Source: LatePost, Author: Li Zinan.

"Let's go Elon!" Tesla CEO Elon Musk's supporters on social media X began to celebrate, cheering that they have successfully defended Musk's power at Tesla and helped him regain $50 billion worth of stocks. On June 13th, U.S. time, Musk announced the voting results of the shareholders' meeting in advance: enough shareholders voted to give Musk more than $50 billion in compensation and support Tesla's relocation of its headquarters from Delaware to Texas. These two voting results were originally scheduled to be announced at Tesla's shareholders' meeting in 16 hours. The number of people who voted in favor has surged in the past two days, with the gray line in the chart showing the number of negative votes, the blue line showing the number of positive votes, and the orange line showing the number of votes needed to win. This means that Musk can buy 300 million shares, or about 9% of Tesla's stock, at an extremely low price, and his equity will rise from 13% to 22%. Musk may become the world's richest person again, and his control over Tesla will also be strengthened. After this news, Tesla rose more than 7% today and closed up nearly 3%. In January of this year, Musk said on social media that if he held less than 25% of Tesla's shares, he would not lead Tesla to become a leader in AI and robotics fields. He believed that 25% was a number that benefited everyone: it retained enough power to promote change, but did not overly centralize power. "Otherwise, I'd rather develop products other than Tesla," he said. At the beginning of this year, Musk once "threatened" shareholders on X that if he held too few shares in Tesla, he might focus his energy elsewhere. Against the backdrop of Tesla's automotive business stagnation and drastic layoffs, this vote has been given more significance. Shareholders are deciding how much salary to give Musk, as well as influencing Musk's allocation of energy to Tesla, and even Musk's departure and the future of Tesla. In the last week before the vote, supporters and opponents played a fierce game: Tesla's investor relations page on the official website launched a link specifically to canvass for votes, provided a detailed voting tutorial, and supported telephone voting. The canvassing website stated that it would draw a lottery from shareholders who voted in favor and invite them to visit Tesla's Texas factory, where Musk would personally explain. The world's largest sovereign wealth fund, the Norwegian Government Global Pension Fund, holds 0.99% of Tesla's shares. Last week, they stated that they did not support Musk's compensation plan because the total amount was too high. The California Public Employee Retirement System, which holds 9.5 million Tesla shares, also said it would vote against because Tesla's current performance does not match the requirements of the compensation plan. The conflict stems from the unique CEO compensation plan of venture capital companies.

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This means that Musk can buy 300 million shares, or about 9% of Tesla's stock, at an extremely low price, and his equity will rise from 13% to 22%. Musk may become the world's richest person again, and his control over Tesla will also be strengthened.

After this news, Tesla rose more than 7% today and closed up nearly 3%.

In January of this year, Musk said on social media that if he held less than 25% of Tesla's shares, he would not lead Tesla to become a leader in AI and robotics fields.

He believed that 25% was a number that benefited everyone: it retained enough power to promote change, but did not overly centralize power. "Otherwise, I'd rather develop products other than Tesla," he said.

Against the backdrop of Tesla's automotive business stagnation and drastic layoffs, this vote has been given more significance. Shareholders are deciding how much salary to give Musk, as well as influencing Musk's allocation of energy to Tesla, and even Musk's departure and the future of Tesla.

In the last week before the vote, supporters and opponents played a fierce game: Tesla's investor relations page on the official website launched a link specifically to canvass for votes, provided a detailed voting tutorial, and supported telephone voting. The canvassing website stated that it would draw a lottery from shareholders who voted in favor and invite them to visit Tesla's Texas factory, where Musk would personally explain.

The world's largest sovereign wealth fund, the Norwegian Government Global Pension Fund, holds 0.99% of Tesla's shares. Last week, they stated that they did not support Musk's compensation plan because the total amount was too high. The California Public Employee Retirement System, which holds 9.5 million Tesla shares, also said it would vote against because Tesla's current performance does not match the requirements of the compensation plan.

The fundamental disagreement between the two sides is whether giving more power to Musk is really beneficial for the development of Tesla?

The conflict stems from the unique CEO compensation plan of venture capital companies.

The salary vote that ended on June 13th was initiated in 2012 with Tesla's unique incentive mechanism for Musk.

The income of most CEOs and executives of listed companies is related to stock prices and performance, but not as extreme as Tesla: Since 2012, Musk has not received any salary or cash rewards from Tesla. The only way he gets a return is to achieve a series of performance and market value goals set by the board of directors. If he succeeds, he will receive a huge reward; if he fails, he will not receive any return for several years and will lose hundreds of millions of dollars. In comparison, Ford CEO, whose personal popularity is not as high as Musk, earned over $26 million a year.

Musk is in charge of multiple technology companies, and Tesla's board of directors initially designed this plan to bind Musk's energy more closely to the company.

Accepting this plan is equivalent to accepting a venture capital plan: if the company achieves unimaginable success, he will receive hundreds of billions of dollars in stocks. If the company's performance does not meet the target, he will not receive any return for several years and will lose hundreds of millions of dollars. In contrast, Ford's CEO, whose personal popularity is not as high as Musk's, earned more than $26 million a year.

This mechanism initially operated smoothly. In 2018, Musk achieved the targets set by Tesla's board of directors in 2012, including a market capitalization of $50 billion and expanding into new business sectors such as solar energy. Musk thus obtained a certain number of Tesla stock incentives.

In January 2018, the Tesla board of directors formulated a new incentive plan, with a total of 28 milestones, 12 of which were related to market capitalization. After all of them are reached, Tesla's market value will increase by 20.3 times, reaching $650 billion; 16 are related to performance, including income and net income; no time limit has been set for the above objectives.

If successful, Musk will be awarded 303 million Tesla shares, equivalent to 9% of Tesla's shares.

In early 2018, Tesla's market value had just exceeded $50 billion and it could only produce less than 1,000 Model 3s per month. It could go bankrupt at any time. Few people believed that Musk would achieve these goals. Tesla's shareholders holding 73% of the shares voted for the plan.

In the following years, Musk did indeed hit the growth targets one by one: In 2020, Tesla had already achieved its revenue and profit targets. In 2021, Tesla’s market value exceeded $650 billion (currently fallen to $565 billion).

Only nine small shareholders obstructed Musk's sky-high incentives.

In December 2018, Tesla shareholder Richard Tornetta sued Musk, accusing him of secretly directing the board of directors in the process of formulating the huge compensation plan and accusing Tesla's board of directors of lacking independence.

According to normal procedures, Musk and his younger brother Kimbal James Musk were excluded from the specific compensation plan discussion in the Tesla board of directors. However, the other 6 board members who participated in the formulation of the compensation plan in 2018 had a potential connection with Musk, such as Antonio Gracias, Musk's former colleague at Paypal, and James Murdoch, Musk's friend. The two go on vacation together every year.

This lawsuit began trial in 2022, and there was a formal result in January of this year: The Delaware court in the United States rejected Tesla’s stock option award plan against Musk.

Tornetta's 9 shares of Tesla stock, valued at the time of filing, are only enough to buy two Model S car models, but he successfully delayed Musk's compensation plan of up to 300 million shares.

According to legal documents, the key to Tornetta’s victory lies in Tesla’s failure to accurately describe the process of formulating the compensation plan in the documents disclosed in 2018.

The Delaware court ruled that Tesla's process of formulating the compensation plan was not fair: There is evidence that this compensation plan was formulated under the influence of Musk, which harmed the rights and interests of Tesla shareholders and was unfair to shareholders.

According to media reports, Tornetta is the founder of a company selling car audio equipment and was a drummer in a heavy metal rock band in New York. The legal team that helped him win the lawsuit came from three law firms and did not charge Tornetta any fees.

According to the usual practice in the United States, when lawyers protect the rights and interests of affected shareholders, they can extract a certain percentage from the compensation amount. After winning the lawsuit, these lawyers requested to take 11% of the involved stocks as legal fees.

11% is not high. The Delaware court awarded 27% of the settlement money in the Dell lawsuit to the lawyers. But Tesla's total stock volume is astonishing. After deducting taxes and fees, the 11% of the involved shares (i.e., 267 million shares that may be obtained after Musk cashes out) will be up to 29 million shares, and the lawyer's income will exceed US$6 billion. This request still needs to be ruled by the Delaware court.

It can be said that the plaintiff's lawyers have chosen the same radical incentive method as Musk-to lose the lawsuit and work for a year for nothing, to win and share a huge sum of money.

Tesla's operational problems over the past year have added many variables to Musk's voting.

If the lawsuit ends in 2022, the tug-of-war between the pros and cons may not be so intense.

In November 2021, Tesla's market value exceeded $1 trillion. In 2022, Tesla sold 1.43 million cars. It seems to be becoming the Toyota and Volkswagen of the electric car era. Musk's reputation reached its peak, and he was on the cover of Time magazine a year ago.

Even if the compensation plan was judged invalid at that time, Tesla’s board of directors may quickly introduce a new compensation incentive plan, and Musk will easily win the support of the majority of people.

However, Musk's performance since the end of 2022 has not satisfied shareholders.

In November 2022, Musk began selling and mortgaging Tesla stocks to acquire Twitter. He entrusted the most important manufacturing and sales tasks of Tesla to the Senior Vice President Ju Xiaotong, while he immersed himself in the drama of saving Twitter. Once again, people witnessed Musk's destructive power.

In 2023, Tesla is facing fierce competition globally. All of Tesla's competitors are seeking to change, yet the final decision-making power of Tesla still rests on one person who manages six companies at the same time. Musk's recent whimsical decisions include: suspending the cheap car plan and instead pushing forward the Robotaxi self-driving car; laying off the entire Supercharger team in one day; cancelling multiple new car projects; and cutting 20% of staff worldwide.

Tesla still has not launched a competitive new car model; in the first quarter of this year, Tesla's sales volume declined for the first time in 15 quarters, and the gross margin of the auto business fell to the lowest in 17 quarters.

The January ruling by a Delaware court gave Tesla shareholders a chance to choose again. In April of this year, Tesla's board of directors initiated a second shareholder vote on Musk's compensation plan, and added a resolution to relocate Tesla's headquarters from Delaware to Texas, which would help Musk and Tesla escape the jurisdiction of the Delaware court.

Institutional shareholders are the main opposition to the compensation plan, such as Norway's sovereign fund, the California Public Employees’ Retirement System, etc. In May of this year, the two major proxy advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis, recommended that investors vote against the proposal as they believed Musk's compensation was too high.

Brad Lander, New York City Comptroller responsible for managing public pension funds, said last week: "When billionaires are allowed to flout the rules, ordinary people suffer." The fund holds $620 million in Tesla shares.

Michal Barzuza, a professor at the University of Virginia Law School, said Tesla's board cannot simply assume that giving Musk incentive pay will make him focus more on Tesla. The equity Musk has obtained in the past has become his bargaining chip for buying Twitter, and has allowed him to do more business beyond Tesla.

Musk and his supporters have turned to grassroots campaigning and sought support from individual investors.

In the top 15 companies with the highest market capitalization in the US stock market, Tesla has the highest proportion of individual investors. According to S&P data, 43% of Tesla's shares are held by individual investors, while Nvidia and Microsoft account for less than 30%.

Musk may be the most famous entrepreneur in the world, and there are many small and medium-sized investors who worship him. Musk and several Tesla executives frequently appeal to shareholders to vote on social media and hold lotteries to visit the Tesla factory. To avoid suspicion, Musk said he "did not know that Tesla executives would express these things on social media".

In the end, the day before the shareholders' meeting, Musk got the victory he wanted ahead of time.

Winning another 9% of Tesla shares is important for Musk.

Today's technology giants usually set up weighted voting right mechanisms, allowing the founder's stocks to have a voting power ratio of 1:10 or even higher. This enables the founder to firmly control the company, even if they hold less than 20% of the stocks. Meta founder Zuckerberg holds 13% of the company's shares, but can exercise 54% of the voting rights, giving him veto power.

Tesla does not have a similar mechanism, because Musk joined as an investor and chairman after the company was established.

In 2022, Musk sold 8% of Tesla's shares to acquire Twitter. His shareholding ratio dropped from 21% to 13%, and his voting rights correspondingly decreased.

But this money was not enough to buy Twitter, so Musk also pledged about 7.5% of Tesla's stocks, equivalent to nearly 60% of his remaining stocks. If Tesla's stock price continues to fall and Musk is unable to make up the difference to the institutions that accept the pledge, his pledged Tesla stocks may be forced to sell, further reducing his remaining shares and corresponding voting rights.

The closing price of the pledge agreement was not disclosed, but Tesla's stock price has fallen 30% since the beginning of this year. If Tesla's share price continues to plummet, Musk may lose control of Tesla.

At this critical juncture, it becomes more important for Musk to get 9% of the voting rights through the shareholders' meeting.

Musk has proven his control through voting, and there are even fewer people who can restrain him.

After this turmoil, Musk strengthened his absolute control over Tesla. Not only did he own stocks worth more than $50 billion, but he also obtained these shares through the votes of all shareholders, making it clear that his approach style is the collective choice of Tesla shareholders.

From the beginning, modern technology companies have formed a centralized incentive mechanism around their founders, encouraging them to take risks to achieve high growth. Just like the venture capitalists always say, "investment is about investing in people." Tesla is the ultimate example of this, and its many successes rely mostly on Musk's full-fledged investment in a single direction, insisting on taking big risks for big returns.

Faced with fierce competition and weakened business, Tesla has become even more aggressive this year. Since April, Musk has launched multiple rounds of layoffs and senior management adjustments, further recovering power.

Before the end of last year, in addition to Musk, Tesla had three core managers, CFO Zach Kirkhorn, senior vice president of electric power system Drew Baglino, and senior vice president in charge of global manufacturing and sales in the European and American markets, Zhu Xiaotong.

Less than half a year later, only Zhu Xiaotong remained among the three core executives. CFO Zach Kirkhorn resigned at the end of last year, and Drew Baglino, the actual number two figure and deputy general manager of the three electric systems, resigned in April. Zhu Xiaotong, who was once regarded by some investors as Musk's successor, had his job scope and responsibilities changed in April of this year: he returned to his role as head of Tesla China, and the European and American sales business he was responsible for was taken over by Musk himself.

It is also more difficult for Tesla to be managed by parachuted professional managers like other companies. In Tesla's 20 years of work, Musk thoroughly changed Tesla's organizational structure, business model, and philosophy.

Musk hates all inefficient behaviors and believes that middle managers are the key reason for inefficiency. He requires Tesla employees not to care about their immediate bosses. If they can solve problems quickly, they can communicate directly with vice presidents of other departments or Musk himself. This makes Tesla's management very flat and disorderly.

In the large-scale layoffs since April, Musk has once again restructured Tesla according to his own will. According to our understanding, Tesla has shelved many models and expansion plans, such as producing a $25,000 low-cost car, the Mexican Superfactory, and the Model Y facelift. The most important new model Tesla is investing in now is the Robotaxi that several executives opposed but Musk insisted on, which is a driverless taxi without a steering wheel or accelerator and brake pedals.

After reaffirming the legitimacy of governance through shareholder voting, Musk can lead Tesla completely on the path he wants. Tesla's shareholders have also signed a risk agreement with Musk, believing in this adventurous CEO and together bear the consequences of their adventures.

Editor/Lambor