Tesla's Latest Proxy Statement Is Materially Misleading

It's very long. It's very detailed. But it omits some very crucial information about the DOJ investigation and about how immensely wealthy Musk has made the sole member of the "committee of one."

On April 17, Tesla’s Board of Directors announced that the company will hold its 2024 annual meeting on June 13, and sailed out a lengthy proxy statement that includes a management proposal to “ratify” Elon Musk’s 2018 compensation package that was voided earlier this year by the Delaware Court of Chancery’s decision in Tornetta v. Musk.

Tesla’s attempt (or, more accurately, Elon Musk’s attempt) to reinstate the 2018 compensation package is problematic at many levels. Rather than trying to describe all the issues in a single post, I am going to write about them topic-by-topic. Today’s focus is the proxy statement.

(Hey, look ma! No hands! Elon Musk & CBS’s Gayle King)

I. No Sins of Either Commission or Omission Are Allowed

When shareholder votes are solicited by public companies, U.S. law requires that those companies prepare proxy statements to inform shareholders about the issues at hand. The law is clear about the nature of the information:

So, two key points. The company may not make any statements that are false or misleading, and the company may not omit to state any material fact necessary when the absence of that fact would make the statements that are made false or misleading.

II. Tesla’s April 17 Proxy Statement Has Material Defects

Chancellor Kathaleen St. Jude McCormick voided the 2018 compensation package because, among other things, the proxy statement for the 2018 vote was defective (1) in stating that certain of the then-directors were independent when, in fact, they were closely tied to Musk, and (2) in failing to disclose the enormous extent to which Musk himself formulated the plan and directed the timing for its consideration and approval.

The proxy statement for the June 13 annual meeting cures these defects by, among other things, attaching a copy of the Tornetta decision. However, there are two new defects in the current proxy statement that make it, too, susceptible to a legal challenge.

A. The April 17 Statement Omits Mention of the DOJ Investigation

First, the proxy statement contains no mention at all of the investigation by the U.S. Department of Justice into whether Tesla has committed securities fraud or wire fraud by misleading both investors and consumers about the self-driving capabilities of its cars. That news was reported by Reuters on May 8. The Reuters report includes this detail:

“While Tesla has warned drivers to stay ready to take over driving, the Justice Department is examining other statements by Tesla and Chief Executive Elon Musk suggesting its cars can drive themselves.”

We have known that a DOJ investigation has been underway since Reuters so reported in October of 2022. However, the latest Reuters story is the first to detail the specific legal violations being investigated and the first to point to the fact that self-driving claims by Musk himself are under the microscope.

Now, Tesla has disclosed that various regulatory agencies, including the Department of Justice, periodically make “requests for information,” but that disclosure is always anodyne, making it sound as if the requests are merely routine. Here is the language from the most recent 10-Q:

Is the DOJ investigation into whether Tesla and Musk have committed securities fraud and wire fraud by misleading investors and car buyers about the autonomous driving capabilities of Tesla cars material? (Remember the language from the regulation: “No solicitation… shall be made… which at the time and under the circumstances in which it is made… omits to state any material fact necessary in order to make the facts stated therein not false or misleading…”)

Well, for starters, we have the spectacle of the Tesla Board urging shareholders to reward Elon Musk with 304 million additional shares (worth $53 billion based on the closing price as I write this) without disclosing that statements Musk himself has made are the subject of a criminal investigation involving potential securities fraud and wire fraud. An investigation that, if it leads to a criminal indictment, could well spell doom for Tesla. The omission under these circumstances is a complete and total disgrace (but, sadly, completely in character for the lickspittles and toadies who populate the board).

Moreover, it could hardly be more clear that the nature of the DOJ investigation is highly material. Indeed, given Musk’s new strategy of abandoning the low cost “Model 2” that was to be built with a brand-new “unboxing” production process, and instead choosing to roll the dice on “robotaxis,” there could hardly be an issue of greater materiality.

Note that Musk’s post has more than 47 million views. In effect, Musk is conceding that Tesla’s days of achieving delivery growth are over. Tesla’s future, he is saying, is not as a car maker. Rather, its future is managing a fleet of robotaxis.

Let’s remember this exchange from last month:

And let’s also recall Musk’s statement during the most recent earnings call:

“If somebody doesn't believe Tesla is going to solve autonomy, they should not be an investor in the company.”

Again, not a single word about the DOJ investigation appears in the April 17 proxy statement. And yet, the proxy statement contains several statements about Tesla’s full self-driving project, starting with the cover letter from Chair Robyn Denholm in which she claims that last year, Tesla made “tremendous strides in our quest for FSD,” and then, in explaining why she thinks Tesla should reincorporate from Delaware to Texas (another management proposal), she writes (emphasis added):

Texas is where we should continue working towards our mission of accelerating the world’s transition to sustainable energy, as we lay the foundation for our growth with our ramp and build of factories for our future vehicles and to help meet the demand for energy storage as well as with our progress in artificial intelligence VIA FULL SELF-DRIVING and Optimus.

Further, the proxy statement describes one of the key motivations for the 2018 grant of stock options as incentivizing Musk to cause Tesla to “[a]dvance autonomous technology to create a fully-self driving future.”

So, yeah, I’m happy to stand by my claim that in failing to mention the DOJ investigation, including specifics about what information the DOJ has requested and what potential legal violations it is examining, and with a disclosure that statements by Musk himself are being scrutinized, the Tesla Board has indeed omitted from its proxy statement material facts necessary to make the rest of the proxy statement not false or misleading.

B. It Also Omits Material Facts about Kathleen Wilson-Thompson

One of the stunning features of the renewed effort to award Musk 304 million Tesla shares (okay, actually, 303,960,630 shares) is that the supposedly “independent” committee that determined the award is in the company’s best interests has become “a committee of one” — namely, Tesla Board member Kathleen Wilson-Thompson. (In an earlier post, I noted that only Wilson-Thompson and Joe Gebbia could potentially qualify as truly independent Tesla directors. Gebbia, quite wisely even if insincerely, declined to be part of any special committee “out of an abundance of caution because of the potential for unfair attacks based on perceived conflicts of interest.”)

I’ll have more to say about the “committee of one” in a future post, but for now, the question is: Is Kathleen Wilson-Thompson actually independent? The proxy statement takes pains to note that she has no personal ties to Elon Musk and has no business dealings with him. However, on the date of the proxy statement was published, Wilson-Thompson had:

“realized a pre-tax total of approximately $62 million from the exercise of equity awards received for her service on the Board and, as disclosed in public filings, currently owns 771,255 shares. This is a meaningful portion of her net worth.”

As of the moment I am writing this, those 771,255 shares equate to a value of almost $135 million. So, pre-tax, Ms. Wilson-Thompson has $197 million of wealth (pre-tax) attributable to Tesla and Musk. How does that compare to her non-Tesla-related compensation or wealth? The proxy statement does not say.

Based on Wilson-Thompson’s resume, I’m don’t think I’m going too far out on a limb to posit that her Tesla wealth constitutes the majority of her net worth. Indeed, very likely, the vast majority of her net worth. Indeed, for her, that accession to that Tesla wealth may very well have been life-changing. In other words, “meaningful” indeed.

In that regard, let’s recall what Chancellor McCormick wrote in Tornetta about Robyn Denholm, in determining that Denholm was, actually, not and independent director at the time of the 2018 options grant (footnotes omitted):

Denholm ultimately received $280 million through sales in 2021 and 2022 of just some of the Tesla options she received as part of her director compensation. She described this transaction as “life-changing.” Denholm testified that between 2017 and 2019, she received approximately $3 million per year in her non-Tesla position. Even assuming Denholm valued her Tesla compensation at a fraction of its Black-Scholes value, her Tesla compensation far exceeded the compensation she received from other sources.

Given the Chancellor’s ruling about Robyn Denholm in Tornetta, I believe that omitting information about Wilson-Thompson’s non-Tesla-related compensation and net worth is the omission of a material fact and, by itself, makes the proxy statement misleading.

But it gets worse. The formidable Rob Schmied (on X, rschmied, and on Threads, rschmied_66) has done some terrific detective work. Here is the tick-tock:

• The Tesla Board met on February 4, 2024 to discuss the Tornetta decision (proxy statement, page E-25).

• The very next day, February 5, Wilson-Thompson filed to sell 36% of her 771,255 shares (from the most recent Tesla 10-Q (buried deep in the notes):

  

• Five days later, Wilson-Thompson accepted appointment to the special committee of one to cast the sole vote to ratify the $55 billion 2018 compensation plan.

And yet, the very lengthy and very detailed proxy statement makes absolutely no mention of Wilson-Thompson’s pending sales when discussing her independence.

(As a sidenote, Wilson-Thompson’s 90-day cooling period has now expired, and she is eligible to sell those 280,000 shares. Schmied expects (as do I) that those sales either happened today (I’m writing this on May 8) or will hit tomorrow. So, another cool $49 million or so into Kathleen’s account.)

III. Expect to Read More About This in Lawsuits

As I have written in the past, I fully expect that, for a host of reasons, there will be legal challenges to the attempt to ratify Musk’s 2018 compensation plan. And I anticipate that some of those challenges will feature the proxy statement deficiencies detailed here.

[Post-publication note: I originally had the publication date of the proxy statement as April 29. It’s actually April 17. I’ve corrected the date in the post. My apologies for the error.]