Tesla is asking shareholders to approve a move to Texas and to re-approve a $55.8 billion pay package for CEO Elon Musk that was recently voided by a Delaware judge.
Musk's 2018 pay package was voided in a ruling by Delaware Court of Chancery Judge Kathaleen McCormick, who found that the deal was unfair to shareholders. After the ruling, Musk said he would seek a shareholder vote on transferring Tesla's state of incorporation from Delaware to Texas.
The proposed move to Texas and Musk's pay package will be up for votes at Tesla's 2024 annual meeting on June 13, Tesla Board Chairperson Robyn Denholm wrote in a letter to shareholders that was included in a regulatory filing today.
"Because the Delaware Court second-guessed your decision, Elon has not been paid for any of his work for Tesla for the past six years that has helped to generate significant growth and stockholder value," the letter said. "That strikes us—and the many stockholders from whom we already have heard—as fundamentally unfair, and inconsistent with the will of the stockholders who voted for it."
On the proposed move to Texas, the letter to shareholders said that "Texas is already our business home, and we are committed to it." Moving the state of incorporation is really about operating under a state's laws and court system, though. Incorporating in Texas "will restore Tesla's stockholder democracy," Denholm wrote.
AdvertisementJudge: Board members “were beholden to Musk”
Musk is a member of Tesla's board. Although Musk and his brother Kimbal recused themselves from the 2018 pay-plan vote, McCormick's ruling said that "five of the six directors who voted on the Grant were beholden to Musk or had compromising conflicts." McCormick determined that the proxy statement given to investors for the 2018 vote "inaccurately described key directors as independent and misleadingly omitted details about the process."
McCormick also wrote that Denholm had a "lackadaisical approach to her oversight obligations" and that she "derived the vast majority of her wealth from her compensation as a Tesla director."
The ruling in favor of lead plaintiff and Tesla shareholder Richard Tornetta rescinded Musk's pay package in order to "restore the parties to the position they occupied before the challenged transaction."
Tornetta's lawyer, Greg Varallo, declined to provide any detailed comment on Tesla's plan for a new shareholder vote. "We are studying the Tesla proxy and will decide on any response in due course," Varallo told Ars today.
In the new letter to shareholders, Denholm wrote that Tesla's performance since 2018 proves that the pay package was deserved. Although Tesla's stock price has fallen about 37 percent this year, it is up more than 630 percent since the March 2018 shareholder vote.
"We do not agree with what the Delaware Court decided, and we do not think that what the Delaware Court said is how corporate law should or does work," Denholm wrote. "So we are coming to you now so you can help fix this issue—which is a matter of fundamental fairness and respect to our CEO. You have the chance to reinstate your vote and make it count. We are asking you to make your voice heard—once again—by voting to approve ratification of Elon's 2018 compensation plan."
Renegotiating too costly, board member says
Denholm's letter was accompanied by a proxy statement and a report from a "special committee," which consists of just one person: Kathleen Wilson-Thompson, who joined Tesla's board in December 2018 after the original pay-plan vote.
Wilson-Thompson's report argued that ratifying the 2018 pay package is a better course than negotiating a new one, and said that "ratification is a tool to fix a procedural error or endorse a prior action." When shareholders vote on ratifying the pay package, they "will get to decide Musk's compensation, with full knowledge of everything criticized in Tornetta," the report said.
"Negotiating (or renegotiating) a replacement compensation plan that Musk would agree to would likely take substantial time in light of the Tornetta decision, and incur a new, incremental accounting charge of billions of dollars. Ratification would be faster, would avoid any new compensation expense, and would avoid a prolonged period of uncertainty regarding Tesla's most important employee," the report said.
Musk apparently made it clear to Wilson-Thompson that he would not accept a substantial cut from the 2018 deal. "Although the Committee expressly and consciously did not negotiate (or renegotiate) with Musk about his compensation, it expects from its interview with him that, for Musk to agree to it, any new plan would need to be of a similar magnitude to the 2018 plan," the report said.
Texas move and Musk’s pay are linked
The one-person committee decided it is best to hold this year's Texas incorporation and pay package votes at the same meeting. Given the widespread interest in both topics, Wilson-Thompson "determined that disclosures for a possible stockholder vote on reincorporation would need to address Musk's compensation. Otherwise, a potential reincorporation could have been wrongly perceived as being made as a direct reaction to the Tornetta ruling, and with the intent to award Musk compensation in a different jurisdiction that he could not get in Delaware."
AdvertisementThe Wilson-Thompson report seems to acknowledge that the Texas move was hastened by the Delaware court decision, though. It said:
Whether to reincorporate is not a new question for Tesla. The Committee confirmed that the Company's management and certain of its outside directors have been exploring the issue without reaching a decision since Tesla moved its headquarters from California to Texas in 2021. The question came up again after the Delaware Court of Chancery invalidated Musk's 2018 compensation plan on January 30, 2024. Later that day, Musk ran a poll on X asking whether Tesla should "change its state of incorporation to Texas, home of its physical headquarters?" Of 1,102,554 votes on X, 87.1% were in favor. The next day, Musk posted that "Tesla will move immediately to hold a shareholder vote to transfer state of incorporation to Texas."
Whether to move for reincorporation "is a decision for Tesla's Board, not Musk alone," so "the Board created this Special Committee on February 10, and charged it with independently evaluating reincorporation and making a final determination," the report said.
Tesla is also trying to guard against another lawsuit. The report said that "if stockholders were not told of any then-existing plans for Musk's compensation, the reincorporation vote could be subject to attack as not fully informed. The Committee therefore requested and received the additional authority to address ratification, so that Musk's 2018 compensation plan could be resolved under Delaware law even if Tesla reincorporated to another jurisdiction."
