Ratifying Elon Musk’s 2018 Compensation Package Previously Rejected by Delaware Court and Reincorporation of Company to Texas May Weaken Shareholder Rights at All Companies
Adopting Proposals Could Encourage Other Companies to Disregard Court Rulings Meant to Protect Shareholders
WASHINGTON--(BUSINESS WIRE)--Jun. 11, 2024--
TheAmerican Association for Justice (AAJ), Americans for Financial Reform Education Fund (AFR), and the Consumer Federation of America (CFA) (collectively the “Coalition”) today released an opinion statement regarding the considerable threats to shareholder protections and corporate governance posed by Proposals 3 and 4 (the “Proposals”) on the ballot at Tesla, Inc.’s (Nasdaq: TSLA) (“Tesla” or the Company”) upcoming annual meeting of shareholders, scheduled for Thursday, June 13, 2024.
Tesla’s Board of Directors (the “Board”) is asking shareholders to ratify Elon Musk’s 2018 pay package that was rejected by a Delaware court in January after the court found that Tesla's 2018 proxy statement omitted important information about the pay plan and was therefore misleading, and that the Board was not independent of Musk. The Board is also asking shareholders to approve moving the Company’s incorporation from Delaware to Texas. Adopting the Proposals could allow Tesla to disregard the court's ruling, and then move to a state with less shareholder protections – setting a precedent that could encourage other companies to disregard court rulings meant to protect shareholders.
Notably, leading independent shareholder advisory firms Institutional Shareholder Services and Glass Lewis have recommended Tesla shareholders do not vote to approve Musk's compensation package and have questioned the judgement of incorporating in Texas. Representatives of some the nation’s largest and most sophisticated institutional investors and Tesla shareholders – including New York City Employee’s Retirement System and Maryland State Retirement and Pension System – recently criticized the Proposals.
The Coalition believes the Proposals are not only a threat to current Tesla shareholders' protections, but to the ability of all shareholders to hold captured boards accountable for putting the self-interests of CEOs ahead of what is best for the company.
The full text of the opinion statement is below.
Upcoming Tesla Vote a Significant Moment for All Investors
What do a billionaire Tesla investor, a renowned law professor,1 and leading independent shareholder advisory firms Institutional Shareholder Services and Glass Lewis2 have in common?
They all oppose the recent attempts by Elon Musk and the “independent” Tesla Board of Directors3 to try to circumvent the law and the American judicial system. At this month’s critical Annual Meeting, the stakes are far greater than what Musk and his “independent” Board would like to you believe.
By asking shareholders to once again ratify Musk’s excessive 2018 pay package and approve the incorporation of the company in Texas, Musk and the Tesla Board are attempting to ignore a Delaware court’s ruling in January that invalidated this pay package and avoid future legal challenges under Delaware law. This scheme is far-fetched and repugnant, with negative implications for not only Tesla shareholders but for the judicial system’s legitimacy when it comes to shareholder rights and investor protection. If these proposals are adopted, they could set a terrible precedent that could encourage others to disregard court rulings meant to protect shareholders from self-serving CEOs and captured boards.
The 2018 pay package was an outlier for executive compensation. There had been few, if any, similar pay packages for CEOs at the time, and both ISS and Glass Lewis recommended votes against it at the time,4 and publicly opposed it again within the past few weeks.
Notably, after the 2018 pay package took effect, major concerns began to surface. Tesla shareholders brought a derivative action on behalf of the corporation alleging that the proxy statement omitted important information about the pay plan and was misleading, and that the Board was not independent of Musk. The Delaware court voided the 2018 pay package for these reasons, finding that “the process leading to the approval of Musk’s compensation plan was deeply flawed” as “Musk has extensive ties with the persons tasked with negotiating on Tesla’s behalf.”5
Now, the current proposals mark potentially devastating tactics to shareholder rights and corporate governance. Corporate law experts generally agree that shareholder rights and remedies are not as established in Texas as they are in Delaware. However, we believe Tesla’s Board chose Texas as the centerpiece of their scheme because the state has less-established consumer and investor protection laws. Look no further than Musk’s decision to move his privately held brain implant company, Neuralink, to Nevada from Delaware almost immediately after the January court decision came out, suggesting to many experts an interest in forum shopping for “favorable law.”
Further, corporate law and investor protection in Texas and Nevada are mostly untested with judges who have far less experience with shareholder rights issues, and many shareholder advocates agree that the long history and relative certainty in Delaware corporate law adds value to shares, as well as much-needed protections should any challenges arise.
Allowing Tesla to move its headquarters to Texas after an unfavorable ruling in Delaware could also have the effect of opening the floodgates for other companies to try to avoid accountability by moving to states that they perceive to be more favorable legal environments preemptively or if faced with an unfavorable court decision in their state of incorporation. This could have deep ramifications for American investors broadly, as the courts in these states could make it more difficult to achieve positive outcomes in private securities cases seeking to enforce investor protections and good corporate governance principles.
Investors rely on crucial government regulation to protect their investments, but history demonstrates that private actions are a critical mechanism for holding companies accountable for wrong-doing and recouping investor money. In fact, federal securities class actions have returned over $100 billion to defrauded investors in the past 20 years alone. Investors cannot afford to lose this avenue for recovery when boards and managements commit wrongdoing.
We believe Tesla’s proposals are not only a threat to the future value of the company Musk founded, but also to the ability of shareholders to hold captured boards accountable for putting the self-interests of CEOs ahead of what is best for the company. Those who value sound corporate governance generally should not sit by and allow Musk and Tesla’s board to get away with these machinations.
Companies and their boards should respect the rule of law and not be allowed to try to rewrite history simply by trying to find a more favorable forum when they don’t like a court’s decision. Without accountability and the ability to protect investments, violations of the law go unchecked, investor confidence diminishes, and market participation suffers, threatening the security of U.S. capital markets and our economy.
American Association for Justice is a broad-based, international coalition of attorneys, law professors, paralegals, and law students.
Consumer Federation of America is a non-profit association of nearly 250 consumer groups that advance consumer interest through research, advocacy, and education.
Americans for Financial Reform Education Fund is a nonpartisan and nonprofit coalition of more than 200 civil rights, consumer, labor, business, investor, faith-based, and civic and community groups.
1 Amicus Brief of Professor Charles Elson, Tornetta v. Elon Musk, et al (C.A. No. 2018-0408-KSJM)
2 See https://www.bloomberg.com/news/articles/2024-05-25/tesla-shareholders-should-reject-musk-s-pay-glass-lewis-says?embedded-checkout=true; see also Glass Lewis Tesla 2024 Meeting Voting Recommendations, page 27.
3https://www.wsj.com/finance/regulation/elizabeth-warren-urges-sec-to-investigate-tesla-over-board-independence-bcfb3f9b; see also https://finance.yahoo.com/news/why-tesla-may-need-new-blood-on-its-board-to-pull-off-a-delaware-exit-121933552.html.
4https://www.barrons.com/articles/tesla-stock-price-musk-pay-vote-41fe5076.
5Richard J. Tornetta et al v. Elon Musk et al., Case Number 2018-0408, in the Court of Chancery of the State of Delaware.
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Source: American Association for Justice
