With his whopping pay package still tied up in legal limbo, Tesla Inc. Chief Executive Elon Musk could begin to push for the controlling stake he once said he wanted in the electric-vehicle maker.
Tesla CEO Elon Musk speaks at a rally for Donald Trump on Oct. 27 at Madison Square Garden in New York.
Tesla will surely appealthe latest ruling by the Delaware Chancery Court judge,which invalidated — for the second time — Musk’s 2018 options package that is now estimated to be worth over $100 billion, due to the rise in Tesla’s stock. An appeal to the Delaware Supreme Court could potentially drag on for about a year or more. In that timeframe, it’s entirely conceivable that Musk will begin again to mention, or start agitating more aggressively for, a bigger stake in Tesla.
In January, Musk tweeted that he was uncomfortable growing Tesla to be a leader in AI and robotics “without having ~25% voting control.” He then briefly discussed the topic in Tesla’s earnings call, when an investor asked if shareholders should be concerned about his comments.
“The reason I just sort of roughly picked approximately 25% was that that’s not so much that I can control the company even if I go bonkers,” Musk said. “And if I’m, like, mad, then they can throw me out. But it’s enough that I have a strong influence. That’s what I’m aiming for, is a strong influence but not control. If there’s some way to achieve that, that would be great.” Musk currently has a 13% stake in Tesla, according to FactSet.
Morgan Stanley analyst Adam Jonas brought this issue up again on Tuesday, in his note on the Delaware Chancery Court ruling. “Does the issue of ‘control’ matter as much this time? Ultimately, we think it does,” Jonas wrote, pointing out that Tesla is the only company of the several that Musk is involved in or started that he does not control. “Moreover, we believe the issue at hand is one of control rather than capital. There may be many alternative paths to achieving control,” Jonas added.
For Tesla, the next move could also be to grant Musk another pay package, since the company is now based in Texas, and it can avoid being under Delaware’s jurisdiction for a future pay agreement. But there will be a huge cost to the company to do that. In 2018, when Musk’s pay package was created, Tesla’s stock was trading in a range of $18 to $23 a share. Today, it is trading at around $352. This year alone, Tesla shares are up almost 44%. Any new stock options issued by the company would be far costlier than they were in 2018.
Another issue is how far — and how long — the appeal process can go. Typically, the Delaware Supreme Court is the end of the line for appeals from the Delaware Chancery Court, and the U.S. Supreme Court would only take on such an appeal if a case had a federal question. But Wedbush Securities analyst Dan Ives believes Tesla and Musk could, if they lose in the Delaware Supreme Court, bring it to the U.S. Supreme Court.
“We continue to believe Tesla and Musk will fight this tooth and nail all the way to the Supreme Court in Delaware and then potentially to the federal system as this remains a frustrating headache for Tesla, Musk and its shareholders,” Ives said in a note.
Stephen Diamond, associate professor of law at Santa Clara University’s School of Law, who teaches courses on securities law, corporate finance and corporate governance, said the Delaware Supreme Court is final with respect to issues of Delaware law. “Unless there is a federal question, it is the final level of appeal,” he said.
“I am not a litigator, but I’m fairly certain that if Tesla did not raise a federal question at the outset (before the appeal) they can’t do so now,” Diamond said in an email. “Of course, they might invent an entirely new claim of some sort and file a new lawsuit in federal court but I have no idea what that could be. The simplest solution is to renegotiate a compensation package as a Texas entity, but it will likely have to generate far lower return for Musk.”
So as Tesla continues to fight the battle over Musk’s pay, it will have to weigh the cost of one, possibly two appeals, versus issuing a new package based on today’s stock price, or some other way to get Musk more of a stake in the company, without it costing Tesla billions of dollars in charges. Bloomberg estimated that giving Musk the same options now would potentially result in an accounting charge of around $25 billion.
Investors have not seen the end to the debate over Musk’s pay package, but they also need to realize that its rejection by the Delaware Chancery Court could lead to even higher costs for Tesla, either in massive potential write-downs to account for a new option package, or in dilution should Musk get more of a stake, as it seeks to remedy the situation.
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