Tesla leads charge to defend Elon Musk’s $56bn pay package
What were the main reasons for the 28% decline in Tesla's shares this year?
Tesla's shares experienced a 28% decline this year due to several factors:
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Slower growth: Tesla warned of "notably" slower growth as sales in China, its second-largest market, fell. This was mainly due to increased competition from local EV manufacturers and the impact of COVID-19 lockdowns on demand.
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Production disruptions: Tesla faced production disruptions at its Shanghai factory due to COVID-19-related issues and global supply chain bottlenecks1. This affected the company's ability to meet the growing demand for its electric vehicles.
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Recall of the latest product: A defect in Tesla's highly anticipated latest product forced the company to recall the vehicles, which negatively impacted its stock price.
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CEO's involvement in other companies: Elon Musk, Tesla's CEO, spends a significant amount of time at other companies, such as SpaceX, Neuralink, and The Boring Company, which raises concerns among Tesla investors about his focus and commitment to the company.
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Legal challenges: Tesla faced legal challenges related to Elon Musk's $56 billion pay deal, which was voided by a judge in January. This ruling created uncertainty around Musk's leadership and his continued involvement in the company.
These factors combined led to a decline in investor confidence, resulting in the drop in Tesla's share price.
How has Tesla's performance in the Chinese market influenced the company's overall growth?
Tesla's performance in the Chinese market has significantly influenced the company's overall growth. As the world's largest electric vehicle (EV) market, China plays a crucial role in Tesla's expansion plans. The company's sales in China have been growing steadily, with Tesla selling around 600,000 vehicles in the country in 2023, making it the company's second-largest market after the United States5.
Tesla's strong sales performance in China has been attributed to several factors, including the Chinese government's support for EVs and the company's efforts to localize production. By producing vehicles locally at its Shanghai Gigafactory, Tesla has been able to reduce costs and improve delivery times, making its EVs more attractive to Chinese consumers.
Additionally, Tesla has been investing in research and development in China, working on projects such as autonomous driving technology and energy storage systems. This has helped the company strengthen its position in the Chinese market, while also benefiting from the country's vast pool of engineering talent.
Overall, Tesla's success in China has been a key driver of its growth in recent years, helping the company to increase its global market share and become the world's most valuable carmaker.
How did the Delaware court of chancery justify voiding Musk’s pay arrangement, and what were the main concerns raised?
The Delaware court of chancery voided Elon Musk's pay arrangement, which was worth a record-breaking $56 billion, after a legal challenge by a Tesla shareholder. The court concluded that the pay deal was a "conflicted-controller transaction" and subjected it to review under the "entire fairness" standard6. The defendants, which included Musk, Tesla, Inc., and six individual directors, had the burden of proving that the pay deal was entirely fair, but they failed to do so6.
The main concerns raised by the court were:
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Musk's control over the process: The court found that Musk had extensive ties with the persons tasked with negotiating on Tesla's behalf. His long business and personal relationships with compensation committee chairman Ira Ehrenpreis and fellow committee member Antonio Gracias were cited. The court also noted that the working group working on the pay package included general counsel Todd Maron, who was Musk's former divorce attorney.
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The size of the pay package: The court questioned whether compensating Musk at such levels was necessary to retain him as chief executive and achieve the company's goals. The pay package was considered "an unfathomable sum".
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Lack of negotiation: The court found that there was barely any evidence of negotiations. Rather than negotiating against Musk with the mindset of a third party, the Compensation Committee worked alongside him, almost as an advisory body.
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Lack of benchmarking analysis: The court considered the lack of a traditional benchmarking analysis in the process as significant.
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Non-independent directors: The court determined that most of the directors on Tesla’s board had close personal and business relationships with Musk, and were not independent.
In conclusion, the court determined that the process that led to the approval of Musk’s compensation plan was deeply flawed and the price arrived at was unfair2. As a remedy, the court ordered the complete rescission of the pay package.