Tesla will ask its shareholders to vote to approve the 2018 pay package that made CEO Elon Musk among the world’s richest people but that a Delaware judge threw out earlier this year.
The pay package gave Musk options to buy 303 million split-adjusted shares of Tesla at the cost of $23.34 a share each. At the time that a Delaware court threw out the pay package in January, it was worth $51 billion. But a drop in the value of Tesla shares since then has reduced its value to $40.7 billion.
In an initial vote in 2018, 73% of Tesla shares not held by Musk or his brother at that time voted in favor of the package. The company’s proxy statement filed with the Securities and Exchange Commission early Wednesday announcing plans for the vote said that “ratification will restore Tesla’s stockholder democracy.”
Delaware Chancery Court Chancellor Kathaleen McCormick ruled in January that Musk and the Tesla board “bore the burden of proving that the compensation plan was fair, and they failed to meet their burden.”
Tesla argued in its filing Wednesday that the pay package was fair to shareholders because the value of their shares had soared since 2018.
“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,” said Tesla chairperson Robyn Denholm in the proxy. “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.”
The case was brought in Delaware because that’s where Tesla and many other major companies are incorporated. Musk responded to the decision in January by tweeting “Never incorporate your company in the state of Delaware.”
“I recommend incorporating in Nevada or Texas if you prefer shareholders to decide matters,” he said in a second tweet at that time.
He announced plans soon after that to move Tesla’s state of incorporation to Texas, where its headquarters is now based. The filing Wednesday asked shareholders to approve that move of incorporation as well.
“Texas is already our business home, and we are committed to it,” said Denholm.
The proxy did not announce a new pay package for Musk for his work for Tesla going forward. The 2018 package would reward him for financial goals and market value of the stock that Tesla has already achieved. Musk is not paid any straight salary and only receives stock options based upon various achievements by the company.
Back in January, shortly before the court’s decision, Musk said it was important that his stake in Tesla be increased as a protection against outside investors getting control of the company.
“I am uncomfortable growing Tesla to be a leader in AI & robotics without having ~25% voting control. Enough to be influential, but not so much that I can’t be overturned,” Musk wrote in a post on X. “Unless that is the case, I would prefer to build products outside of Tesla.”
He said at that time the Tesla board was waiting for the court to make a decision in this case before it moved ahead with a new pay package. It’s not clear if a subsequent package would be announced if the shareholders again approve the 2018 compensation deal.
Attorneys for the shareholders who brought the suit had argued that the package of stock options was excessive and that the directors on Tesla’s board were not truly independent and were too close to Musk to protect shareholders’ interests.
They also argued that the financial targets the company had to hit for Musk to qualify for each of the 12 separate blocks, or “tranches,” of stock were not “stretch performance goals,” as the company told shareholders when seeking their approval of the package.
Instead, they argued the milestones were essentially the same as the company’s internal growth projections that were being shared with banks and rating agencies, the plaintiffs’ attorneys argued in court. Therefore the original shareholder vote was tainted by that deception, according to those attorneys.
Shares of Tesla were little changed in premarket trading following the filing. Shares have lost 38% of their value so far this year as the company has reported its first year-over-year drop in sales since the height of the pandemic, in the face of increased competition and weaker than expected growth in demand for electric vehicles.
In the fourth quarter of last year Tesla briefly lost its title as the world’s largest producer of electric vehices to Chinese automaker BYD, although it regained that title in the first quarter despite the drop in sales.
But it has had to cut its prices to maintain demand for its cars. Those price drops have squeezed its profit margins, although it is still far more profitable than traditional automakers such as General Motors and Ford.
Over the weekend Musk announced that it would be cutting more than 10% of its global staff of 140,000, and several top executives announced their departure from the company.
This story was updated with additional reporting and context.
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