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Tesla's board needs to be refreshed: Corporate governance expert

Electric vehicle giant Tesla (TSLA) has filed a preliminary proxy statement as it seeks shareholder approval for two key items: Elon Musk's nearly $56 billion pay package and the company's proposed reincorporation in the state of Texas.

To provide insight into these developments, Weinberg Center for Corporate Governance at the University of Delaware Charles Elson Founding Director joins Market Domination.

Elson expresses skepticism about the potential approval of Musk's compensation plan, noting that even if shareholders were to vote in favor, it may not supersede the previous court decision that struck down the package. He emphasizes that the plan being proposed is not meaningfully different from the one that was deemed "not effectively fair" by the courts.

On the proposed move, "The real question is, why would a shareholder vote for a move that the CEO says a court has decided against me because what I did was inequitable? So, I'm going to a jurisdiction where they'll say that's okay," Elson told Yahoo Finance.

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Elson argues that, ultimately, the board's responsibility is to ensure that Tesla survives beyond Musk's tenure. "At some point you have to say 'enough.' That's that where I think you need board refreshment. Obviously this board is unwilling to do it," Elson says.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Angel Smith

Video transcript

[MUSIC PLAYING]

JOSH LIPTON: Tesla filing preliminary proxy statement ahead of its annual meeting, which will be June 13th. The two big requests from the EV maker that shareholders ratify CEO Elon Musk, 2018 pay package and approve the company's reincorporation to Texas, moving it out of Delaware. Joining us now is Charles Elson. The founding director of the Weinberg center for corporate governance at the University of Delaware. Charles, it is good to see you. And I want to start here Charles and help me think through this.

If Tesla shareholders, Charles, if they vote and approve this pay package for Musk, does that mute or supersede the judge's original decision from a few months ago, Charles, which argued there was a breach of fiduciary duty here.

CHARLES ELSON: I don't believe so. I mean, you have to look at the ruling in a couple of ways. She talked about a poor process. She talked about a lack of independence and part of the directors which obviously it's the same plan they put out before. There's nothing new here. They haven't done anything differently. Same people. Same plan. But the key is at the end of the ruling. And this is, I think, quite important. She said that the compensation was not effectively fair. That you didn't need to give this man so much stock because he already had so much stock.

And that she ordered rescission that the plan had to stop. That's very interesting because effectively, it's a fairness analysis not necessarily on the process. But the result and look, let's say all the shareholders. Let's say they approve it. Frankly, to give money away, make a gift to someone that has no corporate purpose. If you think about it, has to be approved by all the shareholders. Not just the majority. And you can have a vote and you would still have a quote unfair package to the corporation. Unless everyone votes for it. And obviously you have a plaintiff here.

And that person certainly isn't. And I doubt some others as well. That's the real issue here and that was the key to that ruling. It was basically, the judge said poor process, poor independence. But effectively in result wasn't fair. And that's, I think you've got to think about it, that Delaware always has the right to court of equity to judge the fairness of the equity, if you will, of a particular action. And this was determined to be inequitable. And that it's really hard to get around that unless everyone agrees to it or they reformulate it.

JULIE HYMAN: And of course Charles, one of the other things that Tesla is trying to get shareholders to approve is actually a change of where it's domiciled that it would change to Texas and so be subject to the courts there. Do you think that will be successful and could Delaware courts even block that move?

CHARLES ELSON: Well, yeah. There are some actions in Delaware now where folks have sought to leave Delaware to avoid Delaware jurisdiction in particular. On a particular issue, I think that would be challengeable. But the real question is, why would a shareholder vote for a move that the CEO says, a court has decided against me because what I did was inequitable. So I'm going to a jurisdiction where they'll say that's OK. The Delaware protects shareholders yet I'm going to move to a place where I'm telling you--

JULIE HYMAN: Well, the answer is Charles because the shareholders of Tesla have faith in Elon Musk, which is why they approved the pay package in the first place. I mean, couldn't you argue if the shareholders want to do that? Why not let them do it?

CHARLES ELSON: But I would really be surprised if the large institutional holders would agree to that. It's against their interest. Any way you look at it. And frankly, who's to say a Texas Court won't do exactly the same thing, won't respect the Delaware ruling. It's a very sound ruling. There's nothing odd about it. He can appeal it to the Supreme Court, which I assume he'll do. But that's up to the Supreme Court. If they find it was inequitable, they'll strike it down. But the point is you can't change states because you don't like the court you're in.

You don't like the results you've got. That's a very strange idea if you think about it. I'm not happy with the answer you gave me. So I'll just go to somebody else. That's not the way it's done legally in this country. And I think the shareholders hopefully will agree. If the judge thinks the package was problematic, the Supreme Court agrees. Then perhaps it's time to refresh the board and come up with a different package. But to simply leapfrog a court and move somewhere else. I'm moving out of the United States because I don't like their law.

That doesn't make sense either. The law protects the shareholders. It protects the investors. Certainly, Delaware does. And I'm sure Texas does too. But it's a very odd response. And I'd be very surprised if a majority agreed to it. They may, you never know. But I think it'd be rather foolish on their part to do so. And of course, will would Delaware let them evade a ruling by moving to another state? Would Texas let them do it? That's a problem for Texas. Texas decisions are enforced in Delaware. Should they not be anymore? That makes no sense.

I think it's a grandstanding move that it's a lot of talk and chatter from folks. But I don't know if in the end it's realistic or frankly, fair to the shareholders. Simply stated.

JULIE HYMAN: So Charles, just briefly then, where do you think this all leaves Tesla, Elon Musk's pay package? What do you think the outcome of all of this is?

CHARLES ELSON: Yeah. That's a really good question. He obviously made a lot of money with his equity in the company. But he wants more. Look, at some point someone says if you don't give me this, I'm going to blow myself up. You have to say in the end, OK. Look, the company has to survive Elon Musk. The obligation of the director is to assure that Tesla's value is perpetual not based on one person. One person dies, leaves, that can't be the end of the company. And at some point, you have to say enough.

But that's where I think you need board refreshment. And obviously this board is unwilling to do it. At some point, no one is that good or that indispensable. And I think that's the problem here. It's more of the hype if you will, around the personality cult as opposed of what's happening. Look, Tesla has lost value this year. Tesla's got some issues.

JULIE HYMAN: Yeah.

CHARLES ELSON: And we've been running the company. OK, are you delighted that the stock has gone down this year or that? Production profits are off. Obviously, something is not right there. And are you going to say, thanks so much. Here's $55 million, you're terrific. Because either you get it or you leave. That makes no sense in the end.

JULIE HYMAN: Well, we'll see what ends up happening. Charles, great to get your perspective. Thanks so much.

CHARLES ELSON: Thank you.