“Should continue to focus” – Elon Musk’s $50 billion trap

The vote had not even ended when Elon Musk was already celebrating his victory. “Thank you for your support,” wrote the head of the electric car manufacturer Tesla on Wednesday in his social network “X.” Surrounded by red hearts. The premature thanks are not surprising, because there was quite a lot at stake for the entrepreneur. At this year’s annual general meeting, shareholders were to vote on a lavish compensation package for Musk – currently worth almost 50 billion dollars.

And Musk was right. On Thursday, a majority of Tesla shareholders approved the package for the entrepreneur. “Damn, I love you guys,” he cheered at the shareholders’ meeting after the result was announced. But that is unlikely to have brought long-term relief. Even with the backing of shareholders, the multi-billion dollar compensation package could still prove to be a trap – for three reasons.

Specifically, the package guarantees the Tesla boss the right to buy more than 300 million shares of the electric car manufacturer at the 2018 market value. The difference between the purchase price and the current price is – as of now – almost 50 billion dollars. The actual value of the package depends on when Musk exercises the purchase options. But the value of the package is only one thing. The other is the voting rights that Musk would receive with the shares – and thus significantly more influence in the company.

For Tesla, nothing less than the future of the company depends on the compensation package. The billionaire has made his commitment to the electric car manufacturer largely dependent on its approval. For example, Musk has threatened to develop AI and robot innovations outside of Tesla if he does not receive enough voting rights.

A few days ago, Tesla Board Chairwoman Robyn Denholm once again made a big pitch. The billions for Musk had a simple purpose: “Elon should continue to focus on Tesla and be motivated to achieve the company’s unparalleled goals,” she wrote in a letter. It’s obviously not about the money. “We all know that Elon is one of the richest people in the world,” she continued. He would remain so even without the compensation package.

It was not foreseeable for a long time that Musk would receive the majority of shareholders. Investors had repeatedly accused him of focusing too much on his other companies – such as the space company SpaceX or his social network “X”. Large investors had therefore announced that they would vote against the package, including the Norwegian sovereign wealth fund.

And criticism was also loud during the annual general meeting. “Musk is a genius,” said shareholder lawyer James McRitchie. He was sad that Musk was turning his attention elsewhere, but it just happens. “Prepare Tesla for a future that does not depend on a superhero dictatorship,” said McRitchie.

Even though the shareholders finally agreed, there is still a risk of major trouble. The compensation package was already put to a vote at Tesla in 2018 and was approved with a majority of 73 percent of the shareholder votes cast.

But a judge in the US state of Delaware overturned the decision in January of this year. “The process that led to the approval of Musk’s compensation plan was deeply flawed,” Kathaleen McCormick explained the decision at the time. She explained this with the company’s CEO’s “extensive connections” to board members who had negotiated his most recent salary deal.

The fact that McCormick is responsible is due to Tesla’s legal headquarters. An estimated two-thirds of the 500 largest US companies are registered in Delaware – the state is considered to be particularly business-friendly. And so Musk’s subsequent anger at Delaware was great. “Never set up your company in the state of Delaware,” warned Musk in a post on “X”. The entrepreneur recently followed up his words with actions: On Thursday, Tesla also had its shareholders vote on registering the automobile company in Texas – and also received a majority in favor.

The unrest will probably remain, however – not least because shareholders’ expectations of Musk have probably risen enormously due to the generous package. The figures recently made investors anything but happy. In the first quarter of this year, Tesla had to record its first decline in sales in almost four years. Revenues fell by nine percent year-on-year to 21.3 billion dollars.

The poor result was predictable. After all, Tesla delivered fewer vehicles in the last quarter than in the same period last year – and thus recorded the first decline since the Corona crisis. Musk had actually prescribed a strict growth concept for his company. Heavy discounts were supposed to boost vehicle sales. Musk had repeatedly reduced the prices of the most popular Tesla models in recent years, sometimes by several thousand dollars.

Demand in the market for electric cars is stagnating in general. However, some observers are convinced that the recent discussions about Musk are also deterring buyers. “There is only one person responsible for this,” the well-known US investor Ross Gerber recently claimed on “X”. “Basically, Tesla cannot sell its cars because of Elon’s behavior.”

Surveys also suggest such a Musk problem. According to a recent study by the market research company Caliber, the brand’s appeal has steadily declined in recent years. While more than 80 percent of American consumers liked and trusted Tesla in November 2021, less than 60 percent recently said the same. “It is very likely that Musk himself is contributing to the loss of reputation,” explained company boss Shahar Silbershatz.

And finally, Musk’s premature gratitude for the vote could become a stumbling block. The Tesla boss shared a graphic with preliminary results on Wednesday, an interim result in favor of the $50 billion package, so to speak. Lawyers such as Charles Elson from Delaware commented on the procedure to the US broadcaster ABC as “highly unusual.”

The law professor explained that Musk’s posts may well have had an effect on voting behavior. “Every time you tell people you’re winning, you encourage others to join you and your opponents to withdraw,” Elson said.

And from the perspective of Erik Gordon, a professor of law and economics at the University of Michigan, the posts on “X” could still attract the interest of the judiciary. “His post had better be accurate, otherwise anyone who bought shares in reliance on it will be able to file a lawsuit against him under securities law,” he said. The US Securities and Exchange Commission (SEC) did not want to comment on the posts when asked by US media.