Finance

Eliminating Elon Musk’s $56 billion Tesla pay is a ‘wake-up call’ for all company directors


A Delaware judge’s decision Throw away Elon Musk’s $56 billion Tesla (Tesla) pay package threatens wealth of world’s richest man. It could also change how companies across the U.S. determine CEO pay.

“This is a big deal,” said Brian Dunn, a visiting lecturer at Cornell University, noting that it was the first case ever to overturn a board’s salary decision.

this Decide Delaware Gov. Katherine McCormick’s speech “serves as a wake-up call to all directors about the importance of fair negotiations on CEO pay.”

FILE PHOTO: Elon Musk, CEO of SpaceX and Tesla and owner of X (formerly Twitter), attends the Viva Technology conference dedicated to innovation and new ventures at the Porte de Versailles Exhibition Center in Paris, France, on June 16, 2023.Reuters/Gonzalo Fuentes/File Photo

Musk’s fortune is now at risk due to a judge’s ruling on Elon Musk’s compensation package. REUTERS/Gonzalo Fuentes/File Photo (Reuters/Reuters)

What McCormick discovered was Director of Tesla They breached their fiduciary duty when they gave Musk the largest compensation opportunity ever for a public company executive.

Why? Because there were “extensive connections” between the people who negotiated the pay package and a lack of public disclosure of Musk’s relationship with the people who approved the deal.

“Simply put, neither the compensation committee nor the board acted in the best interests of the company when negotiating Musk’s compensation plan. In fact, there was little evidence of any negotiation,” McCormick wrote.

This photo was taken on January 4, 2019, with Delaware Governor Kathalen St. Jude McCormick serving as referee. The $44 billion court battle between the world's richest man and one of the most influential social networking sites is undoubtedly a tall order, but McCormick, who is presiding over the case, has never been in the face of a challenge. Withdraw. Billionaire Elon Musk has been fighting Twitter Inc. in Delaware Chancery Court since Musk announced in July 2022 that he wanted to scuttle a deal to buy the social media giant for $54.20 per share.  (Eric Crossan via AP)This photo was taken on January 4, 2019, with Delaware Governor Kathalen St. Jude McCormick serving as referee. The $44 billion court battle between the world's richest man and one of the most influential social networking sites is undoubtedly a tall order, but McCormick, who is presiding over the case, has never been in the face of a challenge. Withdraw. Billionaire Elon Musk has been fighting Twitter Inc. in Delaware Chancery Court since Musk announced in July 2022 that he wanted to scuttle a deal to buy the social media giant for $54.20 per share.  (Eric Crossan via AP)

Delaware Chancellor Katherine McCormick (Eric Crossan, AP) (Associated Press)

Analysts and experts said the ruling will reverberate throughout the business community as other high-paid executives and directors watch the legal conflict unfold.

“I think it will make directors wary of offering high compensation packages to keep the CEO happy,” added Dunn, the executive compensation expert. “Do I really think this will lower the CEO’s overall compensation? No, But I do think so.” I think it will dominate in extreme cases, and Tesla is not the only one in that extreme case. “

Shareholder attorney Greg Varallo said that when Musk’s compensation plan was agreed upon in 2018, it was about 33 times higher than the largest compensation package in history (Musk’s previous compensation package in 2014) .

“It’s so big that it single-handedly skews the compensation data,” Varallo said. “Now it’s conceivable to suddenly get a billion dollars, all thanks to this program. If you erase that by repealing the program.” ” .My guess is that the comparable data is starting to shrink. “

Musk’s compensation plan aims to pay Tesla stock options in 12 tranches, but only if the company achieves a series of $50 billion in market capitalization growth while achieving four consecutive quarters of revenue or adjusted EBITDA targets. .

Performance-based compensation is subject to a five-year lock-in period, capped at $55.8 billion, and is tied to the value of Tesla’s outstanding shares as of January 21, 2018.

For each benchmark completed, Musk is entitled to 1% of Tesla’s 2018 value.

The revoked compensation arrangement currently prevents Musk from accessing the $55.8 billion, but the Tesla CEO had neither exercised nor sought to distribute the shares at the time of the court’s ruling.

“The court’s hard work will directly benefit Tesla investors, who will see the dilution of this massive compensation package eliminated,” Varallo said. The original lawsuit alleging board members breached their fiduciary duties was Filed by shareholder Richard Tornetta.

Tesla’s board of directors could appeal McCormick’s decision to the Delaware Supreme Court or create a new compensation plan consistent with McCormick’s decision. Varallo said he expected the defendants to appeal.

Wedbush analyst Dan Ives said Wall Street is watching the reaction of Tesla’s board of directors.

Tesla shares fell 2.2% on Wednesday Amid broader market selloff; Year to date, the stock has fallen 24%.

If the defendants do appeal, the Delaware Supreme Court may examine whether McCormick correctly characterized Musk as the controlling shareholder in the compensation deal, the University of Virginia law professor said Michal Barzuza.

At the time of the deal, Musk owned 21.9% of the electric car maker.

“How they define controlling shareholders is a complicated issue, and there are not many relevant cases,” Barzuza said.

She said the issue was a key component of McCormick’s decision because Delaware law imposes urinary scrutiny on transactions between a company and its controlling shareholder.

Musk expressed his dissatisfaction with a series of issues on his X platform post, recommends that companies avoid registering in Delaware and instead choose Nevada or Texas. His companies, Tesla, SpaceX and X Holdings, already operate in both states and have looser fiduciary duties.

“Never register your business in Delaware,” he said in another post. Then he Ask user Vote on whether Tesla should change its corporate state to the Lone Star State.

To complicate matters, Musk’s latest push Obtaining more Tesla stock to gain 25% voting control of the company underscores Musk’s already outsized influence over Tesla.

Musk reiterated that he wanted the additional shares not for a higher salary but to have greater influence over company decisions, especially as Tesla continues to develop advanced artificial intelligence technology.

William Klepper, academic director and adjunct professor at Columbia Business School, said: “Musk’s latest request for 25% control of the company should provide the board with the legal means to revisit its request, in light of the Delaware court’s ruling. Assure.”

Because the decision says multiple board members are not truly independent and because of their ties to Musk, shareholders may be concerned about whether those board members should approve Musk’s future compensation and whether truly independent directors are needed.

“If the Tesla board’s responsibility to the CEO takes precedence over the overall interests of shareholders, then Tesla investors will need to consider whether the Tesla board is able to meet its fiduciary responsibilities,” Clapper said.

Jan. 25, 2024: Tesla Inc. shares plunged after a fourth-quarter earnings report missed expectations and warnings of lower production growth.  - FILE PHOTO CREDIT: zz/STRF/STAR MAX/IPx 2020 8/14/20 A Tesla car dealership in Lower Manhattan on August 14, 2020 in New York City.  (New York City)Jan. 25, 2024: Tesla Inc. shares plunged after a fourth-quarter earnings report missed expectations and warnings of lower production growth.  - FILE PHOTO CREDIT: zz/STRF/STAR MAX/IPx 2020 8/14/20 A Tesla car dealership in Lower Manhattan on August 14, 2020 in New York City.  (New York City)

Tesla dealership in Manhattan. Photo:zz/STRF/STAR MAX (zz/STRF/STAR MAX/IPx)

More broadly, experts said the ruling will prompt some compensation committees on other company boards to carefully consider the due diligence required to craft executive pay packages. A central issue in the Tesla lawsuit is the influence senior executives have over those responsible for negotiating their salaries.

Jun Frank, managing director of ISS-Corporate, said that to avoid potential self-dealing and real or perceived conflicts of interest, the vast majority of U.S. companies have fully independent compensation committees or consultants that use an objective process to set executive compensation. .

But Frank said that after the ruling, companies may need to conduct more thorough tests of independence, especially when company executives can exercise significant control over the board.

However, Wedbush’s Ives said that for those sympathetic to Musk and Tesla, an adverse ruling against the $600 billion company could prevent the company from pursuing legal action in Delaware, where the lawsuit took place. Set up a company.

Both Nevada and Delaware have passed immunity statutes that protect directors and officers from liability for breaches of their duty of care.

However, Nevada’s statute is much more lenient as it also protects directors and officers from liability for breaches of their duty of loyalty as long as the alleged misconduct was not willful.

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