At the Tesla Annual General Meeting on June 13, 2024, shareholders, with the Musk brothers absent, approved for the second time the stock option program, established by the Board of Directors in 2018. At the same time, they also agreed to relocate the company’s headquarters from Delaware to Texas. This renewed endorsement by the shareholders is intended to persuade the judges at the Delaware Chancery Court to reconsider their ruling from January 2024, which invalidated the stock option program primarily due to procedural and disclosure deficiencies.

Although various media outlets incessantly report on a stock bonus of over $56 billion dollars, the focus was on a reaffirmation of the 2018 ten-year stock options program originally valued at $2.3 billion dollars. The options plan included 12 vesting tranches intentionally set with very high performance targets.

Despite All Adversities, the Financial Goals Were Achieved

To achieve all tranches, Tesla was required to achieve an additional market capitalization equivalent to 12 new companies such as Ford or General Motors, each totaling $50 billion dollars. Tesla faced massive production issues with the newly launched Model 3 in 2017/2018, and investor sentiment, marked by 20 percent short sales of Tesla shares, was far from optimistic. Much to the delight of Tesla shareholders, all targets of the options program (including the increase in market value by $600 billion dollars) were met by 2022. From this perspective, the value of the $2.3 billion dollar options program constituted 0.4 percent of the future market value.

The renewed clear endorsement from shareholders with 72 percent approval is even more remarkable given the vastly different circumstances of the two votes. In 2018, the options plan was typically structured as an incentive for future performance, whereas the invalidation provided shareholders with a judicial opportunity at the 2024 AGM to opportunistically reject the bonus package after achieving all goals.

Musk Also has a Large Following Among Investors

It's also interesting to look at the voting behavior of different shareholder groups: Most index-tracking institutional investors, in line with recommendations from proxy advisors Glas Lewis and ISS, rejected the bonus package, suggesting that the approval rate among retail investors was likely well over 80 percent. Notably, many investors, including the Vanguard Group, the second largest Tesla shareholder with 7 percent, viewed it as unfair to reject the options plan after Tesla's stock had surged by 1100 percent.

However, Musk also enjoys strong support from a dedicated fanbase of investors who believe in his ability as CEO to significantly increase Tesla's value as a leading AI company. They have faith in his vision for advanced Self-Driving software, Robo-Taxis, the rapidly growing business of Megapack batteries, or humanoid robot production. Given Musk's significant influence in six other companies now, shareholders' approval was certainly seen as a motivating boost to encourage his continued commitment to Tesla.

Judges Still Need Convincing

The options plan for Musk is far from settled. Rather, Tesla's lawyers must persuade the Delaware Court judges that the criticized procedural and disclosure deficiencies from the initial vote have been «cured» with the renewed approval from shareholders. What also remains unresolved, are the compensation claims which amount to $6 billion dollars, to be borne by shareholders for the victorious attorneys. This is two and a half times the value of Musk's options program.

According to leading Tesla analysts, the rejection of Musk's bonus program could have led to a double-digit drop in Tesla's stock price. Therefore, it is quite understandable that many Tesla shareholders are displeased with Delaware's court ruling, which was ostensibly aimed at fairness for shareholders.

Companies Led by Controlling Shareholders Perform Better

As the complex legal situation in the case of Tesla demonstrates, it may not be entirely wrong that US courts have largely refrained from retrospectively correcting bonus programs approved by boards and shareholders. Dozens of empirical studies confirm that companies led by controlling shareholders, on average, achieve significantly higher performance than those led by managers. Shareholders who can tolerate—and even appreciate—the greater dependence on polarizing figures like entrepreneurial genius Musk should not be denied this by court decisions that apply a one-size-fits-all approach to all companies.

Perhaps what is needed is a framework of accountability where exceptional non-entrepreneurial performances are not sanctioned, but failures are. Take for instance the example of Credit Suisse, where bonuses were not withheld and over 100 billion Swiss francs in market capitalization have been destroyed since 2006. Or consider Adam Neumann, the outspoken founder of WeWork, who received a severance package of 1 billion dollars shortly before his company's bankruptcy.