Lucian Bebchuk and Robert Jackson discuss how Elon Musk’s threat to develop AI projects outside Tesla may distort investors’ votes on restoring his large options grant.
Next week, Tesla investors will cast an unprecedented vote on what one court called the “largest chief-executive pay package in the history of public markets.” While reporters and the public have closely watched the saga leading up to the vote, insufficient attention has been paid to the elephant in the (board)room: Tesla CEO Elon Musk’s threat not to develop Tesla into an artificial-intelligence leader if he doesn’t get a larger voting stake. Stockholders cannot cast meaningful votes on Musk’s pay package while his threat hangs, like the sword of Damocles, over Tesla’s future, and thus their own. Indeed, this week’s news that Musk asked a key supplier to redirect scarce AI chips reserved for Tesla AI projects to other Musk-affiliated companies highlights the importance of this issue.
In 2018, Tesla’s board granted Musk an option package allowing him to acquire as much as 10% of the company’s voting stock. But a Delaware judge found, after a trial, that Musk’s influence skewed the grant and the process that produced it. Furthermore, the judge found that Tesla’s disclosures to investors voting to approve the grant were woefully incomplete.
Rather than respond to the court’s judgment by bargaining with Musk at arms’ length over a new package, Tesla’s board chose to ask investors to vote to restore the original grant. The board’s belief that such a vote could operate to undo the court’s decision is questionable. However, even if such undoing were legally possible in theory, the vote cannot currently be expected to meaningfully reflect stockholder preferences with respect to Musk’s grant.
On January 15, 2024 Musk tweeted that he is “uncomfortable growing Tesla to be a leader in AI […] without having ~25% voting control.” Musk continued to say that “[u]nless that is the case [he] would prefer to build products outside of Tesla.” That ”threat” made stock analysts worried.
For example, a January 31, 2024 report by a Wedbush stock analyst indicated that Tesla might have to “[d]evise a new comp package that would get Musk directly to [his] 25% voting share bogey.” Another report published on March 13 by a Wells Fargo stock analyst stated that because Musk “has hinted at the possibility of moving the AI piece outside of TSLA,” the two strategies now available to Tesla’s board “come with drawbacks.” These options are “outsourcing the AI,” which “virtually zaps the tech premium reflected in the share price.” Or “increasing Musk’s ownership,” which “brings on share dilution risk.”
What can Tesla’s board do about Musk’s threat? To begin, stockholders should know whether the board’s request for a vote is motivated by the threat—and what, if anything, the board plans to do about Musk’s threat if he attempts to carry it out. Instead, all investors know is that the board is bringing to a vote a proposal to give Musk a sizable voting stake.
Strikingly, the board hasn’t conditioned holding the vote on Musk withdrawing his threat or committing not to carry it out if stockholders vote to approve. The proxy statement Tesla sent to investors in advance of the coming vote is completely silent about the threat. The proxy does not try to allay investor concerns about Musk’s threat by, say, telling stockholders how the board would address it if necessary. Indeed, the proxy offers no assessment of the threat—and no guidance as to how it should affect the choices stockholders will have to make when casting votes.
In such circumstances, the votes investors cast cannot be expected to provide an accurate barometer of their true preferences. To see this, consider an investor who, if Musk’s AI threat were not present, would prefer not to see Musk’s large grant reinstated. Such a stockholder could nevertheless rationally choose to vote in favor of Tesla’s proposal next week in order to reduce the risk that Musk will carry out his AI threat.
Tesla’s board should take Musk’s threat—and its effects on its investors’ votes—seriously. Preferably, the board should work to convince Musk to remove the threat or, alternatively, tell stockholders the board’s plans for effectively addressing it. Until then, the board should recognize the influence of the sword of Damocles hanging over shareholder heads: the outcome of any stockholder vote could well be seriously distorted by Musk’s looming threat.
Authors’ Disclosures: Lucian Bebchuk is a professor of law, economics, and finance, and director of the corporate governance program, at Harvard Law School. Robert Jackson is a professor of law at NYU School of Law and was a Commissioner of the U.S. Securities and Exchange Commission from 2018 to 2020. They have served as independent experts on behalf of the plaintiff in the Delaware litigation regarding Elon Musk’s pay package. This post and related short pieces draw on a short academic essay on Tesla’s governance on which they are at work.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
