Tesla CEO Elon Musk attends a conference in Beverly Hills, Calif., on May 6.David Swanson/Reuters
A Tesla Inc. TSLA-Q shareholder vote on Thursday on whether to reinstate chief executive Elon Musk’s US$56-billion pay package that was shot down by a Delaware judge will not provide a quick resolution, irrespective of the tally’s results.
Tesla’s board is hoping shareholder approval will give the electric-vehicle maker the legal ammunition it needs to reinstate the package, though that is far from certain. The company has also said if the compensation plan is rejected by shareholders, it expects Mr. Musk would only accept a pay package that is similar in size to the voided one.
Here is what we know about the potential outcomes:
What happens if shareholders vote yes?
Mr. Musk’s pay package is not reinstated automatically. Tesla has said it will seek to reverse Delaware Justice Kathaleen McCormick’s ruling in January that invalidated the compensation package as unfair to the company’s shareholders.
Justice McCormick found that the Tesla shareholders who in 2018 voted in favour of granting the pay package were not fully informed on how beholden many directors were to Mr. Musk and how this affected the compensation negotiations.
Tesla included Justice McCormick’s ruling in its disclosures to shareholders ahead of the vote on Thursday, and has said it plans to argue that an affirmative result would show that shareholders back the package with full knowledge of Justice McCormick’s criticisms.
Zohar Goshen, a professor at Columbia Law School, said it was unclear whether such a move would convince Justice McCormick. “It’s hard to estimate how the court will rule because there is too much noise around this decision,” Prof. Goshen said.
If Tesla fails to convince Justice McCormick to change her ruling, which she has not yet made effective, Tesla plans to appeal all the way to the Delaware Supreme Court, a process that will take many months.
Tesla is also asking for shareholder approval at its annual meeting on Thursday to move its corporate domicile to Texas, outside the reach of Delaware courts. It has said it does not plan to use the move to ignore Justice McCormick’s ruling, and she has accepted those assurances.
Tesla could also face more litigation from some shareholders. One of them this month filed a lawsuit challenging the upcoming shareholder vote on Mr. Musk’s pay package and the change of domicile.
What happens if shareholders vote no?
Tesla has said it is “determined” to pay Mr. Musk for his previous work through the 2018 plan or a new one, to ensure he devotes his time and energy to the company.
It can still try to reverse Justice McCormick’s decision in Delaware, but it will have a weaker hand if shareholders reject the package. Given the appeal could take Tesla beyond next year’s annual shareholder meeting, this could give the board some breathing space before it has to negotiate a new pay package with Mr. Musk.
Tesla argues that the costs to shareholders will be significantly greater if the pay package is not reinstated. The company booked a US$2.3-billion accounting charge to issue it in 2018. It estimates that to give Mr. Musk a new package with the same economic benefit, the accounting charge it would have to take would be more than US$25-billion because of the rise in Tesla’s shares since 2018. It has said the new package would have to be less than 10 per cent of the size of the 2018 plan to avoid a new charge.
Tesla has also warned that if Justice McCormick’s ruling stands, shareholders would bear the cost of its legal fees. The legal team representing the Tesla investor who challenged Mr. Musk’s pay is asking for US$5.6-billion out of the Tesla stock Mr. Musk would have received as a fee, though the company is challenging that request.
Will Tesla lose Musk if he does not get the pay package?
Board chair Robyn Denholm said in a regulatory filing last week that reinstating the pay package was necessary for “retaining Elon’s attention and motivating him.”
Skeptics say Mr. Musk’s 13-per-cent stake in Tesla, worth some US$75-billion and accounting for a big chunk of his wealth, as well as his two decades at the company, make it unlikely that Mr. Musk will walk away. He could also face shareholder lawsuits if he is shown to be neglecting his CEO duties.
Samantha Crispin, a corporate lawyer at global law firm Baker Botts, said it would be hard to predict how Mr. Musk, who draws no salary from Tesla, will respond. “That’s the US$56-billion question,” she said.