Transcript: Elon Musk’s big payday

This is an audio transcript of the Unhedged podcast episode: ‘Elon Musk’s big payday’

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Robert Armstrong
Shareholders in Tesla have just awarded the company’s CEO, Elon Musk, one of the largest pay packages ever: $56bn worth of the company’s shares. Is he worth it? This is Unhedged, the market and finance podcast from the Financial Times and Pushkin. I’m Rob Armstrong, coming to you from Unhedged world headquarters in New York City, joined by Sujeet Indap, the FT’s Wall Street editor and the world’s pre-eminent journalistic expert on the Chancellery Court of Delaware. Sujeet, welcome.

Sujeet Indap
Well, as the world’s leading expert, only person following Delaware courts, I will correct you and point out it is the Delaware Court of Chancery.

Robert Armstrong
I stand corrected, Chancery Court. So why, if the shareholders, way back in 2018, approved this immense pay package for Elon Musk, how did it end up becoming controversial in 2024?

Sujeet Indap
Well, the thing that happened most immediately, or most shockingly, was in fact, he hit all these outlandish targets that were set out for him in 2018. There was 12 different tranches, if you will, and they were increasingly far-fetched or unrealisable.

Robert Armstrong
So the idea was that the more the value of the company, its market cap, rises, the more shares he will be awarded by the board.

Sujeet Indap
It was that and some operating targets like revenue and ebitda, and they were increasingly more difficult. But to hit them all just seemed virtually impossible at the time. And that ultimately happened. And at the same time, there happened to be a single shareholder who filed a lawsuit about this award.

Robert Armstrong
Yeah. So it was almost like back at the time, what was the market cap of Tesla in 2018? It was like . . . 

Sujeet Indap
$100bn or less.

Robert Armstrong
It was $100bn or less, and the targets were up to 650. So it seemed like almost the board was just writing numbers in the air, like, and if, Tesla becomes the biggest company in the world and Elon Musk is king of the universe and everything we touch turns to gold, then of course, we’ll give Elon Musk $56bn, or what has turned out to be $56bn at the current share price.

Sujeet Indap
Yeah. So there’s two ways to think about it. One is, these will never be reached, so it’s totally hypothetical; or two, if he does hit them, that’s an amazing result for all of us.

Robert Armstrong
Everybody got so rich. Then, who cares?

Sujeet Indap
Exactly.

Robert Armstrong
Now if that was approved back in 2018 I can’t, you know, my basically libertarian instincts say, look, you had a contract back in 2018. It had these slightly bonkers targets in them. He hit them. Give him the money. Everybody said, no givesies, no backsies.

Sujeet Indap
And there was a shareholder vote in 2018 and roughly three-quarters of Tesla shareholders agreed with you and said, hey, if you can hit these targets, we’re happy giving them . . . 

Robert Armstrong
Because we’re gonna be rich.

Sujeet Indap
But you only need one shareholder to file a lawsuit.

Robert Armstrong
OK. It’s a relevant fact that the lawsuit succeeded, at least initially.

Sujeet Indap
It did. So there was this decision earlier this year. The plaintiff is a gentleman named Richard Tornetta. And in this lawsuit, he focused on how exactly did the board of directors of Tesla at the time come up with this pay package and this decision to award Elon Musk these shares and said, you know what, this was a breach of fiduciary duty. And because there’s a breach of duty, it taints the entire process and . . . 

Robert Armstrong
So what’s the idea that Elon Musk held the board members at gunpoint and dictated to them this pay package that they were gonna sign off on? 

Sujeet Indap
Well, the board of Tesla has always been a polarising group of people in that they are people deemed to be independent directors who have all these ties to Elon Musk from Silicon Valley. You know, they’re co-investors in other businesses and they were investing with Elon Musk and vice versa. And so the idea that your typical board of directors have people who are kind of arm’s length from the CEO, that just didn’t really manifest itself.

Robert Armstrong
So that was the core of the lawsuit. You know, to exaggerate slightly, the contract doesn’t count between the CEO and the board when the board is like your mom, your pool cleaner and brother-in-law, or something like that. Obviously, those are not the case here, but something similar. Yeah, close relationships.

Sujeet Indap
Or venture capitalists that you are tight with and tight with you and you have close relationships with. And when in fact, their job as a director is to oversee you, the CEO.

Robert Armstrong
Yes. But there was another aspect to the judge’s decision in the case. She also said, this is just plain too much money. This is crazy.

Sujeet Indap
Right. And so there’s two aspects to the review here. And we’re gonna maybe get into Delaware law in a second. But there’s this famous idea of the so-called business judgment rule in Delaware that says, if you are a director of a company, you almost never will be second-guessed the decision you make, even if it’s a bad decision, because that’s just not something a judge should do. And no one would be a director if you had someone after the fact saying you made a bad call.

But there are instances where the business judgment rule does not apply, and that scenario is when the directors themselves are not independent. So in the Tesla scenario, what happened was there was this review about how independent were these directors. And once the judge determined they in fact were too intertwined with Elon, then their decisions got second-guessed and the judge decided, based on her view of the evidence, the $56bn, the 304mn shares that were awarded was in fact beyond the pale. She looked at compensation consultant reports and just how did, where did Tesla come up with these targets and numbers? And there was no real basis she could find that this was pegged to anything that was defensible.

Robert Armstrong
So now we have before us a meaty philosophical question, Sujeet, which is, is anybody worth this amount of money? Tesla shares have gone bananas. Everybody who has owned them for six years has made a lot of money. The company has changed the car industry in the United States. There’s a crazy way in which Elon Musk is the model of the modern CEO, whether you like it or not. On what grounds would you say it’s too much money? I mean, other people don’t get paid that much, but most other companies don’t go up in value this much.

Sujeet Indap
I think the most interesting thing the judge, her name is Kathaleen McCormick. She’s the chancellor of the Delaware Court of Chancery, the lead judge on that court. She said Elon Musk already owns $200bn of Tesla’s stock. That alone should be enough of a motivation to make the stock price keep going up. And look at all these other CEOs out there, Bill Gates and others, they had huge stakes and they were never taking more shares along the way. So he’s already the richest man in the world. And this grant can’t be tethered to any compensation consultant report or any precedent transaction. And in my judgment, it’s just . . . it’s too much.

Robert Armstrong
Right. So there’s two aspects to an award like this for an executive. There’s rewarding them for what they’ve done and there’s also motivating them to look out for the company and for the interests of shareholders. And the judge seems to have decided, you know what? This guy’s motivated enough.

Sujeet Indap
Yeah. And so the shares that are being awarded, that is like dilution to existing shareholders. And that’s the, if you oppose it, that’s what you’re thinking about. In fact, we’re giving this guy all these shares but in fact, those shares belong to me or the company.

Robert Armstrong
They don’t come out of nowhere. They come out of somebody’s pocket.

Sujeet Indap
Yeah. Like stock comp you talk about all the time and you write about all the time. This is the most egregious example of stock being granted that there is.

Robert Armstrong
OK. Well, as it turns out, Tesla asked the shareholders. Elon Musk asked the shareholders. And that was the point of this recertification vote that we had just a few days ago, right? Is this OK with you guys who are getting diluted? And 70 per cent of them said, yeah, go for it. Dilute away. So case closed. Who’s to tell him no?

Sujeet Indap
And that was the motivation of this very clever idea of ratification. So after this decision came down early this year, Tesla put out its annual proxy and in it were two proposals. One was this ratification idea saying, you know what? What we’re gonna do is we’re gonna cure all those process deficiencies that the judge said last time. We have a new independent director who will be a special committee. She’s gonna hire her own advisers. We know what the ruling was. We’ll attach that to the back of the proxy. And so there can be no doubt as to the new process that we’ve implemented and what happened last time. And the shareholders can decide again. Do they really wanna give Elon Musk the 304mn shares? And they said, yeah, we actually do.

Robert Armstrong
So is he gonna get the money?

Sujeet Indap
It’s not so simple. So where we left the existing court case — and recall again, the judge had overturned the original package in January or February of this year. Where that case lies right now is Elon was planning to appeal that to the Delaware Supreme Court and have it overturned. But before we could get to that phase, the plaintiffs have argued that they should be awarded $5bn in Tesla shares for saving the Tesla shareholders $56bn.

Robert Armstrong
There is an irony there that some lawyer and some client of that lawyer are saying Elon Musk is diluting you, shareholders, massively. I have pointed this out. Therefore I should dilute you somewhat.

Sujeet Indap
Yeah. And instead of getting 304mn shares they want 29mn shares. (Robert laughs) So, right, you can imagine how plaintiffs lawyers reviewed in this country that has not gone over very well. (Robert laughs)

Sujeet Indap
So in the middle of all this was this idea of the ratification vote. So there’s a bunch of things that are in the soup right now, which is A, this lawyer fee; B, does this new vote, does it override either substantively or legally the decision overturning the pay package? The judge now has to evaluate all these things.

Robert Armstrong
So that last point is important. So it is contested whether the recent shareholder vote reratifying the pay package even counts. Can you do that? Is reratification a thing?

Sujeet Indap
Yeah. Is it a thing? And it is completely novel. Again, they’re trying to cure something that happened already in the ruling already. And whether you can do that after the fact is in fact a contested legal question.

Robert Armstrong
And the plaintiff’s lawyers are squawking for money and there’s a Supreme Court case, an appeal to the Supreme Court. So there’s a lot of balls still in the air.

Sujeet Indap
Right. And so yeah, so it’s kind of a mess. But the big-picture question I think is this: is a Delaware court, whether it’s the trial court, the Court of Chancery or the Delaware Supreme Court, are they really going to cross the shareholders of Tesla who have voted for this pay package now twice, six years apart? Do they really have the guts to do that?

Robert Armstrong
Well, I’m going to turn you from a reporter into a commentary writer. I know you also write commentary. And my instincts about this are very clear. The company belongs to the shareholders. If they wanna do stupid things with it, and I would argue they have done stupid things with it in the case of this pay package. If they wanna do stupid things with it, it’s their property. They get to do that. And the Delaware court should stay out of it. Do you disagree, agree?

Sujeet Indap
And I think that generally has been Delaware’s posture. It’s only tricky though when you have a controlling shareholder or a dominant shareholder and how minority rights — I mean, it may just be that 28 per cent who didn’t vote in favour of this, how were their rights represented and vindicated? And that’s a really hard and meaty question. But your point is correct that ultimately there’s a huge majority of shareholders who have twice supported this pay. Does a court really wanna get in the way of that?

Robert Armstrong
Well, this issue about the dominant founding shareholder seems likely to come up again. We have a whole class of Big Tech companies — Google is one, Meta is one — where these founding shareholders have massive economic control and even greater voting control than they have economic control, thanks to dual-class voting structures. And they sort of tower over these companies. And in the case of a Google or a Meta, things have gone so smoothly so far that it hasn’t become an issue. But what’s happened with the massively powerful Elon Musk, who’s kind of done this unconventional and wild stuff is it’s brought this issue to a head is how to handle these supremely powerful founding shareholders.

Sujeet Indap
That’s right. And so the counterpoint to all this is the drama at Paramount, which has this dual-class share structure and the shareholders wanna sell the company but the founding family doesn’t want to. We’ve had a crazy few weeks in that situation and people are tearing their hairs out because someone who owns 5-10 per cent of the company has decided for themselves what they wanna do in conflict with what everyone else wants to do.

Robert Armstrong
Now, even if Elon Musk gets the shares in this case, he’ll own 25 per cent of the shares. Is that right? He won’t have the magical 51 per cent voting power over Tesla so that makes this a slightly different case.

Sujeet Indap
It does. And so this has been a big theme in Delaware of late, where you have these shareholders who don’t quite have 50 per cent something below. But in fact, the board members are all somehow tied to that dominant CEO through relationships. And what exactly, you know, counts as too close a relationship? The one thing I think is important just as an overlay here is talking about like why is Delaware like a dominant venue? 

Robert Armstrong
Yes. Well, we can put that in context of a question, right? Elon Musk has threatened to take his ball and take it back to Texas and move the company’s operations. Tesla’s operations are already based in Texas. He’s threatened to take it’s legal — what’s the term? Jurisdiction or its domicile?

Sujeet Indap
Domicile.

Robert Armstrong
Domicile. Move its corporate domicile to Texas.

Sujeet Indap
Well, he’s done it. So he won that vote last week and they’ve already filed the paper. So I think it is a Texas corporation by now.

Robert Armstrong
And why does everybody else seem to wanna be in Delaware? And is it good for Tesla to be in Texas all of a sudden?

Sujeet Indap
So Delaware has been dominant now for close to 100 years. Actually, New Jersey before that was the place to be. But in fact, they made changes. I think Woodrow Wilson was behind them when he was the governor of New Jersey that led to this exodus to Delaware. So Delaware has a couple things going for it. One, it does have this really sophisticated corporate law and that’s developed over decades and created precedent and really sophisticated judges who are seen as non-partisan and not really on one side or the other and the sophisticated legal community.

And so what that’s done is made Delaware popular for two constituencies, in balance. One is companies who get predictability and understand the rules of the road. And then two, shareholders like Delaware for the same reason. And if you look at the court and their decisions, they have a very harmonious balance between vindicating shareholder rights and then also prerogatives of CEOs and boards. And that balance works for both sides. And what is the externality from that? The externality is that theoretically, a Delaware corporation should have a greater value because shareholders value it and then companies, you know, respond to that. And so now there’s an incredible academic debate, and there’s a real kind of fight going on whether there is a premium to being a Delaware corporation.

Robert Armstrong
So has Elon Musk just given up the Delaware premium? In other words, does the move to Texas make Tesla’s shares riskier and therefore less valuable?

Sujeet Indap
So for now, shareholders based on the stock price. Obviously they approved the vote or approve the move. And B, the stock price reacted neutrally or favourably. So they seem to like the idea of Elon having seemingly a freer rein in Texas and believe that’s now a good idea. And he’ll be motivated. And all these things he’s threatened about taking AI elsewhere or spending his time elsewhere. Now he’s focused again between Texas and the pay package being approved. The question is down the road, as Elon gets older and maybe he gets even more eccentric, have they ceded too much power to him? And do they have, shareholders, any redress like they once had in Delaware? And that will be the question.

Robert Armstrong
The proof in the pudding will be in the eating. The Texas pudding, as it were.

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Thank you, Sujeet. Up next, Long/Short.

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Listeners, welcome back. This is Long/Short, that part of the show where we go long things we like and short things we don’t like. I’m gonna go short stars. Not only stars; CEOs with star players. The big rap against my Boston Celtics was they didn’t have a big star and so they couldn’t win a championship. Well, last night, their five non-stars won a championship. Just like the Detroit Pistons of 2004 they proved once again it’s about the team not the individual, in sports as in corporate finance. Sujeet, do you have a long or short?

Sujeet Indap
I am short on climate change this week because we’re gonna have some hot weather in New York and I am just not ready for it.

Robert Armstrong
(Laughter) Doesn’t that mean you’re long climate change? Like, it’s happening.

Sujeet Indap
It’s happening. I’m short and enduring it.

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Robert Armstrong
You’re against it. Yeah, yeah, yeah. (Sujeet laughs) All right. Yeah, I think we can all pile into your short against climate change. With that, listeners, we’ll be back in your feed on Thursday.

Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta Cohn and Natalie Sadler. FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com/unhedgedoffer. I’m Rob Armstrong. Thanks for listening.

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