I Remain Confused By The Ruling On Elon Musk’s Compensation Package

There are a number of people, both those who agree with me and those who disagree with me, who seem to think I have some sort of personal dislike of Elon Musk. That's not true. I find it amazing that he gets away with some of the stuff he gets away with, and I am perplexed at why anyone thinks he supports free speech," when he clearly does not. I also have pointed out the many times he seems to make counterproductive decisions at ExTwitter.

But most of that is because I wish he wasn't making those mistakes. I wish he actually would improve ExTwitter and fix many of the problems the old Twitter obviously had. I also think that while his role in his various other companies has been exaggerated at times, he absolutely deserves some amount of credit for jumpstarting the electric vehicle market, as well as the private space flight market (I'm a bit less sure about his role changing the underground tunnel" market or the brain implant market" but we'll see).

And while I've seen a bunch of folks cheering on the Delaware Court of Chancery decision that may deprive him of $55.8 billion worth of his wealth... I'm somewhat confused by the ruling.

The ruling is an astounding 200 pages (exactly) and I didn't write about it immediately because I wanted to read the whole thing (and because I believe in the value of slow news" and taking our time to understand things). So I read the whole thing and... I'm left scratching my head. It doesn't make sense to me.

Now, lots of people can have reasonable opinions on excessive CEO compensation, and I don't disagree with any of that. And people can have reasonable opinions that no one human being should be paid $55.8 billion for anything. And I also might agree with that. But I still don't see what was particularly egregious in this compensation package in a manner that harmed anyone.

The case was brought by Richard Tornetta - who every news org has to tell you is a thrash metal drummer who only held nine shares of Tesla stock. So the argument that he was harmed by Musk's compensation package seems questionable.

On top of that, much of the opinion revolves around the fact that Tesla's board is very, very closely tied to Musk and unlikely and unwilling to be adversarial to him. From the very opening of the ruling:

The process leading to the approval of Musk's compensation plan was deeply flawed. Musk had extensive ties with the persons tasked with negotiating on Tesla's behalf. He had a 15-year relationship with the compensation committee chair, Ira Ehrenpreis. The other compensation committee member placed on the working group, Antonio Gracias, had business relationships with Musk dating back over 20 years, as well as the sort of personal relationship that had him vacationing with Musk's family on a regular basis. The working group included management members who were beholden to Musk, such as General Counsel Todd Maron who was Musk's former divorce attorney and whose admiration for Musk moved him to tears during his deposition. In fact, Maron was a primary gobetween Musk and the committee, and it is unclear on whose side Maron viewed himself. Yet many of the documents cited by the defendants as proof of a fair process were drafted by Maron.

Given the collection of people tasked with negotiating on Tesla's behalf, it is unsurprising that there was no meaningful negotiation over any of the terms of the plan. Ehrenpreis testified that he did not view the negotiation as an adversarial process. He said: We were not on different sides of things." Maron explained that he viewed the process as cooperative" with Musk. Gracias admitted that there was no positional negotiation." This testimony came as close to admitting a controlled mindset as it gets. And consistent with this specific-to-Musk approach, the committee avoided using objective benchmarking data that would have revealed the unprecedented nature of the compensation plan.

In credit to these witnesses, their testimony was truthful. They did not take a position on the other side" of Musk. It was a cooperative venture. There were no positional negotiations. Musk proposed a grant size and structure, and that proposal supplied the terms considered by the compensation committee and the board until Musk unilaterally lowered his ask six months later. Musk did not seem to care much about the other details. They got ironed out.

But... none of this was particularly secret. It's widely known, and widely discussed publicly, that the board of Tesla are a bunch of Elon cronies who, basically, are happy to grant him whatever he wants. There are plenty of news articles about this going back years. Here's a Barron's piece from 2017. And a CBS piece from 2018. There are lots more.

The point is: if you were investing in Tesla, you should have done some pretty basic due diligence to know that the board was close to Musk, and if you didn't like it... don't invest?

The fact that the negotiation over the compensation package wasn't that adversarial... doesn't seem like a bad thing either. Yes, the board should be looking out for the interests of the shareholders, but that includes not making the relationship between the board and the CEO untenable. And it's not like they just handed out a bunch of cash to Musk, rather they created a plan that was incredibly ambitious. To hit the targets that freed up that $55.8 billion, it required him to increase the value of the company from around $50 billion to $650 billion, and hit other growth milestones as well.

In defense of the historically unprecedented compensation plan, the defendants urged the court to compare what Tesla gave" against what Tesla got." This structure set up the defendants' argument that the compensation plan was all upside" for the stockholders. The defendants asserted that the board's primary objective with the compensation plan was to position Tesla to achieve transformative growth, and that Tesla accomplished this by securing Musk's continued leadership. The defendants offered Musk an opportunity to increase his Tesla ownership by about 6% (from about 21.9% to at most 28.3%) if, and only if, he increased Tesla's market capitalization from approximately $50 billion to $650 billion, while also hitting the operational milestones tied to Tesla's top-line (revenue) or bottom-line (adjusted EBITDA) growth. According to the defendants, the deal was 6% for $600 billion of growth in stockholder value."

And the company hit those targets under his leadership. Say whatever you want about Musk or Tesla (or its cars), but that's just impressive. There certainly was no guarantee that Tesla would hit any of those milestones, and many people believe that the company remains massively overvalued. But the company did hit those milestones.

Reading through the entire opinion, there's nothing in there that really suggests nefariousness, or even self-dealing. As silly as it may be, the board really did (and mostly still does) seem to believe that Musk is some sort of uber genius and super important to the future of Tesla. And they wanted him compensated accordingly. And it appears all of that went into the thinking behind the compensation package and how it was presented to shareholders.

While there were some worries early on about the speed with which Musk was pushing to ink the compensation plan, things actually slowed down at Musk's request, where he admitted he wanted to spend more time focused on getting the Model 3 shipping to scale. Later on Musk himself noted (correctly!) that the proposal should come across as an ultra bullish view of the future, given that this comp package is worth nothing if all' I do is almost double Tesla's market cap." And... that's true.

Over and over throughout the negotiations, the discussion and considerations being reviewed seemed... pretty normal, once you get past the size. They were looking at rewarding Musk (who it could rightly be said was a big part of promoting Tesla to the world) for massively growing the company at a moment when it wasn't at all clear the company would (or even could) grow to match those numbers.

It's also not like there weren't credible and public critics of the plan, which should have alerted shareholders to concerns about it:

The two largest proxy advisors, ISS and Glass Lewis, both recommended voting against the 2018 Grant.

Glass Lewis expressed concern with the size and potential dilutive effect of the grant, noting that any relative comparison of the grant's size would be akin to stacking nickels against dollars[]"and that the lower tiers of the goals are relatively much more attainable given the time periods in question, potentially allowing for sizable payments without commensurately exceptional achievement."

ISS described the grant value as staggering" and concluded that even the challenging" and far-reaching performance goals do not justify the extraordinary grant magnitude[.]" In an internal email, ISS noted that it steered clear of getting too deep into this[]" because making that argument essentially puts us in the situation of saying Tesla's board is not strong enough to stand up to Musk[.]"

Also, both recommendations expressed concern with Musk's non-Tesla interests, although Glass Lewis stated that Musk's extracurricular exploits undoubtedly contribute to his value to the Company[.]"

Stockholders also criticized the Grant, noting that Musk's Tesla equity provided sufficient motivation for Musk to perform, the Grant's size and dilutive effects were excessive, the EBITDA milestones were too low, and that linear milestones were inappropriate for an exponential company" like Tesla.

Again, all of this suggests to me that shareholders who didn't like the compensation plan should have been fully aware of the concerns, and could have voted against it, or, if the plan was approved, could easily sell their shares and move on.

Separately, the opinion has some odd paragraphs, such as this one:

Events relevant to evaluating the fairness of the Grant occurred after stockholders approved the Grant. Namely, Tesla disclosed that several Grant milestones were greater than 70% probable of achievement, nearly all the tranches vested, Musk got in trouble with the SEC, named himself Technoking, and acquired Twitter, Inc.

While it's true that having the grant milestones be probable seems relevant, I'm not at all clear why any of the other things are relevant to the Tesla compensation package. While they all do represent ways in which he did some crazy shit that could impact Tesla, if it impacted Tesla negatively, it seems that it would be reflected in not reaching the milestones in the compensation agreement, and thus, it shouldn't be an issue.

And so, in the end, while the process seems a bit sleazy, there's nothing that I can see indicating that any shareholders were mislead in a material way that damaged their own interests. Indeed, given the very high bars Tesla needed to reach (including in terms of overall valuation), it seems that the shareholders have done very well, even if their equity was slightly diluted by Musk getting more shares.

Either way, I have no idea where any of this goes, as Musk will appeal it. Musk also is making himself look a bit foolish in pretending that this is somehow a Delaware" issue. The whole reason such a huge percentage of companies incorporate in Delaware is because the state (and the Court of Chancery) are somewhat infamously friendly to companies. I mean, this is just silly whining:

Of course, since then Musk has actually started to make moves to transfer Tesla's incorporation to Texas. And we'll see what happens. If investors are truly upset about the compensation package, they can reject it. If they're not and they agree to move it to Texas, it again raises questions as to how harmful this package really was to shareholders?

Again, there are lots of things that I think Musk does wrong, and lots of decisions he makes that I think are highly questionable. But reading through all of the details, I'm surprised at the outcome of this case, and don't see how any actual Tesla shareholders were materially misled or harmed.