Elon Musk attends the premiere of ”Lola” held at the Regency Bruin Theatre in Los Angeles, California, U.S., February 3, 2024.
Aude Guerrucci | Reuters
Tesla said Wednesday it will ask shareholders to reinstate CEO Elon Musk’s $56 billion pay package, which a Delaware judge voided earlier this year after ruling that the record-setting compensation deal was “deeply flawed.”
Tesla also said it would ask shareholders to approve moving the company’s incorporation from Delaware to Texas. Musk had suggested the move after his pay package was ruled illegal. The announcement Wednesday came days after the automaker said it would cut its workforce by 10%.
Tesla said the court decision created a “fundamental problem for the company.”
The two proposals are likely to be fiercely controversial. Tesla has hired a proxy solicitor, Innisfree M&A, and plans to spend an undetermined amount, in the millions, to help secure the votes for the two proposals, according to the filing.
Tesla has not hired Innisfree since 2018, when it first asked shareholders to vote on Musk’s pay package. Companies often only advertise the cost of proxy solicitations when major proposals or proxy fights are expected. (Innisfree was also suing Musk’s Twitter over unpaid bills.)
Musk’s pay package was invalidated after a shareholder won a lawsuit against the company earlier this year. Delaware Chancery Court Chancellor Kathaleen McCormick found that Musk, rather than Tesla’s board, controlled the company and that the board’s compensation committee, rather than negotiating with Musk over the terms of the deal, “worked alongside him, almost as an advisory body.”
The Tornetta decision, named after Tesla shareholder Richard Tornetta who brought the suit, prompted Musk to say, “Never incorporate your company in the state of Delaware.”
McCormick was also the presiding judge in the legal action compelling Musk to buy Twitter, which he renamed. Tesla, in its Wednesday filing, cast doubt on her decision. “The Company and the Board believe that the decision in Tornetta ignored material evidence presented at trial and that the Delaware Court made errors of fact and incorrect conclusions of law,” Tesla said in the proxy filing.
The company also noted that “dozens of institutional stockholders” have told Tesla that they disagree with the Tornetta decision.
Delaware has long been a preferred home for corporations — more than 60% of the Fortune 500 companies are incorporated there — because the state has a robust legal framework and court system dedicated to resolving corporate issues, like executive pay, but also broader contract negotiations.
Moving from Delaware to Texas
Tesla’s new proposal cautions shareholders that the Delaware court found the company’s initial 2018 disclosures to be deficient, and urged them to read the full text of the decision.
In January, the same day the pay package was rejected, Musk asked his X followers if Tesla should reincorporate in Texas. Months later, Tesla’s board agreed and is now proposing the move to Texas and asking shareholders to approve the move.
Tesla connected the Delaware decision directly to its proposal, but it said that both Elon Musk and his brother Kimbal Musk, who also sits on Tesla’s board, recused themselves from deliberations.
The company said that Tesla’s “home and future are in Texas” and that the board considered every U.S. state before narrowing it down to a head-to-head comparison between Delaware and Texas, Musk’s public comments notwithstanding.
Tesla also defends the move as commonplace, saying that 35% of S&P 500 companies are not incorporated in Delaware. The company acknowledged Delaware’s court system as world class, but said “doing new things is part of Tesla’s DNA, and how it has become one of the most valuable companies in the world.”
— CNBC’s Lora Kolodny and Dan Mangan contributed to this report.
