Delaware struggles with Tesla investors’ disregard for governance

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Does Elon Musk really need more money? Tesla shares are up 42 per cent this year, much of that since the election of the billionaire’s new best friend Donald Trump as president last month.

As it happens, one reason Musk’s $56bn pay package was rescinded by a Delaware judge earlier this year was that the court said the sum was far too much money for a guy who had plenty of Tesla stock to motivate him (His 13 per cent stake is worth $150bn and the mooted share award worth more than $100bn).

Musk and Tesla found out this week that the 300mn of shares he was awarded after taking the electric-car maker’s market value to over $1tn for the first time in 2021 would now be a matter for the Delaware Supreme Court. The lower trial court ruled a second shareholder vote, the one this year, was not enough to change its February invalidation of the share grant.

The outrage over unelected judges over-ruling the will of shareholders from Musk and his friends is all over social media. But Tesla’s original sin — the one that led to a judge imputing her own value judgment — comes from the loose corporate governance at the company.

The board who approved the package is filled with characters with close business and social ties to the entrepreneur. If Tesla and Musk had simply been somewhat less sloppy over corporate governance formalities and gotten better legal advice in 2018, this legal quagmire (however intellectually interesting) could have been avoided. And Musk could have gotten his shares.

In two shareholder votes, more than 70 per cent of unaffiliated Tesla equity holders have supported the 300mn share grant. The second vote took place after they had benefited from the company’s performance and were under no obligation to hand Musk the shares. The tycoon had cryptically said on X that he needed to take his ownership stake above 20 per cent, through the grant, in order to keep devoting his interest to the carmaker.

Assuming today’s gross market cap of Tesla of $1.3tn and 300mn more shares outstanding, the company’s stock price would fall by 8 per cent. For most shareholders, that trade is more than worth it to have the acumen or vibes that Musk brings. Either Tesla or corporate law will have to find a way to adapt.

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