Elon Musk is pursuing substantial compensation from Tesla after a judge invalidated his previous package. He has expressed interest in increasing his ownership stake and hinted at developing products independently if his requests are unmet. The board may appeal the ruling or create a new compensation plan, but both options carry financial implications. Reactivating Musk’s old compensation plan could result in significant tax liabilities, and settling a lawsuit with a shareholder might conflict with his usual litigation stance.
An Insight into Musk’s Aspirations
In the unfolding saga surrounding Tesla and its enigmatic CEO, Elon Musk, the billionaire is actively pursuing substantial compensation from the company. Following a judge’s ruling that annulled his previous compensation package in January, Musk communicated his desire for a similarly significant replacement to a specially appointed committee of Tesla’s board. This revelation comes from documents submitted to securities regulators.
Earlier this year, Musk expressed on his social media platform, X, that he is interested in acquiring a larger ownership stake in Tesla. He hinted at the possibility of creating specific products independently if his demands are not met. Beyond Tesla, Musk oversees several other ventures, including SpaceX, known for its space exploration efforts, and Neuralink, which focuses on brain-computer interface technology.
Potential Legal Maneuvers and Financial Implications
In light of the recent judgment, both Musk and Tesla’s board have the option to appeal the decision to the Delaware Supreme Court, a process that generally spans about a year. This case, which represents the largest compensation agreement in the history of U.S. public companies, introduces complex issues that Delaware judges have seldom tackled, increasing the unpredictability of the appeal outcome.
Chancellor Kathaleen McCormick, the trial judge, noted that Musk exerted significant control over the compensation negotiations despite holding only approximately 22% of Tesla’s shares. Additionally, the board recognized that the shareholder vote in June, aimed at ratifying Musk’s compensation, employed an ‘unprecedented’ legal strategy, leaving its future treatment under Delaware law in question.
As an alternative, Tesla’s board could opt to devise a new compensation structure, although this approach might incur substantial costs. The original plan initiated in 2018 allowed Musk to acquire stock options contingent on meeting ambitious financial targets. Since then, Tesla’s stock has soared tenfold, making these options exceedingly valuable. The financial impact when the 2018 plan commenced was recorded at $2.6 billion, and any replacement plan today would likely need to be significantly smaller.
Alternatively, Tesla could consider reinstating the previous plan, offering Musk the same 304 million stock options at the original exercise price of $23.34. However, any objections from shareholders would necessitate legal action in Texas, where Tesla was reincorporated this year, as opposed to Delaware.
Nonetheless, this strategy does not mitigate the potential accounting and tax repercussions. Documents reveal that reactivating the old plan could lead to a staggering $25 billion charge for Tesla. Moreover, since the stock options would hold considerable value upon issuance, they would be classified as taxable income, potentially subjecting Musk to a 57% tax rate when combined with penalties, according to an analysis by tax expert Schuyler Moore.
Lastly, Musk may contemplate settling the ongoing lawsuit filed by a Tesla shareholder, accepting a reduced portion of his compensation. However, this would contradict his typical preference for litigation over settlement, even when facing significant liabilities. The perspective of Chancellor McCormick on such a settlement at this juncture remains uncertain.