What the $56bn Tesla pay deal setback means for Elon Musk and his empire

A judge in Delaware has determined that Elon Musk must give up $56 billion worth of Tesla shares that he was awarded through a pay package that was geared toward the long term. This development has caused some tumult at the electric vehicle manufacturer and could potentially shift Musk's attention away from issues that need to be addressed within the company and in his other business endeavors.

"Don't ever consider registering your business in Delaware," Musk stated on X, the social network he possesses.

This is the interpretation of the decision for the billionaire and his business if it is confirmed.

How Come The Pay Deal Was Overly Generous?

Back in the beginning of 2018, Tesla disclosed a compensation plan for Musk that was met with skepticism. Its purpose was to keep Musk committed to Tesla as the board was concerned he might divert his focus to SpaceX or other endeavors exclusively.

The plan included 16 distinct financial goals that were divided among gains, earnings, and market value. As per the plan, Musk was given approximately 10% of the company's stocks. If he accomplishes at least 12 out of 16 of these goals, he would be allowed to claim shares worth over $50 billion, marking the most substantial compensation package ever provided.

The goals that required the most effort were related to generating $175 billion in revenue, obtaining adjusted earnings of $14 billion, and reaching a market capitalization of $650 billion.

When this occurred, Tesla's worth was $59 billion and Musk was granted a deal that would grant him no compensation if the company didn't reach a valuation of $100 billion, despite not receiving any salary or pay from the automaker.

In the past, it wasn't a guarantee: Tesla was facing difficulties in producing their cars, constructing them in a tent located in their parking lot. They were even making certain models without necessary components like seats and computer modules due to problems in their supply chain.

Despite missing their previous production goals and only managing to rack up $12 billion in sales, with a meager $400 million in profits, it appeared that achieving their targets of surpassing General Motors in revenue and Microsoft in market value was an impossible feat.

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An ex-employee of Tesla mentioned that nobody considered it to be a serious matter.

Despite everything, the corporation managed to raise their production levels, which led to a significant boost in sales figures and their shares surpassing those of Toyota, ultimately achieving an overall market value of $1tn. Their latest car, the Model Y, was introduced in 2020 and went on to become the top-selling car globally.

According to a former executive at Tesla, nobody else in the world could have achieved what he did. If the cost is $56 billion, that's simply what it is. He is as great as Ronaldo or Messi, and has the privilege to ask for anything he wants.

Who's Suing? Meet The Shareholders

The main person involved in this legal case is called Richard J. Tornetta. He said in a written statement in 2018 that he had been owning Tesla shares without interruption when Elon Musk got his stock reward.

According to legal records submitted in Delaware, Tornetta had taken legal action against Pandora and Sirius XM back in 2019. His claim was that the merger between the two companies left Pandora shareholders at a disadvantage.

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Tornetta raised a concern about Tesla that covers all shareholders through a 'derivative' action, which is a legal claim made by an individual or a group of shareholders.

At first, the demand was to receive compensation for the damage, but the decision concluded with Musk being obligated to return the shares to Tesla as a form of punishment.

The plaintiff's claim that Musk had control over Tesla, despite only having a 20% stake in 2018, was supported by the Delaware court. This meant that the board of Tesla had to prove that the pay package was agreed upon through a fair process and at a fair price, which was difficult and ultimately unachievable.

Impact Of The Ruling On Tesla's Governance

According to Dan Ives, a Wedbush analyst, the recent ruling has caused a chaotic situation for Tesla's board. He thinks that the board will either file an appeal against the verdict or devise a new compensation plan.

For a while now, the company has struggled with maintaining autonomy, and previous attempts by Tesla's governing board to increase supervision have not produced significant results.

The people in charge of Tesla are made up of a group of individuals that includes Kimbal Musk, who is Elon Musk's brother, James Murdoch, who is a long-time associate, and JB Straubel, who was one of the original co-founders. Robyn Denholm has been the chair of the company since late 2018 and has also been a director for ten years.

Following Musk's tweet that he had the necessary funds to take Tesla private in 2018, which led to the US Securities Exchange Commission accusing him of securities fraud, the board attempted to limit his access to the platform.

Attempts to stop Elon Musk from posting controversial messages on Twitter have been unsuccessful. Musk, who acquired Twitter for a staggering $44 billion in 2022 and renamed it as X in the previous year, has been sharing his views on various topics such as immigration policies in the United States, the art of handwriting, and even the subject of chickens. However, despite the concerns raised by many, Musk continues to express his opinions freely on the social media platform.

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According to ex-executives from Tesla, Musk does not face much opposition from the people who are supposed to control his actions.

"Does anyone from the [Tesla] board express any form of opposition or resistance towards anything?"

Auto analyst Philippe Houchois from Jefferies mentioned that the recent incident may prompt alterations in governance. He stated that it would be perilous for the board to persist with their current functioning. Philippe also expressed that he believes the board won't simply approve Elon Musk's desires without careful consideration from now on.

However, those who support the plan argue that the board's duty is to increase the wealth of shareholders and those who bought shares before 2018 have received generous rewards.

Last year, Tesla's total value on the stock market grew by twenty times to reach approximately $1.2tn. Despite recently decreasing to around $600bn, investors have still received a return of ten times their investment, which outperforms the returns they would have received if they had invested in Amazon, Meta, or Netflix during the same period.

A previous executive from Tesla expressed, "The investors and board members have earned such a substantial amount of money that they choose to ignore certain facts."

"Tesla's Potential Business Fallout: What To Expect?"

Following ten years of being on top, the automaker is now facing some intense competition in the electric vehicle market. China's BYD took over as the primary maker of battery-powered vehicles at the end of last year. In efforts to stay current, Tesla is working on a cheaper model that should go into production by late 2025. However, Tesla is also facing a decline in growth as they continue to push deliveries of their Cybertruck.

An individual who used to work for Tesla and has experience in the car industry stated that Tesla was an exceptional case in the automobile sector. However, presently it is acting more similarly to other car companies, and it is struggling to keep up because society is expressing that there are additional alternatives available.

With the deceleration in demand for electric vehicles, Tesla has reduced prices in an attempt to enhance sales. Nevertheless, this move has left current vehicle proprietors infuriated due to the devaluation of their automobiles.

Many people are raising concerns about Musk's most recent choices, particularly since some of the company's top leaders have left at the same time.

Houchois from Jefferies recently expressed criticism towards Musk's disregard for governing responsibilities and obligations, as well as his poor allocation of personal funds. The note also called attention to the doubtful product and strategic decisions made by Tesla, which have led to decreased growth, profits, and overall management unity.

Will Musk's Other Ventures Face Repercussions?

The recent judgment in Delaware poses a risk to Musk's strategy of using his Tesla stock as collateral to secure funding for his expanding business ventures.

Earlier this month, Musk expressed his desire to acquire more shares in Tesla, with the aim of increasing his ownership from 13% to 25%. This move is expected to support the development of the company's artificial intelligence products. As per the regulatory filings, Musk currently holds 13% of Tesla's shares, and he had been granted an additional 304 million of share options under the 2018 plan, which would have increased his stake to roughly 20% had he exercised them.

Last week, the car manufacturer shared their quarterly results and expressed their desire to transform Tesla into an "AI powerhouse". However, the CEO also acknowledged that he could potentially be ousted by an unforeseen shareholder advisory organization, despite his limited control at that point.

Prior to the Twitter acquisition, Musk was already supporting a range of enterprises, such as SpaceX which focuses on rockets, Neuralink which is working on brain implants, xAI which aims to rival OpenAI in the field of artificial intelligence, and the Boring Company which is digging tunnels to be used for transportation in Las Vegas and Los Angeles.

For a while now, the super-rich businessperson has said that they don't have much cash to spare because their riches are mostly invested in their companies, Tesla and SpaceX. People who study and analyze finance have figured out that they've put up several tens of billions of dollars' worth of their shares as security for loans.

Two years from now, in 2022, Musk generated funds for buying Twitter by selling over $20 billion worth of his Tesla shares. He also committed to offering additional funds for a $12.5 billion margin loan, but this particular plan was not carried out.

Tesla's latest annual filing from last year revealed that Musk had committed approximately $49bn, which is approximately one-third of his shareholding, as collateral. This includes the shares he received from the 2018 award, which is currently under discussion in Delaware. In the event that Musk forfeits the 2018 award, over half of his shares in the car company would be held as security.

Corporate governance advisors are worried about the amount of borrowing. Institutional Shareholder Services warned last year that the large number of pledged shares may cause problems for the company's audit committee in monitoring risk effectively.

One simple approach for Musk to strengthen his financial situation without requiring more sales of stocks in his carmaker firm is to sell off some shares in his SpaceX company. Sources suggest that the rocket company, which is privately owned, was valued at a staggering $180 billion when shares were sold in December. An initial public offering for SpaceX seems to be in the cards, and many view it as a lucrative opportunity.

Further coverage was provided by Euan Healy based in London and Tabby Kinder situated in San Francisco.