It’s high noon for Musk as his $80 billion payday looms

On Thursday, Elon Musk will find out whether Tesla shareholders will approve his controversial $US53 billion ($80 billion) incentive package, again. If they do, there’ll be inevitably another court challenge against the largest pay deal in US history.

Tesla has been lobbying shareholders for months to “ratify” the incentives they had approved in 2018, but which were struck down by a Delaware court in January on the basis that the board was too close to Musk to exercise independent judgment, and that shareholders hadn’t been properly informed.

On Thursday, Tesla shareholders will vote on whether to re-approve Musk’s pay package.Credit: AP

Led by its Australian chair Robyn Denholm, the board is arguing that ratifying the package would “restore Tesla’s stockholder democracy” and motivate Musk to focus on achieving the company’s ambitions. The directors hope that shareholder approval would convince the Delaware court that shareholders, now better informed, still support the pay deal.

Meanwhile, Musk has threatened to take Tesla’s artificial intelligence development – the key to the electric carmaker’s autonomous driving technologies that are in turn the main driver of its perceived value – outside the company if he isn’t given a bigger ownership stake.

He has said he would be uncomfortable growing Tesla into a leader in AI and robotics unless he has at least 25 per cent voting control – “enough to be influential but not so much that I can’t be overturned” – because his shareholding of about 13 per cent made a takeover by “dubious interests” too easy.

The grant of about 304 million share options he is seeking in the pay package, worth about $US53 billion at Tesla’s current share price, represents just under 10 per cent of its existing shares on issue.

Like a lot of things involving Musk, the situation is messy.

If the incentives were approved, and he exercised the options, which have a strike price of $US23, he would end up with just over 20 per cent of Tesla’s capital. Paying about $US7 billion to exercise the options, his net benefit would be worth about $US46 billion at current share prices.

Despite recommendations from the two major proxy advisers, Glass Lewis and Institutional Shareholder Services, that shareholders block the proposal – and the stated intentions of several major investors, including the giant pension fund Calpers, to vote against it – the package will probably be ratified.

In 2018, with similar advice from the proxy advisers, 73 per cent of the votes cast at the meeting were in favour.

With a strong retail presence on the register and some institutions that approved the deal in 2018 feeling a moral obligation to do so again – on the basis that a deal is a deal – it is likely that it will be up to the court to decide whether ratification six years after the event has remedied the issues that led the court to nix it earlier this year.

Circumstances have, of course, changed since 2018.

When the package was first constructed, Tesla’s share price was hovering around $US20. The package consisted of 12 tranches of options, each representing 1 per cent of Tesla’s then-capital, that would vest if Musk hit market capitalisation targets spaced at $US50 billion intervals. The first tranche would vest at a $US100 billion market capitalisation, the last one at $US650 billion.

In November 2021, Tesla’s market capitalisation was $US1.24 trillion – nearly double the “stretch” target. Today, however, it is “only” $US554 billion, and below the level that would have triggered the final tranche.

Back in 2021, Tesla was the pioneer of electric cars, with a massive lead over any rival. Today, there are a host of competitors, and Tesla’s sales and profits are being swamped by waves of price-cutting as the substantial excess capacity in China pushes a tide of cheap electric vehicles into the global market.

In many respects, the EV market is starting to look a lot like the low-margin legacy auto sector, which explains why Musk, with an edge over the Chinese in software and AI, has pivoted to a focus on autonomous driving and “robotaxis”.

Given how significant Tesla’s prospective software is to its future – and to its sharemarket value – Musk’s threat to shift AI development outside Tesla if he doesn’t get his options is potent.

A recent revelation that he diverted Nvidia AI chips destined for Tesla to his social media company X, formerly known as Twitter, and his artificial intelligence start-up xAI Corp, claiming that Tesla “had no place to send the Nvidia chips to turn them on, so they would have just sat in a warehouse”, underscores the coercive nature of that threat.

It also points to the conflict of interest raised by critics of the incentive deal. Musk isn’t just Tesla’s chief executive but owns X and is either chief executive or heavily involved in SpaceX, Neuralink, The Boring Company and the recently launched xAI Corp.

You’d think that, for $US53 billion, Tesla could expect 100 per cent of Musk’s time and attention during a very challenging phase of its development, but that’s not going to happen between him overseeing his other interests and posting copiously on X.

Soliciting approval for the incentive package, Denholm has said it isn’t about the money. Motivating someone like Musk and keeping him focused on Tesla and keen to achieve the company’s “incomparable ambitions” requires, she said, something different.

To be fair, Musk doesn’t receive a salary but, you’d think, with a shareholding in Tesla worth about $US72 billion even without the incentives (it would have been significantly more if he hadn’t sold a slice to help fund his acquisition of Twitter) he would already have sufficient motivation to focus on his role as Tesla’s CEO.

The pay package requires a simple majority of the non-conflicted votes cast at the meeting to pass.

There’s another resolution requiring a majority of all shares on the issue that will also be put to the meeting. Musk, unhappy with his treatment in Delaware, wants to move Tesla’s legal domicile to a more Musk-friendly Texas. He’s already moved some of his companies there and urged other boards and management to follow him. Delaware is regarded as being a tougher jurisdiction for companies with controlling shareholders than Texas.

Whether a successful passage of that resolution will have any impact on how the Delaware court views a fresh ratification of the 2018 deal – or a renewed challenge to it from dissident shareholders – is unclear. Like a lot of things involving Musk, the situation is messy.

Read more:

• Colin Kruger: How much money is enough? Elon Musk’s Aussie chair battles to secure billions for her boss
• Randall Chase, Jef Feeley: Musk got $82 billion pay deal to ensure his ‘tenacity’ for Tesla, chair says
• Stephen Bartholomeusz: The China ‘game changer’ that just made Elon Musk billions

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