individual investors, who typically do not participate in shareholder votes, now own about 30% of Tesla's shares.
To approve the pay package, a majority of voted shares, excluding Musk's stake and a small portion owned by his brother, must support it, prompting Tesla to encourage individual investors to vote.
The vote to incorporate in Texas requires a majority of all outstanding shares, making it an even more challenging endeavor. Tesla is rolling out new advertisements, including paid posts on X, to encourage investors to vote.