#102 ELON MUSK

DELAWARE, C.A. No. 2018-0408-KSJM, TORNETTA v. MUSK, TESLA, INC, et al.

By PETER THOMAS BUSCH

The hubris of corporate executive officers may at times be breathtakingly singularly minded.

Elon Musk, the richest person in the world with a net value of $229 billion, a 46% increase year over year based on stock market growth, was set to receive another $56 billion as the directing mind behind electrical vehicle and electric power company, Tesla.

The richest person in the world was about to become even richer, at least until Delaware Judge C. McCormick came along on January 30. The court had jurisdiction over a shareholder civil claim against the Tesla pay package because Tesla is registered as a corporate entity in the state, as opposed to being registered in Texas where the Tesla headquarters are located.

Corporate America loves incorporating as a legal entity in Delaware, as opposed to their home state, because Delaware does not charge corporations state income tax. Tesla and Musk found out the hard way this week that the Corporate America self-governing (self-driving) feature had directed the electric vehicle company to the wrong jurisdiction.

The dollar value estimate of the pay package given to Musk in 2018 is based on share prices listed in US dollars. So, for all other people, such as Canadians, the value is closer to $78.4 billion CDN, as the third of three pay packages awarded so far to the dynamic CEO since 2004.

Delaware Judge C. McCormick took apart the corporate shenanigans item by item in a carefully crafted 200 page decision, hinting all along the way at a much larger problem of how publicly traded corporations operate for the benefit of the chosen few Wall Street celebrity insiders.

On the outside, the pay structure appears almost rational, with built in incentives connected to the market capitalization of the company and company operational milestones, such as so many Teslas produced over so many years.

The pay was promised in the form of company publicly traded common shares, of which Musk already owns 21.9 percent. Musk would have received about 1% of company common shares in 12 installments as Tesla met the milestones. If Tesla met 3 milestones in one year, Musk would receive 3% of corporate common shares or three of the 12 installments.

The court even highlighted the stated purpose of such a large sum of cash as benefitting the greater good. Musk wrote an internal email to his trusted advisor, Tesla general counsel and Elon’s divorce attorney, Todd Maron, as follows:

“Given that this will all go to causes that at least aspirationally (sic) maximize the probability of a good future for humanity, plus all Tesla shareholders will be super happy, I think this will be received well…” (Page 63)

The Secret Tesla Motors Master Plan from the very beginning has been to “move toward a sustainable energy economy, and to “expedite the move from a mine-and-burn hydrocarbon economy towards a solar electric economy.” The future envisioned by Musk also includes a Tesla/SpaceX colonization of the planet Mars.

This dream may have been received as more of a fantasy round of public offerings when Tesla could barely produce 100 high-end electric powered roadsters for the ultra rich celebrity class in 2004. Twenty years later though SpaceX has the ability to launch space vehicles into near orbit and all the way to the International Space Station multiple times per month.

Musk used his fortune from selling PayPal to buy into Tesla Motors and begin the development of SpaceX. SpaceX also received government financing and tax incentives, eventually accelerating research and development with the cash from NASA contracts.

The same year that Musk received the 2018 pay package and was sued by Richard J. Tornetta (re: Tornetta v. Musk, tesla, et al.) the SEC (United States Securities and Exchange Commission) had fined Musk $20 million USD for various statements made on Twitter designed to manipulate Tesla share value and market capitalization. The SEC also required that Musk step down from the CEO position at Tesla.

When a corporation gives up private operations to convert into a publicly traded company that capitalizes finances with cash from common shares sold, the owners give up control to the money in a kind of democratization of capitalism as shareholders get a say and a vote in exchange for their investment. Corporate executive officers also become accountable to the public.

Delaware Judge C. McCormick stated, that through this process of becoming a publicly traded company, Musk and the Tesla Motors board of governors became fiduciaries. And this obligations of trust and transparency was never met as Musk continued to control the company as a directing mind, including writing his own multi-billion dollar paycheck in 2018.

Musk had clearly fallen through the murky waters of hubris, and now appears to be gasping for air a bit, like Eva Green, all caged up in the plunging Venice elevator cage in Casino Royal, having been caught trying to get away to an off-world colony with the public’s money.

Delaware Judge C. McCormick did not seem to care too much that many of Tesla shareholders ‘love’ Musk and supported the pay package. McCormick, through various nuances, warned over and over again that the superstardom of certain executive officers of certain publicly traded corporations changes the dynamics of corporate decision making.

Musk was found to be a manipulating autocrat of a democratized legal entity, even turning on the ‘red light or the green light’ (p. 162) when doing so suited him and his personalized cause on behalf of all of humanity. McCormick became so smitten by her task that she even quoted William Shakespear and referenced Mary Shelley.

Musk had controlled the entire process with his seven dwarves on the board, even beginning the process with an initial proposal of 15 installments. Oddly enough, 15 installments amounted to the same amount of money as the ultimate 12 decided upon, which was 50 billion dollars, or according to McCormick, a rather grotesque amount netting out at zero this week.

Musk and his brother, Kimbal, had recused themselves from the process, while one other board member ran away. The seven board members that remained part of the process, however, owed a lot of loyalty to Musk, including their own personal compensation packages and, in some instances, investments and even personal vacation time with the Technoking, as Musk called himself after stepping down from the CEO position following the SEC ruling (Page 89/96).

For the Technoking, existence was sufficient if not for the only purpose of controlling a singular transaction worth 50 billion dollars.

The seven dwarves went through the motions, admitting during trial that the Tesla board of governors took a non-adversarial approach, before getting the shareholders to certify the deal in a massive majority proxy vote.

Delaware Judge C. McCormick found that Tesla, for the purposes of the shareholder proxy voting, had made the process look objective when the process from green light to red light was anything but.

DELAWARE, C.A. No. 2018-0408-KSJM, TORNETTA v. MUSK, TESLA, INC, et al, explains a lot about Corporate America and the need not just to know who owns and operates the companies but who influences decision making, and what their intended purposes are for the publicly owned corporations.

Musk’s high-minded hubris can be found replicated in other chief executive officers whose efforts have benefitted humanity. But this contribution to the public good does not qualify as some sort of carte blanche approach to everything in between.

The mercurial combination of ‘superstardom’ and immense financial means translates into real power that also carries a heavy burden of public accountability.

While Musk wants to explore Space between Earth and Mars, the on-line metaverse on Earth is mined by algorithms developed by publicly traded companies, such as Google (Alphabet), Amazon, Apple, Meta and Microsoft. The public entities often appear to be operating with their own self-serving, manifest destinies despite the public accountability factors.

These five big High-tech public entities and Tesla/SpaceX must accept their unique obligations that operating in the public sphere demands. The one thing that became crystal clear for certain this week is that transparency is essential to the fiduciary duty and that the corporate officers of these massive public companies do have a fiduciary relationship with the public.