Legally, the only clear course was to create a new stock options grant for Musk. Yet the Tesla board is trying to revive the old one. Let's explore why.
Nicely done. It's worth noting that by stating in the proxy that the vote can cure a fiduciary breach, the proxy is itself probably invalidated. Of course they equivocated with "believes" and the "board's view", but that is still capable of challenge, because the board has a fiduciary responsibility to seek informed legal counsel.
I hadn't considered the point about disclosure of the investigations, but depending on the the non-public details, even more so because if the reported SEC investigation into misleading investors re FSD is true, this is clearly material.
There's no question that Tesla's board has really walked a long way out on a very weak legal bridge with this gambit. The fact that this proxy exists merely goes to prove that the board is not independent and that Musk is controlling it, so I think in the long run this proxy may delay matters, but it also powerfully supports McCormick's decision. The only solid grounds for appeal to the DE SC, post Match, would have been that Musk wasn't controlling the board.
We're really all waiting to see how the Tesla story ends - with a bang or with a whimper? We still don't know. Musk is running the company into the ground, and the fatal flaw of corporate governance prevents anyone from stopping him.
The proxy's implicit promise that the vote can cure a fiduciary breach, and the fact that such an implicit promise is itself materially misleading, is a terrific insight.
I certainly agree that the proxy's very existence drives a stake into any argument that Musk does not control Tesla. That argument, as you note, appears to be all Musk has left by way of appellate complaints after the recent Match decision.
First, it's not the Board's gambit. They are just meekly going along with Elon's demands. That much is VERY clear. Second, I'll be anything it won't all end with a whimper. When this thing ends it goes thermonuclear. LOL Though unfortunately there will be a lot of whimpering (and crying) from the poor fools that have invested their life savings into this fraudulent sh!tshow.
I think there would also be a huge tax issue for Musk in granting new in-the-money stock options. If I recall they would not by qualifying and would ultimately be taxed as normal income vs capital gains.
Great point, and one I should have mentioned. Because Musk owns more than 10% of Tesla, such a grant would be non-qualifying. In effect, this is all an audacious tax avoidance scheme by Musk.
Musk has not stated that he would leave Tesla, or sell his shares if his compensation plan is voted down, but there has been substantial talk on social media of his doing exactly that, and he has made no statement to deny it.
The video from Denholm implies that Tesla 's future is somehow tied to the approval of the compensation award which implies that Musk will do something that negatively affects Tesla if the award is not ratified. Keeping in mind that Musk, as CEO and director has a fiduciary duty to act in shareholder's interests, any action on his part, short of resigning, could be construed as a breach of that fiduciary duty.
It could be construed that the Denholm video and other materials presented by Tesla in support of the proxy are coercive in nature. In fact, the degree of disinformation in this proxy and the accompanying materials is probably worse than the 2018 proxy, and would be subject to the same judgement.
Great insight. I would just add that Musk has indeed made a not so veiled threat to quit if he doesn't end up with a significantly greater percentage ownership after all the dust is settled - - otherwise he will go do his wondrous AI shit somewhere else. He tweeted it.
For accounting purposes the options are valued at the time the award is granted. The valuation is based on one of the commonly used option formulae, of which the Black-Scholes is the most popular. The options were granted at a price 10% higher than the share price at the time of the grant. Total value according to the formula was, I believe, $2.3 billion, that's what Tesla recorded as share based compensation, over a period of about 4 years based on their assessment of the likelihood of vesting.
The $56 billion number was invented by the media, who simply calculated what the value of the award would be if the market cap targets were met. The value of course depends on the share price. At the peak share price that value would have been over $100 billion, at today's price it would be about $45 billion.
If Tesla were to offer a replacement award with the same number of options at $23.34 strike they would have record approximately $45 billion in share-based compensation, which would wipe out all profits for the foreseeable future, and may jeopardize their position in the S&P 500 . There would also be tax implications for Musk because the strike price is lower than the current share price. Such an award, of course, would be subject to the same challenges as the former award.
If they were to reprice the options at 10% above the current share price, the value would work out to about $22 billion, enough to wipe out several years of GAAP profit.
Great stuff, jaberwock. You are 100% correct about the $56 billion number being, in effect, a media invention. The media had help from the Chancellor, of course, as the opening paragraphs of the January 30 decision make clear.
(I missed the detail that the options were granted at a price 10% higher than the share price at the time of the grant, but that doesn't affect the overall analysis.)
Thanks for running the numbers on what the SBC expense would be if replacement options were awarded.
It doesn’t seem like there is a win win solution for the Tesla situation. After reading this piece and others, I don’t understand how Tesla’s board exists as it is 12 months from now. It seems they’ve given their detractors too strong an argument to continue, this compensation package being the turning point.
The question becomes who loses?
Elon, apart from some hypothetical criminal investigation, will be fine due to the extreme market cap/dominance that SpaceX owns as well as what I would guess is a small fortune made trading crypto. Tesla and X can go away and he’ll be fine.
So it leaves a bunch of firms, some gigantic, that are going to be the losers, along with the general public, who has not only a bunch of cars that take forever to be repaired, do not meet the claims of the company selling them, but also is heavily invested in Tesla.
Is a shame. Is tricky. There is good in this story, but the bad is going to come on thick and heavy I feel. The best thing that can happen is the bandaid is ripped off, and there isn’t predatory abuse of the already victims of this clown show.
I tend to doubt Elon will leave Tesla. It is too crucial to him - for his image, for his wealth (which goes south quickly if he departs), and for his ability to use it to raise money.
As for SpaceX, never trust the "marks" of a private company. Valuations as reflected by equity raises can often prove to be deeply mistaken. Moreover, it affords Musk no liquidity.
There’s too many vehicles on the road. Too many investors. Too much capital invested.
The cost we would all pay for their collapse is too high to ignore.
They’ll put a dress on it and put competent people in charge of it. Peoples confidence in the brand will not plummet, it could go up. The share price would probably experience volatility, but I can see them holding substantial value after a transition as I’m unsure what party would want to move ownership, they’d want to fill a vacuum yeah?
Id guess the market making entities, if they remain as they are now or if there is some change in that area, would happily drop the price extremely low allowing aligned institutional groups to accumulate as undesirables gave up their position - but this would be a multiyear controlled strategy. It would also be predictable high volatility (profitable).
Would be the opposite side of a captured board: a wide open one. A benefit of tsla the asset is that you could slice off parts and get cash: robotics, component mfg, supercharge, energy storage. If you control the board you’ve got multiple piles of billions of dollars at your fingertips. It’s easy to get a majority in that circumstance, who doesn’t want a giant bag of cash. It might be highly valued just because it’s modular and the vultures wanna pick it apart, the opportunity to partake providing a floor or enough desire for the security that the financial side of this situation is a non issue. The bag holders here will be the ones standing next to the emptied husk. Elon maybe a giant fraud, but Americas top engineering talent built functional things while employed there.
I agree that the Delaware courts may be tempted to swallow hard and accept the results of a “ratification” vote. That would be terrible for the governance of US public companies, but there will be that temptation.
I don’t necessarily agree with all of your other points.
I think the timeline of the above case (or a similar case) is one that dictates change. Due to there being “innocents”, such as public investment money and customers with vehicles, it is the responsibility of our governing bodies to prevent total collapse. We can’t let like a third of cars in California become valueless and unrepairable - it’s just too damaging to the purchasing power of the consumer base, everybody financing guaranteed underwater with no way out. We would all share the cost either way but if controlled, less cost. I’m not a legal mind, but these suits like the one above attacking the board will maybe force change: I don’t know how Elon could stay if the board weren’t in his pocket. He’s def the kinda guy who is either in charge or not involved.
In hindsight, the greatest error the board may have made is to combine the vote to move corp from Delaware to Texas with elons pay. If they seperated those two actions, and moved first…idk how the court of chancery handles it when you leave their jurisdiction, but it seems like it could buy time? Regardless, I think the board is probably in more trouble than Elon is. They don’t have SpaceX to fall back on, their liability appears to be growing larger than they are, and their compensation is way easier to claw back.
If I were a gambler, I’d wager people like Robyn Denholm and Ira Ehrenpreis will find themselves falling off of wealth lists. If the board is staring at defeat, a negotiated continuity without elon where the board gets some degree of immunity from certain liability is the most likely outcome IMO. If, however, they fought to the absolute end, the proceedings would dictate the possible outcomes, and as it got close, plans would exist for the various possibilities.
I think the biggest challenge Elon faces would come from criminal charges (or overdose), but we live in a society where some people are above the law, so I’ll believe it when I see it. I think a year in jail would be good for him and us. It didn’t kill Mike Tyson, another quite broken but superlative human being who might have died if not sent to chill. Elon contributes at a very high level - even if it’s mostly fraud, lies, exaggerations to gain wealth - he’s still really damn good at it, it’s just unfortunate that he’s a jackass. Maybe sitting a year fixes some of the jackass part. Maybe it doesn’t and we put him right back in. If Tyson had gotten out and beat up another lady he’d have gone back. He is quoted saying they were the best 3 years of his life.
I hadn't seen that Wagner lawsuit. The SEC will soon be able to depose Musk. I think if there are going to be any consequences for his violation of the 2019 orders, the SEC has the best chance to bring them home.
Aren’t all incentive options taxed as income upon exercise. The 2012 options were taxed as income. Why wouldn’t the 2018 options be taxed the same? I’m not sure I understand the tax avoidance part of this ratification effort. Thanks
The 2018 options would be taxed the same, upon exercise.
Assuming those options are rescinded, and hence gone, the only way for Tesla to give Musk the same economic benefit today would be to grant him deeply in-the-money options. Those would be taxed upon the grant to the extent market value exceeds strike price, and would also be an enormous compensation expense for Tesla. LMK if that's still unclear.
That part I understand. But if say the 2018 options are reinstated, wouldn’t Musk owe roughly the same amount in terms of taxes? So if he exercised when the stock is at $175, he would owe income tax on the difference (175-23) ?
Nicely done. It's worth noting that by stating in the proxy that the vote can cure a fiduciary breach, the proxy is itself probably invalidated. Of course they equivocated with "believes" and the "board's view", but that is still capable of challenge, because the board has a fiduciary responsibility to seek informed legal counsel.
I hadn't considered the point about disclosure of the investigations, but depending on the the non-public details, even more so because if the reported SEC investigation into misleading investors re FSD is true, this is clearly material.
There's no question that Tesla's board has really walked a long way out on a very weak legal bridge with this gambit. The fact that this proxy exists merely goes to prove that the board is not independent and that Musk is controlling it, so I think in the long run this proxy may delay matters, but it also powerfully supports McCormick's decision. The only solid grounds for appeal to the DE SC, post Match, would have been that Musk wasn't controlling the board.
We're really all waiting to see how the Tesla story ends - with a bang or with a whimper? We still don't know. Musk is running the company into the ground, and the fatal flaw of corporate governance prevents anyone from stopping him.
The proxy's implicit promise that the vote can cure a fiduciary breach, and the fact that such an implicit promise is itself materially misleading, is a terrific insight.
I certainly agree that the proxy's very existence drives a stake into any argument that Musk does not control Tesla. That argument, as you note, appears to be all Musk has left by way of appellate complaints after the recent Match decision.
First, it's not the Board's gambit. They are just meekly going along with Elon's demands. That much is VERY clear. Second, I'll be anything it won't all end with a whimper. When this thing ends it goes thermonuclear. LOL Though unfortunately there will be a lot of whimpering (and crying) from the poor fools that have invested their life savings into this fraudulent sh!tshow.
I think there would also be a huge tax issue for Musk in granting new in-the-money stock options. If I recall they would not by qualifying and would ultimately be taxed as normal income vs capital gains.
Great point, and one I should have mentioned. Because Musk owns more than 10% of Tesla, such a grant would be non-qualifying. In effect, this is all an audacious tax avoidance scheme by Musk.
What about the question of coercion.
Musk has not stated that he would leave Tesla, or sell his shares if his compensation plan is voted down, but there has been substantial talk on social media of his doing exactly that, and he has made no statement to deny it.
The video from Denholm implies that Tesla 's future is somehow tied to the approval of the compensation award which implies that Musk will do something that negatively affects Tesla if the award is not ratified. Keeping in mind that Musk, as CEO and director has a fiduciary duty to act in shareholder's interests, any action on his part, short of resigning, could be construed as a breach of that fiduciary duty.
It could be construed that the Denholm video and other materials presented by Tesla in support of the proxy are coercive in nature. In fact, the degree of disinformation in this proxy and the accompanying materials is probably worse than the 2018 proxy, and would be subject to the same judgement.
Great insight. I would just add that Musk has indeed made a not so veiled threat to quit if he doesn't end up with a significantly greater percentage ownership after all the dust is settled - - otherwise he will go do his wondrous AI shit somewhere else. He tweeted it.
Another great post, jaberwock, thank you. I agree with you right down the line.
For accounting purposes the options are valued at the time the award is granted. The valuation is based on one of the commonly used option formulae, of which the Black-Scholes is the most popular. The options were granted at a price 10% higher than the share price at the time of the grant. Total value according to the formula was, I believe, $2.3 billion, that's what Tesla recorded as share based compensation, over a period of about 4 years based on their assessment of the likelihood of vesting.
The $56 billion number was invented by the media, who simply calculated what the value of the award would be if the market cap targets were met. The value of course depends on the share price. At the peak share price that value would have been over $100 billion, at today's price it would be about $45 billion.
If Tesla were to offer a replacement award with the same number of options at $23.34 strike they would have record approximately $45 billion in share-based compensation, which would wipe out all profits for the foreseeable future, and may jeopardize their position in the S&P 500 . There would also be tax implications for Musk because the strike price is lower than the current share price. Such an award, of course, would be subject to the same challenges as the former award.
If they were to reprice the options at 10% above the current share price, the value would work out to about $22 billion, enough to wipe out several years of GAAP profit.
Great stuff, jaberwock. You are 100% correct about the $56 billion number being, in effect, a media invention. The media had help from the Chancellor, of course, as the opening paragraphs of the January 30 decision make clear.
(I missed the detail that the options were granted at a price 10% higher than the share price at the time of the grant, but that doesn't affect the overall analysis.)
Thanks for running the numbers on what the SBC expense would be if replacement options were awarded.
It doesn’t seem like there is a win win solution for the Tesla situation. After reading this piece and others, I don’t understand how Tesla’s board exists as it is 12 months from now. It seems they’ve given their detractors too strong an argument to continue, this compensation package being the turning point.
The question becomes who loses?
Elon, apart from some hypothetical criminal investigation, will be fine due to the extreme market cap/dominance that SpaceX owns as well as what I would guess is a small fortune made trading crypto. Tesla and X can go away and he’ll be fine.
So it leaves a bunch of firms, some gigantic, that are going to be the losers, along with the general public, who has not only a bunch of cars that take forever to be repaired, do not meet the claims of the company selling them, but also is heavily invested in Tesla.
Is a shame. Is tricky. There is good in this story, but the bad is going to come on thick and heavy I feel. The best thing that can happen is the bandaid is ripped off, and there isn’t predatory abuse of the already victims of this clown show.
I tend to doubt Elon will leave Tesla. It is too crucial to him - for his image, for his wealth (which goes south quickly if he departs), and for his ability to use it to raise money.
As for SpaceX, never trust the "marks" of a private company. Valuations as reflected by equity raises can often prove to be deeply mistaken. Moreover, it affords Musk no liquidity.
I seriously doubt he could leave even if he wanted to... All the loans secured by TSLA... He leaves and the value plummets, margin calls ensure.
The cult is the Tesla cult. There is no Neuralink cult or SpaceX cult or Boring Company cult.
Elon needs the cult. It’s a big part of his identity.
So, I don’t think he’ll leave.
They won’t let it collapse.
There’s too many vehicles on the road. Too many investors. Too much capital invested.
The cost we would all pay for their collapse is too high to ignore.
They’ll put a dress on it and put competent people in charge of it. Peoples confidence in the brand will not plummet, it could go up. The share price would probably experience volatility, but I can see them holding substantial value after a transition as I’m unsure what party would want to move ownership, they’d want to fill a vacuum yeah?
Id guess the market making entities, if they remain as they are now or if there is some change in that area, would happily drop the price extremely low allowing aligned institutional groups to accumulate as undesirables gave up their position - but this would be a multiyear controlled strategy. It would also be predictable high volatility (profitable).
Would be the opposite side of a captured board: a wide open one. A benefit of tsla the asset is that you could slice off parts and get cash: robotics, component mfg, supercharge, energy storage. If you control the board you’ve got multiple piles of billions of dollars at your fingertips. It’s easy to get a majority in that circumstance, who doesn’t want a giant bag of cash. It might be highly valued just because it’s modular and the vultures wanna pick it apart, the opportunity to partake providing a floor or enough desire for the security that the financial side of this situation is a non issue. The bag holders here will be the ones standing next to the emptied husk. Elon maybe a giant fraud, but Americas top engineering talent built functional things while employed there.
I agree that the Delaware courts may be tempted to swallow hard and accept the results of a “ratification” vote. That would be terrible for the governance of US public companies, but there will be that temptation.
I don’t necessarily agree with all of your other points.
https://www.plainsite.org/dockets/download.html?id=329803263&z=2d5fe9d8
I think the timeline of the above case (or a similar case) is one that dictates change. Due to there being “innocents”, such as public investment money and customers with vehicles, it is the responsibility of our governing bodies to prevent total collapse. We can’t let like a third of cars in California become valueless and unrepairable - it’s just too damaging to the purchasing power of the consumer base, everybody financing guaranteed underwater with no way out. We would all share the cost either way but if controlled, less cost. I’m not a legal mind, but these suits like the one above attacking the board will maybe force change: I don’t know how Elon could stay if the board weren’t in his pocket. He’s def the kinda guy who is either in charge or not involved.
In hindsight, the greatest error the board may have made is to combine the vote to move corp from Delaware to Texas with elons pay. If they seperated those two actions, and moved first…idk how the court of chancery handles it when you leave their jurisdiction, but it seems like it could buy time? Regardless, I think the board is probably in more trouble than Elon is. They don’t have SpaceX to fall back on, their liability appears to be growing larger than they are, and their compensation is way easier to claw back.
If I were a gambler, I’d wager people like Robyn Denholm and Ira Ehrenpreis will find themselves falling off of wealth lists. If the board is staring at defeat, a negotiated continuity without elon where the board gets some degree of immunity from certain liability is the most likely outcome IMO. If, however, they fought to the absolute end, the proceedings would dictate the possible outcomes, and as it got close, plans would exist for the various possibilities.
I think the biggest challenge Elon faces would come from criminal charges (or overdose), but we live in a society where some people are above the law, so I’ll believe it when I see it. I think a year in jail would be good for him and us. It didn’t kill Mike Tyson, another quite broken but superlative human being who might have died if not sent to chill. Elon contributes at a very high level - even if it’s mostly fraud, lies, exaggerations to gain wealth - he’s still really damn good at it, it’s just unfortunate that he’s a jackass. Maybe sitting a year fixes some of the jackass part. Maybe it doesn’t and we put him right back in. If Tyson had gotten out and beat up another lady he’d have gone back. He is quoted saying they were the best 3 years of his life.
I hadn't seen that Wagner lawsuit. The SEC will soon be able to depose Musk. I think if there are going to be any consequences for his violation of the 2019 orders, the SEC has the best chance to bring them home.
Aren’t all incentive options taxed as income upon exercise. The 2012 options were taxed as income. Why wouldn’t the 2018 options be taxed the same? I’m not sure I understand the tax avoidance part of this ratification effort. Thanks
The 2018 options would be taxed the same, upon exercise.
Assuming those options are rescinded, and hence gone, the only way for Tesla to give Musk the same economic benefit today would be to grant him deeply in-the-money options. Those would be taxed upon the grant to the extent market value exceeds strike price, and would also be an enormous compensation expense for Tesla. LMK if that's still unclear.
That part I understand. But if say the 2018 options are reinstated, wouldn’t Musk owe roughly the same amount in terms of taxes? So if he exercised when the stock is at $175, he would owe income tax on the difference (175-23) ?
Yes, that's right. Here's a deeper dive than I did:
https://johnd12343.substack.com/p/the-vote-on-elon-musks-bonus-no-winning