The Dirtiest Lie in Tesla's Proxy Statement

Kathleen Wilson-Thompson wanted some independent directors on her Special Committee. Musk said no; he wanted to rush the shareholder vote before the Chancellor could issue a final judgment.

I. Tornetta v. Musk

This is another in my series of posts on Tornetta v. Musk, the immensely consequential lawsuit pending in Delaware’s Court of Chancery.

Those unfamiliar with the background, or wanting a quick refresher, can find one at Part II of this Substack post. Those wanting to read the clearly written and carefully reasoned 200-page Post-Trial Opinion, which rescinded Tesla’s 2018 grant of stock options to Elon Musk (the 2018 Grant), can find it here.

(Graphic generated by Microsoft Designer AI)

II. What This Post Is Not About

At Thursday’s annual meeting of Tesla shareholders, we will learn the outcome of the vote on the Tesla Board’s proposals (1) to “ratify” the 2018 Grant and (2) to reincorporate the company in Texas.

This post is not about why I believe any affirmative ratification vote will ultimately be ruled legally ineffective. You can find those bullet point reasons here (and, for more detail, you can read the amicus brief Professor Charles Elson has asked to submit).

Nor is this post about why, even with an affirmative reincorporation vote, Tesla will be unable to move the Tornetta v. Musk lawsuit (as well as any further litigation related to 2018 Grant) out of Delaware and into Texas. You can find those reasons here.

Nor is this post about why Tesla shareholders ultimately will be the big losers regardless of whether the 2018 Grant is ultimately restored to Musk. You can find those reasons at this astute analysis from jaberwock.

Nor will this post rehearse all of the many disgraceful deficiencies in the Board’s ratification and reincorporation proposals. Those deficiencies include an insupportable price, a deeply flawed process, and massive instances of both misleading disclosures and inexcusable failures to disclose. You can read about some of those deficiencies here (and since that post was published, there have been even more disclosure failures).

III. What It Is About: the Special Committee Scandal

In writing the recent post detailing the many shameful defects in the entire process giving rise to the impending shareholder vote, I collaborated with an insightful Silicon Valley corporate attorney who has served on the board of several well-known tech companies.

A. The Vexing Question

One of the points in our post kept rolling around in my mind. When I mentioned my vexation to my collaborator, he said he has been troubled by precisely the same point.

We had written about how Tesla’s Board appointed a two-person “Special Committee” that was charged with investigating both reincorporation and “ratification” of the 2018 Grant, and then making recommendations to the Board. We had detailed how one (Joe Gebbia) of those two allegedly independent Committee members abruptly resigned, leaving only Kathleen Wilson-Thompson.

We had further noted that after Gebbia’s resignation, Wilson-Thompson had asked the Tesla Board to add one or more additional independent directors to the Board, and then appoint those independent directors to join her on the Committee. But, that request was refused.

And that brings us to the question that has continued to trouble us the most:

Why did the Board refuse Wilson-Thompson’s plainly reasonable request?

On reflection, the answer is obvious. Let’s explore; we’ll first consider why Wilson-Thompson would make such a request, then examine how the proxy statement is deliberately opaque about why the request was refused, and finally state the real reason for the refusal.

B. Why Did She Need Help?

Why would Wilson-Thompson want to have independent directors join her? There are obvious and powerful reasons:

1. She Herself Was Not Independent

Notwithstanding the endless claims about her independence in the proxy statement, Wilson-Thompson plainly is beholden to Musk. As outlined in an earlier post, she already has been immensely enriched by stock options awarded to her for her service as a Tesla director. To date, she has realized $62 million in proceeds from selling some of that stock. She still holds another 771,255 shares (worth $137 million as we write this).

And, although the proxy statement fails to disclose this fact, shortly before accepting appointment to the Special Committee, Wilson-Thompson filed a document with the SEC to enable the sale of 280,000 of those shares within the next nine months. For all the reasons Chancellor McCormick determined that Robyn Denholm (who has received “life-changing” compensation from Musk) is not independent, neither is Wilson-Thompson independent.

2. Gebbia Became Scared and Ran Away

Wilson-Thompson made her request after Gebbia decided to exit the Special Committee. You can read Gebbia’s explanation for why he exited; it appears in on page E-26 to the preliminary proxy statement. The explanation makes absolutely no sense, as Gebbia insists that he had no conflict of interest and, further, that the Board agreed he had no conflict of interest.

So what happened? I’ll tell you what happened: Gebbia became frightened at the prospect of exposing himself to personal liability for breach of fiduciary duty, threw up his hands, resigned, and ran away (which, perhaps, is evidence that he is the only Tesla director with even a shred of integrity and sense).

In the wake of Gebbia’s resignation, Wilson-Thompson had become a “committee of one.” She was all alone. It made complete and total sense for her to ask that her committee be expanded by adding one or more independent directors.

3. Wilson-Thompson Had Very Limited Expertise

Wilson-Thompson’s background is in human resources. Besides lacking any legal training, she has no experience in corporate finance or in evaluating executive compensation plans.

Yes, she hired a bevy of lawyers and consultants (though no compensation consultant, in plain contravention of the requirements of the governing cases, Kahn v. MF Worldwide Corp. and In re Match Group, Inc. Derivative Litigation). You may be sure that at the time they were engaged, those lawyers and consultants understood full well that their real marching orders came from Elon Musk, not Kathleen Wilson-Thompson.

The steps taken by those lawyers and consultants, like almost every other event detailed in the chronology appearing in the preliminary proxy statement, are Kabuki theater. All those steps were stage-managed by Musk, and choreographed by the lawyers and consultants who understood their role was to assure that the performers were in their proper places as they were moved about the stage.

4. The Decisions Facing the Special Committee Were Enormous

The decisions to be made by the Special Committee were monstrously huge and consequential: (1) whether to abandon the most respected corporate governance judiciary in the United States in favor of a brand-new court in Texas to which no judges have yet been appointed, and (2) whether to recommend “ratifying” the largest (by a factor of 250) compensation package ever awarded to any corporate officer other than Elon Musk.

The idea that the responsibility for these decisions would be placed on the shoulders of a single director, and, indeed, a director who both lacked independence and had very limited expertise, is both laughable and outrageous.

5. Kathleen versus Kathaleen: No Contest

The Committee’s recommendations would have to be made in the face of a highly detailed and carefully reasoned opinion — 200 pages in length — from Chancellor Kathaleen St. Jude McCormick, a respected jurist with a vastly greater understanding of the operative law (and, most likely, of the underlying facts) than Wilson-Thompson could possibly have had. Moreover, much of that 200-page opinion was devoted to explaining the evils of having dependent directors (as Wilson-Thompson surely is) making decisions involving the compensation of a “Celebrity CEO” who controls the company.

C. The Argle-Bargle Explanation

Given the eminently sound reasons for Wilson-Thompson to request some additional committee members, why was the request refused? The proxy statement (at page 19) offers only this:¹

After Mr. Gebbia stepped down, Ms. Wilson-Thompson became a committee of one. According to the Special Committee Report, the Special Committee discussed with the Chair of the Board, the Chair of the Nominating and Corporate Governance Committee, and management the possibility of accelerating the in-process search for new independent directors, and adding any new director(s) to the Special Committee. The Special Committee reported that the timing of the ongoing director search ultimately did not fit with the Special Committee’s work, and the Special Committee determined there was no reason to delay its work based on the possibility that additional directors would be added to the Board at some point in the future.

The Chair of the Board is Robyn Denholm, she of the “life-changing” $500 million in Tesla stock awards. The Chair of the Nominating and Corporate Governance Committee is Ira Ehrenpreis. Let’s recall what the Tornetta decision tells us about Ehrenpreis (footnotes omitted):

Ehrenpreis is a founder and managing partner of DBL Partners, an impactinvesting venture-capital firm that focuses on driving environmental change through investments. Ehrenpreis and DBL have invested tens of millions of dollars in Musk-controlled companies.

Ehrenpreis had been a member of the Board since 2007 and chair of both the Compensation Committee and the Nominating and Corporate Governance Committee since 2009. Between 2011 and 2015, Ehrenpreis was granted 865,790 Tesla options. He exercised less than a quarter of those options in 2021, netting over $200 million. Being a Tesla director had “been a real benefit in fundraising” for Ehrenpreis’s funds.

Ehrenpreis and the Musk brothers have known each other for over 15 years. As Ehrenpreis acknowledged, his personal and professional relationship with the Musk brothers has had a “significant influence on his professional career[.]”

The final party to Wilson-Thompson’s discussions about her request for some independent director assistance is “management.” Now, who might that be? Why, Elon Musk, of course.

So, after consulting with (1) the Tesla Chair sitting on $500 million of wealth from Musk, (2) the director whom Musk has helped to make a billionaire, and (3) the vindictive Musk himself, who has almost absolute control over Tesla and who is publicly angry with the Delaware Court of Chancery (and who, moreover, cannot deny the factual allegations of fraud in the SEC’s “funding secured” lawsuit), we are supposed to believe that Wilson-Thompson dropped her request for help because it “did not fit” with her “independent” work.

It could not be more obvious that Wilson-Thompson’s request “did not fit” because Elon Musk was in a hurry. A very big hurry. Now, why might that have been?

D. The Reason Musk Said ‘No’

Most of you have guessed why Musk (and his supine sycophants, Denholm and Ehrenpreis) declined to find some truly independent directors to serve with Wilson-Thompson on the “committee of one.”

It’s because finding new directors would take time. But, Musk was in a big hurry. His attorneys, and those of the other Tornetta defendants, had quite cleverly kept quiet about the reincorporation and ratification gambits while negotiating a briefing schedule for the legal fees issue. Until that issue was resolved, they understood that no final judgment could be entered in Tornetta v. Musk.

It was only after the Chancellor, acting on the parties’ stipulation, set July 8 as the hearing date on the legal fees issue that the Tesla Board finally revealed what the Chancellor has called “a plot twist” — the April 17 proxy statement calling for the shareholder votes 25 days before the July 8 hearing.

There can be no doubt that Musk harbored the hope of having Tesla reincorporated in Texas and having his 2018 Grant “ratified,” and then of having a Texas court undermine the Chancellor’s January 30 rescission ruling. Now, to be clear, we happen to believe such an action by a Texas court — or any court — would be highly unlikely to succeed; it would require a truly crooked judge to attempt to wrest jurisdiction of the case away from Delaware’s Court of Chancery.

Though, to be sure, such judges exist. And given that no judges have yet been appointed to the Texas Business Court that Tesla has selected as its forum for resolving corporate governance disputes in the event the reincorporation vote succeeds, a phone call from Musk (or Jared Birchall) to Governor Greg Abbott (who, most assuredly, is a friend of Musk) to suggest a judge or two as a possible appointee would by no means seem out of the question.

Remember; we deal here with Elon Musk. He answers to no one. He has invited the Securities and Exchange Commission (the SEC), which regulates U.S. securities markets, to “Suck Elon’s C*ck.” The rules that apply to others do not apply to Musk. He is a narcissist and egomaniac on a truly galactic scale.

IV. Wilson-Thompson Is Not Innocent

In life, we all have hard choices to make. Sometimes they define us and shape our legacy.

1. The Money Seduction

Frequently, those hard choices involve money.

Wilson-Thompson, were she to have stared long and hard in the mirror, might have appreciated that she is compromised by the $200 million of riches that have come her way by reason of her service as a Tesla director. Having had that realization, she might then have declined to serve on the Special Committee, explaining that she regards herself as too tied to Musk.

But that was not the choice she made.

If ever the Board and Special Committee deliberations between the January 30 date of the Post-Trial opinion and the April 17 date of the preliminary proxy statement are challenged in court, and if in consequence Wilson-Thompson is questioned under oath about what actually happened, and who said what to whom, it is likely to be a highly unpleasant episode for her.

2. No Alternative Considered

Moreover, Wilson-Thompson was vested with the authority to consider “all alternatives” to the 2018 Grant. From the April 17 proxy statement:

In addition to the powers it already had, the Special Committee gained the authority to: determine the Company’s decision on the ratification question; consider all alternatives, including not seeking ratification of the 2018 CEO Performance Award; and determine whether to condition any ratification on a particular stockholder vote standard.

Did Wilson-Thompson consider the alternative spelled out so powerfully by Chancellor McCormick in her 200-page opinion? That the Board should do absolutely nothing by way of further compensation because Musk already was powerfully incentivized by his enormous share of Tesla stock ownership?

From page 6 of the Tornetta Post-Trial Opinion:

. . . Musk owned 21.9% of Tesla when the board approved his compensation plan. This ownership stake gave him every incentive to push Tesla to levels of transformative growth—Musk stood to gain over $10 billion for every $50 billion in market capitalization increase. Musk had no intention of leaving Tesla, and he made that clear at the outset of the process and throughout this litigation. Moreover, the compensation plan was not conditioned on Musk devoting any set amount of time to Tesla because the board never proposed such a term. Swept up by the rhetoric of “all upside,” or perhaps starry eyed by Musk’s superstar appeal, the board never asked the $55.8 billion question: Was the plan even necessary for Tesla to retain Musk and achieve its goals?

The Board never asked that question before making the 2018 Grant. And you can search the preliminary proxy statement in vain for any indication that either the Board or the Special Committee (Wilson-Thompson) ever asked that question in 2024, either.

3. An Obviously Flawed Process

The governing case law instructs that a compensation consultant is indispensable for the work of a Special Committee charged with evaluating a compensation package for a controlling shareholder. And yet, as the proxy statement reveals (emphasis added):

Because of the nature of the ratification process, the Special Committee did not substantively re-evaluate the amount or terms of the 2018 CEO Performance Award and DID NOT ENGAGE A COMPENSATION CONSULTANT. It did not negotiate with Mr. Musk. The Special Committee determined that none of those steps would have been consistent with ratification.

A 200-page analysis from a brilliant jurist decisively determined that the 2018 Grant was not fair to Tesla or its shareholders. And Kathleen Wilson-Thompson, asked to use her “independent” judgment, made absolutely no effort to evaluate whether the grant was or was not fair. She concluded, simply, let’s ratify it.

Great work, Ms. Wilson-Thompson.

V. This Is An Opinion Piece

Obviously, this piece includes opinions from me and my collaborator. It speculates about Elon Musk’s motives.

That said, Occam’s Razor tells us why Wilson-Thompson’s request was denied. Mr. Musk was in a big hurry, as always, to have everything exactly as he wanted it.

And so, to hell with the law, to hell with the abuse of judicial process, and to hell with the reputations of his directors. What Elon wants, Elon must have.

1. An almost identical explanation appears in the Special Committee’s report, at page E-26 of the proxy statement.