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"It seems to me impossible to understand how any investor motivated by fiduciary duties can vote in favour of the pay scheme’s proposed resurrection."

Investors at Tesla are faced with a series of challenging voting decisions at its June 13 AGM. That’s not least because of what they have learned about the board and its relationship with founder and CEO Elon Musk through the January Delaware court decision that set aside Musk’s multi-billion dollar pay scheme. While the board says it disagrees with that decision, it doesn’t respond to the court’s findings – which are damning about board independence and processes.

Some voting matters are literally a consequence of the court decision. The board proposes to reinstate the pay scheme. And while the board spends 40 pages of the Proxy Statement (published at the end of April) explaining why the proposed shift of corporate domicile from Delaware to Texas is not on the basis of a fit of pique over the Delaware decision, not all investors will be convinced – not least given Musk’s polling of his X (ex-Twitter) followers on the domicile question almost immediately after the court decision and announcement that it would be taken forward following the 87% support shown in this poll.

The first resolutions on the AGM ballot are re-elections to the board. Because Tesla has a so-called classified board, not all directors are put up for election each year. The two candidates in 2024 are James Murdoch and Kimbal Musk (Elon’s brother), neither of whom was directly involved in the discussions on the pay scheme. Nonetheless, the Delaware court specifically found that Murdoch was “beholden” to Musk given their close personal relationship – indeed, the court found that either the members of the board were “beholden” to Musk or “acted beholden” to him over the pay scheme. Kimbal is acknowledged not to be independent given his family relationship. In this context, will shareholders vote in favour of these non-independent board members?

AGM resolution 3 is proposed redomicile from Delaware to Texas. Given how effective the Delaware court has just proven to be in protecting shareholder interests, it would be surprising if institutional investors welcomed a move to the unproven corporate law jurisdiction in Texas (as the Proxy states, “Texas’s business courts were just created and will not start hearing cases until September 2024”). There is a further and crucial aspect of the Texas redomicile proposal, which may matter particularly to those shareholders who care about the existence of multiple share classes and the differential voting rights often associated with them. The intended Certificate of Formation of the new Texas Tesla includes powers for the board to issue new preferred shares (Article 4.1) and to give those preferred shares differential voting rights (Article 4.4(a)). This means that if the Texas redomicile goes ahead, this may be the last Tesla AGM where the success of the proposed resolutions is in any doubt.

Resolution 4 is the proposed reinstatement of the pay scheme. This was set aside by the court because the process for approving it was not fair, the outcome – essentially the quantum of the award – wasn’t fair, and shareholders were misled about it in the company’s communications. This meant that the 2018 endorsement of the scheme by independent shareholders could be set aside. The court was particularly damning about the process: “Put simply, neither the Compensation Committee nor the Board acted in the best interests of the Company when negotiating Musk’s compensation plan. In fact, there is barely any evidence of negotiations at all.” The board never appears to have considered whether any additional pay for Musk was needed at all, given the incentive he already had as a 20% shareholder – notably Musk had said that he would stay at Tesla whether the pay scheme was approved or not. So the scheme – let alone a pay scheme 250 times larger than the average – simply wasn’t necessary.

It seems even harder to think it is necessary now. It seems to me impossible to understand how any investor motivated by fiduciary duties can vote in favour of the pay scheme’s proposed resurrection. The proposal now is to make an award to an individual for value that has already been created (in fact, some of that value has since dissipated given more recent share price falls). The proposal will create no new value for shareholders, rather it is simply to give money away for no benefit. That is not a fiduciary-led decision. While it is still called a 100%-performance linked award, there is no performance still to be delivered. 

The clients to whom those fiduciary duties are owed may well seek particularly robust justifications from any fund manager that decides to vote in favour of making a gift –especially such a sizeable gift.

There are a number of shareholder resolutions, perhaps most notably one considering the Tesla policy on freedom of association and collective bargaining, and one regarding anti-harassment and discrimination efforts. The results on these will be interesting, but inevitably the greatest attention will be on the decisions regarding the Texas redomicile and the pay scheme. We’ll see what investors choose.


By Paul Lee, Head of Stewardship & Sustainable Investment Strategy at Redington. Click here to read the full unabridged version of this article.

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