Elon Musk, Chief Executive Officer of SpaceX and Tesla and owner of X speaks during the Milken Conference 2024 Global Conference Sessions at The Beverly Hilton in Beverly Hills, California, U.S., May 6, 2024.
David Swanson | Reuters
Tesla’s annual meeting on Thursday in Austin, Texas, will feature a final vote on a contentious proposal asking shareholders to “ratify the 100% performance-based stock option award to Elon Musk” granted in 2018.
Even if investors back the measure, the courts will have the last say.
The proposal, one of a dozen for shareholders to consider, is on the ballot because a Delaware court in January ordered the Tesla CEO’s compensation package to be rescinded. The pay package included performance-based stock options previously worth around $56 billion.
Judge Kathaleen McCormick found that Tesla’s board members lacked independence from Musk, failed to properly negotiate at arm’s length with the CEO and didn’t to give shareholders the full picture before asking them to vote on his 2018 pay plan.
Ann Lipton, a corporate and securities law trial attorney who now teaches at Tulane Law School, said shareholders aren’t in a position to overturn the judge’s ruling.
“Some people apparently believe (incorrectly) that a vote in favor will settle the legal disputes,” Lipton told CNBC in an email. “It won’t. It will make them more complicated.”
A vote to reinstate the pay plan would serve as a public relations win for Musk, who’s dealing with a host of major challenges at Tesla and beyond. The electric vehicle maker is mired in a sales decline due to an aging lineup, increased competition especially in China and brand deterioration that a recent survey attributed partly to Musk’s “antics” and “political rants.”
Large institutional investors, including CalPERS and CalSTRS (California’s giant retirement systems) as well as Norway’s Sovereign Wealth Fund and SOC Investment Group have come out staunchly against voting for the pay plan.
“The compensation is excessive when compared to executives at peer companies, highly dilutive to shareholders, and isn’t tied to the long-term profitability of Tesla,” CalPERS CEO Marcie Frost said in a statement on Wednesday.
By contrast, Tesla said in an April proxy filing that it’s heard from several institutional shareholders who disagreed with the court’s decision, and indicated they would support a vote to reinstate Musk’s pay package.
Sarath Sanga, a Yale Law School professor, said the proposal to ratify Musk’s pay plan is an effort by the company to fix what the court determined was a “defective process” under the 204 statute of Delaware business law.
“You need to have an independent board negotiating with the CEO, and then you need to submit all the proper details for a vote,” Sanga said. “The court said they didn’t. And it’s likely that even a majority vote for ratification will be challenged and require more judicial review.”
A resounding shareholder vote in favor of the pay plan could help Musk sway a court to give him the options in the future, Sanga noted.
Most Tesla shareholders had to submit their votes by the end of the day on Wednesday. Others in attendance are eligible to vote in person or online on Thursday.
In addition to the pay package vote, Tesla shareholders will also decide whether the company should move the site of incorporation out of Delaware, where most large publicly traded companies are incorporated, and into Texas, home to Tesla’s largest U.S. factory.
Musk’s recommendation that the company should move followed McCormick’s decision in the Delaware Chancery court.
Shareholders have also put forward a proposal asking Tesla to conduct “annual reporting on anti-harassment and discrimination efforts.” The company has asked investors to reject the proposal even though Tesla, and SpaceX, are facing private litigation along with state and federal probes over alleged sex and race discrimination.
Tesla shares have dropped 29% this year, badly underperforming the Nasdaq, which has gained 17%. Musk has been encouraging shareholders to look past the current state of its business and toward a future that he says will be all about artificial intelligence software, robotaxis and robotics.
“If somebody doesn’t believe Tesla’s going to solve autonomy, I think they should not be an investor in the company,” Musk said on the latest earnings call in April. He added, “We will, and we are.”
Musk has been making these kinds of pronouncements for years, and the company has yet to deliver.
He still has friends and believers.
Altimeter Capital CEO Brad Gerstner told CNBC’s “Half-Time Report” on Tuesday that he sees Tesla as a leader in self-driving technology.
“I think Elon has done an extraordinary job, and I think his advantage in AI and full self-driving relative to all the other manufacturers in the world is deeply under-appreciated,” said Gerstner, whose firm has a small position in Tesla.
While Musk has been promising software that can turn existing Tesla vehicles into self-driving cars since 2016, competitors including Pony.ai, Didi and Waymo have developed robotaxis and already operate commercial services.
WATCH: Altimeter’s Brad Gerstner
