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Tesla shareholders side with Elon Musk. Here’s why it won’t erase legal woes

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Elon Musk lassoed victory in Texas on Thursday, June 13. Tesla shareholders overwhelmingly approved his pay package for the second time and voted to approve the company relocating its incorporation from Delaware to Texas.

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Tesla officially announced the results at Thursday’s shareholder meeting but Musk jumped the gun nearly a full day early, posting preliminary numbers on his other company’s site, X.

Because of the posts and Tesla’s subsequent stock surge, Tesla issued a regulatory filing with the Securities and Exchange Commission. The filing simply includes Musk’s X posts.

However, experts said the shareholder votes only make the legal issues around Tesla more complicated. It does not mean Musk can walk away with his contested pay package, which shareholders have twice approved.

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How did Tesla and Musk get to this point?

It all started when a Tesla shareholder sued over Musk’s pay package, which was worth around $56 billion at the time a Delaware judge struck it down. Tesla is, at least for now, incorporated in Delaware, as are the vast majority of Fortune 500 companies. 

“The judge’s concern was that the disclosure to the shareholders about this package was inadequate; that there are serious flaws, she felt, in the process; the independence of the directors; how the thing came together,” Charles Elson, a renowned expert in corporate governance in Delaware, said. “And she felt that, obviously, had disclosure been more accurate, that the shareholders may not have approved it.”

Straight Arrow News spoke with Elson about Musk’s compensation issues after Musk blamed the state of Delaware for the blow to his pocketbook and warned other companies to stay far away. 

“Simply because a CEO is upset at a ruling against him in a neutral court, Delaware, is not a reason to reincorporate, period,” Elson said.

But that is what Musk set out to do, squaring in on Texas, where Tesla is headquartered. The state is also forming a business court system of its own to challenge Delaware’s reign as America’s corporate home.

“I think it would be rather insulting to Texas judges to suggest that they would have done something differently had they found the same facts,” Elson said. “You can’t go forum shopping, if you will, for a friendly judge, or if you do, it’s not the right thing to do.”

Even if Tesla successfully reincorporates in Texas, that does not mean his current legal woes move with it. Tesla already vowed to keep the Delaware issue in Delaware, where Musk is appealing the original compensation decision. 

“Originally, the only question on appeal was whether [the judge’s] original findings regarding 2018 were correct,” Tulane law professor Ann Lipton told SAN in an email. “Now, we have this new vote, with uncertain legal effect. [Judge] McCormick will decide it in the first instance: she’ll either say it cures the problem and the package is restored, or that it doesn’t. Whichever she decides, the loser will appeal.”

That makes Thursday’s victories more like moral victories for Musk. There is no guarantee the courts will approve his pay.

That pay package is worth considerably less than when the Delaware judge struck it down, too. Tesla’s share price is down more than 26% in 2024, bringing Musk’s pay package value down about $10 billion.

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Simone Del Rosario: Elon Musk lassoed victory in Texas. Tesla shareholders overwhelmingly approved his enormous pay package

Charles Elson: It’s more than the GNP of some countries.

Simone Del Rosario: And voted to approve the company’s reincorporating in Texas. 

Tesla officially announced the results at Thursday’s shareholder meeting, but Musk jumped the gun nearly a full day early, posting preliminary numbers on his other company’s site, X.

Because of it, Tesla had to officially file the posts with the Securities and Exchange Commission. It’s literally regulatory filing with his posts copied and pasted.

That’s because Tesla stock surged on news of Musk’s landslide. But experts say the votes just make the legal issues around Tesla a lot more complicated.

How did we get here? And what does it mean for the most valuable car company in the world?

It all started when a Tesla shareholder sued over Musk’s pay package, which was worth around $56 billion at the time a Delaware judge struck it down. 

Tesla is, at least for now, incorporated in Delaware, as are the vast majority of Fortune 500 companies. 

Charles Elson: The judge’s concern was that the disclosure to the shareholders about this package was inadequate, that there are serious flaws she felt in the process, the independence of the directors how the thing came together. And she felt that obviously, had disclosure been more accurate, that the shareholders may not have approved it. 

Simone Del Rosario: That’s Charles Elson, by the way. He’s a renowned expert in corporate governance in Delaware. We interviewed him after the court decision when Musk blamed the state of Delaware for the blow to his pocketbook and warned other companies to stay far away. 

Charles Elson: Simply because a CEO is upset and a ruling against him in a neutral court, Delaware, is not a reason to reincorporate, period.

Simone Del Rosario: But that’s what Musk set out to do, squaring in on Texas, where Tesla is headquartered. The state is also forming a business court system of its own to challenge Delaware’s reign as America’s corporate home.

Charles Elson: I think it would be rather insulting to Texas judges to suggest that they would have done something differently had they found the same facts. You can’t go forum shopping, if you will, for a friendly judge, or if you do, it’s not the right thing to do.

Simone Del Rosario: Even if Tesla successfully reincorporates in Texas, that doesn’t mean his current legal woes move with it. 

Tesla has already vowed to keep the Delaware issue in Delaware, where Musk is appealing the original compensation decision. 

Tulane law professor Ann Lipton told SAN, “Originally, the only question on appeal was whether [the judge’s] original findings regarding 2018 were correct. Now, we have this new vote, with uncertain legal effect.”

That makes Thursday’s victories more like moral victories. There’s no guarantee his pay will be approved by the courts.  

That pay, mind you, is now worth a lot less. Well, a lot in relative terms. Because Tesla’s stock has been performing so horribly this year, it’s now worth about $10 billion less.

I’m Simone Del Rosario for Straight Arrow News.