Elon Musk recently stated that he would need 25% voting control of Tesla (NASDAQ:TSLA) to be comfortable creating AI and robotics products and services within its corporate structure. He currently owns 13%.
“I am uncomfortable growing Tesla to be a leader in AI & robotics without having ~25% voting control. Enough to be influential, but not so much that I can’t be overturned,” Musk wrote on X on Jan. 15
There are so many reasons the board complying with Musk’s wishes would be a terrible mistake. Here are three that stand out for me.
Musk the Hypocrite
In his post on X mentioned in the introduction, Elon Musk tries to suggest he’s different from institutional investors such as Fidelity.
“As for stock ownership itself being enough motivation, Fidelity and other own similar stakes to me. Why don’t they show up for work?,” Musk stated.
First of all, the ego he must have to bad mouth the institutions that financed Tesla’s growth over the years making him a very wealthy man is mind-boggling. While I’ve always respected his genius and entrepreneurial drive, to expect these institutions to roll over and welcome being diluted exponentially are the thoughts of a petulant child.
Now, in fairness to Musk, he gets no compensation other than his performance-based options. This means that he is not earning salary and cash bonuses, and performance-based stock and option awards at the same time.
However, if he’s so principled about his fair and just compensation for work on projects related to AI and robotics within Tesla, he should simply push the board to spin off this piece of the company and require Tesla to pay that public company retail rates for any work done on its behalf.
Of course, he wants to have his cake and eat it too. It’s incredibly hypocritical.
TSLA Dilution Part I
The first part of Elon Musk’s grand dilution scheme is his 2018 CEO Performance Award.
Pg. 45 of the 2023 proxy statement outlines the process that went into the award’s design. The next page admits that Musk has already met the requirements for all 12 of the 2018 CEO Performance Award tranches. At any time, he’s free to exercise the 303,960,630 shares at an exercise price of $23.34 a share.
If he exercises 100% of the shares today, that would be a $57.5 billion gain based on a current share price of $212.55. Assuming he sells half the 304 million shares to pay the taxes on the gains, he would retain 151,980,315 shares. Add that to 411,062,076 that he already owns, and he’ll own 16.2% of Tesla’s outstanding shares.
In July 2018, Joseph Bachelder, the special counsel at McCarter & English LLP, posted an article that he and two other colleagues originally wrote for the New York Law Journal discussing Elon Musk’s 2018 CEO Performance Award.
The lawyers noted, while comparing the compensation of 10 founder CEOs, that Musk isn’t the founder of Tesla. Meanwhile, the value of Musk’s 2018 CEO Performance Award was 80 times the median value of the 10 founder CEOs over the previous five years.
The potential dilution was so extreme it could rightly be considered corporate waste. That’s my analysis, not the trio of lawyers.
TSLA Dilution Part II
The second is his demand for 25% of the company to keep the AI and robotics work within Tesla.
First, Elon Musk has already been given leeway by the board to operate business activities outside Tesla.
“The terms of the Musk Option do not restrict Mr. Musk as to activities outside of Tesla,” the article stated. So, it seems odd that he is now trying to get more money out of Tesla, in the form of further share issuance, to gain 25% of its stock.
That suggests he wants to get the 8.8% additional percentage points ownership through another performance award rather than paying for it on the open market. Given his disastrous X acquisition, I guess the poor man’s short of cash.
As for the second dilution, Tesla would have to issue approximately 401 million shares to Musk for him to hit 25%. No matter how it chooses to work the issuance that’s a 12% dilution on top of the original dilution of 12% based on 2.53 billion shares outstanding as of Dec. 31, 2017.
The Bottom Line
I would use “blackmail” to describe what Elon Musk is doing to the board and the company’s other shareholders. However, it’s not a criminal action. Although I’m not a lawyer, it seems perfectly legal and above board.
Musk feels he’s not being compensated for the AI-related work being done now and will be done in the future. AI wasn’t even in the picture when his 2018 CEO Performance Award was designed and offered to him. So, he does have a point that a new performance award is appropriate.
What that is, I can’t say. But I don’t believe 401 million shares should be offered up. Unfortunately, the board set a precedent in 2018. It will be tough to wiggle out of something similar in 2024.
I’d at least try.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
