In the aftermath of a recent court ruling that nullified Elon Musk’s record-breaking $56 billion stock compensation, activist investors are gearing up for a potential shake-up at Tesla. The ruling, delivered by Delaware Judge Kathaleen McCormick, criticized Tesla’s board for its perceived subservience to Musk, opening a window of opportunity for reformist shareholders.
These investors have long accused Tesla’s board of lax oversight of Musk, and this court decision could be the catalyst they need to garner broader shareholder support for their proposed reforms. Past attempts to introduce changes in corporate governance, such as altering director term lengths or voting thresholds, have met with limited success at Tesla’s annual shareholder meetings.
Notably, John Chevedden, an independent activist investor, plans to present a resolution at the upcoming shareholder meeting, advocating for a simple majority vote instead of the current requirement of two-thirds support for major corporate changes. This move aims to curtail what critics perceive as an undue concentration of power within the board.
The court’s scathing rebuke, particularly targeting directors like Musk’s brother Kimbal and former 21st Century Fox CEO James Murdoch, who were deemed lacking independence due to personal ties with the CEO, is expected to embolden proxy advisory firms like Institutional Shareholder Services (ISS) and Glass Lewis. These firms may use the ruling to intensify their recommendations against Tesla’s board, potentially influencing shareholder votes.
While Tesla’s critics are optimistic, they face challenges in the company’s staggered board structure, where only a few directors face re-election each year. Shareholders seeking change may encounter hurdles, as directors with close ties to Musk, including Kimbal and Murdoch, have historically garnered substantial support in re-election bids.
Tesla, with its charismatic CEO holding a 12.9% voting stake, poses a formidable challenge to dissenting shareholders. Gaining support from influential mutual fund holders like BlackRock and Vanguard becomes crucial for these critics to effect meaningful change within the company.
The recent court ruling, described by governance expert Charles Elson as a severe indictment of Tesla’s board, could mark a turning point, prompting even staunch supporters to reconsider their stance. The judge’s call for collaboration on a new pay plan and the potential for an appeal to the Delaware Supreme Court add uncertainty to the situation.
As the dust settles, Andrew Poreda, a senior research analyst, sees the judge’s ruling as a wake-up call for Tesla shareholders, signaling a need for heightened scrutiny and a reevaluation of the company’s corporate governance. The looming shareholder meeting, yet to be scheduled by Tesla, promises to be a battleground where the fate of proposed reforms hangs in the balance.
