Tesla shareholders are set to finally reveal whether or not CEO Elon Musk’s $46 billion pay package will be reapproved on Thursday, several months after it was struck down by a Delaware judge.
If investors re-approve the plan, it could pave the way for Musk to buy up to 304 million Tesla shares at a price of $23.34. The plan is currently valued at $46 billion, making it the biggest executive compensation plan in U.S. history.
Tesla’s annual meeting of shareholders will begin at 4:30 p.m. ET/3:30 p.m. CT at the company’s electric vehicle factory in Austin, Texas.
Here’s what you need to know about how Tesla got here, where things stand, and what comes next.
How did we get here?
In 2018, 73% of Tesla shareholders voted to approve Musk’s compensation plan, which required Musk to meet a series of increasingly difficult milestones. Despite the difficulty — and widespread doubt — Tesla had met enough of them by the end of 2022 for Musk to receive the full package.
But in January, Delaware Chancery Court Kathaleen McCormick struck down the deal after a shareholder sued to block it, citing a “deeply flawed” approval process and Musk’s “extensive ties” to members of the board. The ruling outraged Musk, who asked shareholders to vote on reincorporating in Texas.
In April, Tesla officially put both the Texas move and the reapproval of Musk’s compensation up for a vote during its annual meeting. Shareholders will also vote on reappointing Kimbal Musk — Elon Musk’s brother — and former 21st Century Fox CEO James Murdoch to Tesla’s board.
Where do investors stand?
Although it’s unclear — and will remain so until the meeting — how many investors have voted and where they stand, several major firms have revealed how they will vote.
Norges Bank Investment Management, CalPERS, and funds represented by New York City Comptroller Brad Lander will vote against the compensation plan. Major retail investor Leo KoGuan, who owns about 27.7 million shares as of May, has also said he will vote against the plan.
On the other side are a series of high-profile investors, many of which are longtime Tesla bulls and fans of Musk. They include the billionaire Ron Baron and his Baron Capital investment firm, Scottish Mortgage Investment Trust, and Cathie Wood’s ARKInvest, which on Wednesday said Tesla stock would reach $2,600 a pop in 2029.
Proxy advisors Glass Lewis and Institutional Shareholder Services (ISS) have also recommended a vote against the plan. Their recommendations can hold some major weight: When the firms oppose management on say-on-pay proposals, support can drop between 17% and 19%, according to recent analysis by University of Utah finance professor Chong Shu. Both firms recommended against the plan in 2018.
Some major shareholders have not publicly stated where they stand on the vote, including Vanguard, State Street, and BlackRock. Those three firms collectively own 17% of Tesla stock.
“Roughly 90%” of retail shareholders who have cast their ballots have voted in favor of both his compensation and a move to Texas, Musk said Wednesday. It’s unclear how many of those shares have been voted.
What about analysts?
Largely, industry analysts expect the vote to be a major win for Musk, albeit with a few caveats.
Wedbush Securities’ Dan Ives predicts that Musk’s compensation will be “overwhelmingly approved,” as does Morgan Stanley’s Adam Jonas, who noted that surveyed clients expect a “yes” vote by a two-to-one ratio. On the other side of the aisle sits Bernstein analyst Toni Sacconaghi, who expects that investors will shoot down the compensation.
JPMorgan Chase analysts led by Ryan Brinkman say they suspect that investors will approve the deal, although with less than the 73% approval rate it had in 2018 and “perhaps by a lesser margin than popularly imagined,” according to a June 11 research note. The Future Fund’s Gary Black foresees a similar outcome, estimating that 54% of investors will approve Musk’s pay.
Musk is tied to Tesla on an extreme level, which suggests a high risk, Brinkman added. If Musk’s pay is struck down, diluted share count may grow more than 10%, but a departure by Musk could wreck the stock price.
“Investors voting to disapprove the compensation plan would seem to be betting that Mr. Musk would then not leave Tesla (we are uncertain whether he would or would not),” Brinkman said.
What happens next?
Despite the enthusiasm on both sides of the compensation debate, the shareholder vote isn’t legally binding.
If approved, Tesla plans to use it to help make its case and appeal McCormick’s January ruling as it seeks a redo. Although investor approval won’t necessarily undo the judge’s concerns over director conflicts of interest, it will reaffirm that most shareholders believe Musk deserves his pay. It would also secure Musk’s position as Tesla’s leader and, likely, ensure he stays on as CEO for at least the short-term.
“It’s hard to say whether or not she would actually change her mind,” said Samantha Crispin, a partner and head of corporate law at Baker Botts, noting that the unusual circumstances make it difficult to predict a clear outcome. “[McCormick will] be thoughtful and take it into consideration. But it’s really a wildcard as to whether or not it’ll change the outcome.”
Tesla, too, is unsure, writing in its proxy filing that we “cannot predict with certainty” how a vote to ratify Musk’s compensation will be treated under Delaware law.
If investors vote down the compensation but approve a Texas move, Tesla believes the Texas courts would be more favorable to his pay. But the company would still need to start the costly process over again and contend with similar challenges it faced in Delaware, but without the state’s extensive legal precedent.
