Transcript
Welcome to shareholder Primacy from free flow media. Podcast about activist investing Securities Law, and all the ways, the financial legal roles intersect and Collide and real life. Once again, and I are here and of course, is a lot professor at the University of Colorado, teaches and research to Securities and business law, she holds up the legal end of the podcast. That's Mike Levin, an activist investor who lives and works in Chicago, he covers the financial side. I got together to talk about. A really interesting subject, and then current events interfered. So we're gonna do a little detour and then we'll get to the main event. The main event is ESG, proposals will describe that in a minute, but the current event had to do with our favorite poster, child in corporate fairs and corporate governance and so forth that Tesla who announced a new PayPal package today for Elon Musk. We're recording this on Monday, August 4th a couple days before we were scheduled to post it. So this is someone as we were as we were waking up, so I can describe, but why did you describe sort of what the news was? Okay. Well, the news was that so we remember where we left off was that he had gotten this, hey package which was designed in 2018, that gives him a certain amount. Of Tesla shares, if he was able to increase Tesla's market capitalization and the total amount that he would be given would be 56 billion dollars in today's share prices. It's worth almost double that that's a lot more. Um, but the Delaware Chancery Court Chancellor McCormick held after trial, violated fiduciary duties of testing. So, that's, that's, that's that's on hold right now. But it's on app. That decision might be undone, which left the question. Well, what do we do in the meantime? Partially? Because he needs a new pay package going forward, like, even like leaving that aside, he's continuing to work at Tesla. That's expired, a new paper going forward and we didn't know what they were going to do about the fact that this other payback age, may or may not come back, right? So there's so and we're we're, we probably won't know for many months at least. Yeah. What's going to happen with even scheduled the Royal argument yet? But let's say within a year, Right. So potentially realistically at least a year from now we will know the outcome of that 2018 Grant. Yes. All right what? Let's just put this on the table, it is theoretically possible Delaware. Supreme Court could remand for further proceedings even more. I just don't think that's like, I think they're gonna do a thumbs up a thumbs down. So today's today's news was, what was that? He decided this is so hilarious. They decided that given the uncertainty of whether he's going to get that money back, they are going to use the 2019 employee compensation plan, which I will talk to you about a second to award him about a third of what he would, otherwise have gotten under the 20th century 95 million shares compared to about 3003 million shares, granted under the 2018 Grand. Okay. Yes. So it's about 30. It's about, we're about. Heel and tornado. In other words, if they win the appeal and he has that 2818, Grant restored. He doesn't get this. So just like this, this goes away if that goes away, if that happens but what it's supposed to be? Well there are some timing issues and you can imagine sort of weird scenarios where somehow that doesn't happen. But theoretically if you get his Paypal package back, this goes away. It's just there in the event that he doesn't get that PayPal package back. Well, at least given this about a third of it and then separately they announced That they will come up with a new comp package to compensate him, going forward. And that one will be, you know, voted on at the next shareholder meeting which we talked about in November all right, so this is, this is this is designed to provide a part of what the 2018 56 billion dollar, whatever Grant was And that part, of course will go away if in whole the whole thing's restored but there's also an intent to do more. Later. Yes, the compensating for his feet like is this is essentially to compensate him for to reverse six or seven years to make up for that lost Grant. But still for his future work, they are designing another. There's still there's still that committee. It was a committee too. Right? Was it down home and Wells? All right. So, and I have a comment about this, but I think you had, you had a thought to about what? God granted here. So this is borderline illegal. So um except that there's no idea about it. We had a podcast on. Lucille, and you will meeting and like what to expect. Yeah, I was like last month. Yeah, and one of the things that we said was that we expected them to come up with a new paper and we expected a shareholder vote on it. Now, the reason that they have to have a shareholder vote on it, though. This is important. They have to have a shareholder vote on it, because Tesla's traded on NASDAQ and NASDAQ requires shareholder approval of new Equity compensation packages, right? That's just a listing rule, that's just a listing Rule. And what we said was normally, you know, in the past they've had shared older vote on these things because they're conflicted transactions and you have a shareholder vote to cleanse them so that the subject to business judgement review. The reason the 2018 Grant was not cleansed was because among other things, the Court held at the proxy statement was misleading and shareholders were not right now. Tesla doesn't have to worry about that, really? Because they're moved to Texas where they have this by law. Now, that says that you can't bring a derivative action challenge what they do unless you have 3% of the shares and since that's essentially nobody, I mean, there's zero, right? There's there's interested. Transactions. They can do whatever they want. No one can sue over it. So, but we said, if they awarded in this new Compensation Plan, they were going to have to have a shareholder vote under NASDAQ rules because it's a listing. Requirement, are they having a shareholder vote under this package? You mean, for today's package? Yes, the answer. To Grant. They are. Oh, they are claiming that. So what happened originally was, they gave musk this 2018 package, then in 2019, they came up with a whole big Equity incentive plan for all Executives employees. Right? Exactly. Right. And everybody, but the shareholders voted on that and they approved that. So in like 2019, there was a shareholder vote. It was before I was just a shower holder, right? On the general Equity comp plan. It explicitly said it didn't cover musk, because muscles covered by the 20 because you already have the 2018 plan. So they approved this 2019, but so they put it to shareholders approved, it by some probably large margin. Yes. And but shareholders at the time, what they thought, they were voting on was Equity, compensation for everybody besides most, because they, because they voted on that the year before. It explicit. But now they are saying that this new award is under that old plan and because it's under the old plan, it was already approved. So no Cheryl to vote needed. Do not need a shareholder book, that's their claim now. Yeah, so I'm gonna test the shower. Can I sue them over this probably? Cannot you under it because you don't hold 3%. Right now. So the only other entity that could possibly make a stink about this is NASDAQ, they could say, wait a minute, you didn't really have a shareholder vote on this 200, excuse. So the 2090 the actual language that shareholders voted on. It said the board intends the 2018 CEO performance award to be the exclusive form of compensation for Mr. Musk until it is completed expires or otherwise terminates. So there the board is going to claim that by inserting that language because this is conditional on terminating the 2018 Grant they can now give musk. I mean that. But clearly shareholders did not think they were compensating musk under this plan. And so, you know, definitely say that they are violating NASDAQ listing Rules by not having a new vote for this new award. But the Just are notoriously lacks about enforcing their rules and shareholders don't have a private right of action under listing rules. So, um, there's nothing anyone can do about it. The shareholders, can't sue because this bit because you're not a 3%, holder and Tesla has a bylaw. That's right. And they're making a bet that NASDAQ isn't going to make a steak about it and they're probably right? Because the exchange. Yeah they asked I mean this is NASA has been NASDAQ in fact, probably doesn't want to piss off test too much. Because they're yeah, exactly. So There's not what shareholders intended when they voted on the 2019 package but they're claiming that it essentially, the Chevrolet approved it. So therefore they don't have to get a second show over vote. Now they will have to get a shareholder vote for the new Compensation Plan. Going forward that they're going to put to shareholders at their new annual meeting. But at least this way, they kind of get a freebie of 30 billion dollars with older right decision. So comes out against them. so, you think Whether or not, this is in, someone will enforce the illegality. You just laid out that this this violates some law. I think it violates a listing rules listing. Oh the listing rules, okay? Because I don't think that shareholders understood that they were approving. A compensation package from now. I have a different comments. Which is. I'm not sure this is necessary. Really not necessary. Okay. Oh, you agree with me. All right, so because because And there was, and I would encourage people who care deeply to go read it. There were, there were two or three documents that were released this morning. There was the 8K. That kind of laid out the structure of this. It's summarized a very extensive employment. Or Grant agreement that I haven't read yet and I probably should. And then there was the latter. From the committee. And again, we said it was committee to it was board chair denholm. And another director, independent director, Tom's one who approved when they did the right. She's the one who was the committee of one who recommended that Cheryl's ratified last year, the grant. Okay. So, the two of them wrote this letter that is just great reading because they're really, they're really, you know, giving big sloppy wet kisses to their boss. So really, he's their his boss. About how important it is to retain him. And and we really need the guy and so on and so forth. And I I think that's true. I think it is important that that Tesla retain him in part because No Tesla shareholder, you know, president company included. Once this thing to go down to a ordinary Auto Company valuation. Yeah that'll be bad for everybody. My point is that's especially bad for Elon Musk. That he will. if he were to go, His his share, and this makes up, you know, I've looked at the numbers up a third or a half or more of his wealth and a lot of this is Blended, there's all sorts of financial disaster that befalls not just us, but him if these shares declined precipitously that way. But I think the company in musk are kind of tied together that there's absolutely no. Good reason for him. I mean, you know, financially, there's a bad reasons for him to leave. And so there were no other than he's demanding and he says, I want, you know, right now he said about 13% and he says he, he's comfortable. I don't really care comfortably is, but others do. He's comfortable with his chair. Getting up to 20%, he thinks that's going to be enough to kind of insulate him in the company from other shareholders. okay, and my view is that, that is Just not concern the board or should not concern the board one bit. That he ain't going nowhere, they got him locked up. And, and even one more share is is a waste. But that's me, know, I think you're right. So two things about that first. That's part of the reason that McCormick struck, the original PayPal package one of her rationale. I mean, remember, like so I really just need to emphasize the logic here. The logic here of striking, the pay package, was that normally she would defer to the Judgment of the board and the Judgment of shareholders. Except that she found that the board was too close to mosque. They were in, right? And the oldest weren't fully informed, so that she had no one to defer to because there was no independent decision maker. She had to decide on her own, whether the PayPal package was fair. He's in she concluded it wasn't or one of the reasons was because he wasn't going anywhere in a big part of this world was right? The company. What, and that's still true. Now one of the things about this shareholder letter is it's very cagey. It's being reported their these news headlines musk threatened to leave unless he got this. That is not what the letter says. The letter says very casually. We want to ensure his continued services but nowhere says that he threatened to leave and I think you're right, he can't go anywhere. He in fact affirmed in sworn testimony in tornado that he ain't going anywhere. There's in the record And that's exactly right. It's because if they replace him, then suddenly Tesla's a car company, the stock price drops and the person hurt, most by that, is Elon Musk, right? And his creditors? That's the thing is, he's a pledge, a lot of shares and he's going to come with a lot of cash when that Margin Call comes in and that's going to hurt. So anyway, wow. so, so There won't be impulsive thing that right. But and so importantly, our prediction that they would be a PayPal package to vote on at the November. I think it's the sixth meeting is possible. No, no, this okay, come up with something, but this may be, this may be enough to get to stop complaining. It might be the board about, but it's not, but they said that they're all. So, working on a new PayPal, I'm skeptical that, you know, they're going to meetings November, we talked about this, they're going to have to come up with the proxy pretty soon. Yeah. And then I think they're going to, it's like they're gonna have to make up for the uncertainty about tornetta, and then they'll have a Elan. Please. Keep America for the next cuz this one. I think is keeps him around. There's I think he can't exercise it for two years, then he's got five or something like. Yeah. And they're waiting for the tornado decision. And if the tornado decision comes out, his way, it all goes away, it's a little. Yeah, yeah. That's right. Well, that was, that was today's news. Why don't we? Why don't we do this? Let's take a quick break and then we can talk about what you and I originally set out to discuss. All right. Yeah. So yeah. So we'll we'll return to talk about ESG and anti-esg proposals here at Cheryl they're Primacy Shoulder Primacy is brought to you by free float, analytics.com. The only free database of corporate directors their influence and their performance. If you own a Stocker, retirement plan go to free. Float. Analytics.com and look up which of your elected directors are performing well, which aren't use your vote in the alternative democracy and get your data at free. Float analytics.com. Now, back to the show, we're going to talk about ESG proposals. Now, Mike is of the view that they are not Central to activist investing and they aren't interesting from a Securities Law perspective. So many professors have wasted so much ink on Cheryl the proposals. We love them, we have them. But From an activist perspective. What experience do you have with these? What do you myself, personally? Minimal, um, I, you know, I sponsored a bunch last year having to do with directors, say on pay and so forth, but otherwise, I'm really just an observer, I'm interested in them, I think it sort of illustrates some interesting stuff that's going on in kind of corporate governance and so forth. And, you know, I I respect some of what's Happening Here. But again I, you know, I'm I don't think as you accurately captured, my view that this stuff is completely Central to the project of show of corporate governance and and show older Primacy, and and activist investing and so along those lines. I occasionally post about this stuff and I posted about the very interesting phenomenon to me at least of these anti ESG proposals. It's kind of this fun house mirror proposals What so you did this substack post that we were talking about and yes, it was and it was on. Yeah. Law School. Blue Sky thought? Yeah. All right. Yeah. The blue sky black. Picked it up. Yes. So a lot of I got a lot of calls about it. Yeah so it's okay. So this is about ESG versus Ana ESG. So let's start with what's an ani. Yes. So everyone knows the issue proposal, but the aunt that ESG proposal project is a little strange at least to me. You know, it's it's this kind of parallel universe that where, where a proponent and we'll talk about the proponents in a minute. Can I ask shareholders and these are all predatory proposals. There's no biolog amendments. There's no direct or elections. This is just all resolution's that sort of expressed the sentiment and sense. Of a shareholder base. and they and and but all the proposals, and there's a lot of them this year, relatively speaking Express kind of this this opposite to ESG or Dei stuff. So, It's worth noting who the proponents are. Okay, you know, we know all the ESG proponents, it's a whole mix of Pension funds and Independence and individuals, you know, John Travis, a famous One, Jim MC Ritchie as you sow, does a bunch of these, you know, those are the conventional ESG proposals. And again, they have a lot of experience in it. They're very skilled at this kind of thing. There's really only two major proponents of these kind of anti-esg proposals once called the national legal and policy Center. The others that National Center for Public Policy research. And I, you know, I again, I haven't really explored them. I have figured who their donors are and so forth. It's worth noting. That they essentially are Washington. DC lobbying firms or lobbying organizations, okay, they're not like investors. They're not, you know, they sound like they have a bunch of portfolio companies that they're you know trying to manage. so they seem to do their anti-esg advocacy kind of, as part of their overall. Anti Dei or whatever advocacy like in Washington. You know that no one's there, no one. There is like, you know, some sort of portfolio manager or some sort of a stewardship expert, these are all kind of lobbyists. Now they're, they're proposals. And it's, you know, there's like I said, there's been a bunch of them. Are. You know, things you'd expect, you know, there were a lot of proposals here to remove Dei goals from executive comp plans. A lot of companies added, you know, to a little tiny slice of your bonus is going to have to do with how well you do with diversity. If you're a CEO and they a lot of proposals were urging companies to stop doing that. To stop adopting goals for climate change or to, you know, your emissions are going to go down or something like that or okay? There were so, this is what this was gets interesting. There were some proposals that were straight corporate governance. Like adopted independent board of directors chair. Okay, or declassify a board. Okay. Then these are all proprietary. So there were some really interesting ones that come from those. Come from totaling normal shareholder, right? Oh yeah, right there. I mean, John Chapman could have run that written those or I could okay or whatever. All right. And then, there are some new ones about, you know, need to assess the impact of artificial intelligence on a company as business, some of their diversity ones though. I mean, they're not just exactly moving EX Like it was they tried. Actually they tried to just don't have diversity goals. Yeah, right. Yeah. Right. So, that's kind of the project that they've worked on now. These start these kind of cropped up, you know, the first ones were filed four or five or six years ago. Again, it was pretty new. With like a handful of these these year in 2025 the robot, 120 of these were submitted to US public company. Something like, 20% of all proposal submitted this year. Were these anti-esg proposals? And, you know, they went through the typical no action, stock and so forth at the SEC. and then they got surprise surprise, the average voting support, among not 120, some were excluded. The average voting support was like 2%. Was like nothing. Okay. And so, I wondered. Okay, what's going on here? Oh, the other thing that happened, Was that I these proposals annoy the ESG Community, immensely. Okay. I think they should be delighted, but that's me that there were okay. Well, okay, why that's cool why. Oh, they should be Delight. Oh yeah, right. No, the presence of the proposals annoyed, the ESG Community, but the 2% led to a lot of elation in that in that Community, there were quotes about how they do. Supportively, let them vote, you know, and, you know, some sort of proposal at Apple one only three percent support and and he is she a conventionally is she proponent was saying Apple investors today have made it clear that the company's Dei programs are valuable for its staff and its business. and then there was a lot of similar, kind of Celebration at that, very low, level of support and and and and what was and and they were pointing to that as investors really, really oppose these anti-esg. Stuff and investors really love the Dei programs. And now that in fact, maybe true. Okay, but I then wrote a post that said I don't know if that's that's celebration is exactly On Target. That in fact I attribute that very low level of support to an overall trend. That the big institutions, The Big, Three, the top 20, or whatever. Just don't like shareholders proposals that. okay, that they kind of Don't necessarily oppose completely the whole idea but that their affinity for these which was higher years ago. Yeah. As declined dramatically. and so, I wrote like, In the post that, you know, average support and this is after, you know, a couple decades of trying average. At least I saw one study that average support for all ESG proposals not, including the anti-esg ones was somewhere in the range of 1012 percent. And like I said, that was after many years of, yeah, for a few years in the past, it was much, it was higher. Now it's now it's Gone down, right? It's declined. Yeah. And and again that doesn't necessarily mean and what my point was that it doesn't necessarily mean that these Proponents that investors. Really, really hated this antique and really want to companies to adopt the Dei. So I just think that they're anyway. So I I got like three separate yelled at by three separate ESG proponents Saying what do you what do you thinking? What do you doing? And so I just want to make it clear that I was trying to make a very specific point. It really having to do with You know, the value of the ESG proposal project, have you been talking to? Investors about their views on this. Yeah, I've talked to a few, it's funny because I well so I again, you know, I'm not out there rounding up support for ESG proposals routine, right? But I did have this thing last year where I was trying to get support for this one specific idea about the director of vote on. Cheryl, Devon and director count. I talked to a number of drone with the big three talk to the Proxy advisors talked a bunch of other big shareholders. And they to my mind, I would summarize their attitude, to what I thought was again, I, of course, I thought it was great but was proposal fatigue. Was that was that, you know, the stewardship teams and so forth in the leaders. And I talked to some, you know, the heads of stewardship at some of these big, you know, big names, people would know. And they said we're just getting. We're my sense my takeaway. These are my words was, we're kind of tired. Of this. Stop at the proposals are getting more and more. Esoteric. They're you know they're taking you know they're going from a low level of a very low levels of support minimal level of support to an increase and so we're being asked to vote on this each year. Um, you know, some of the core governance stuff. Accepting mine. I guess they were they were fine with. but a lot of the other ens stuff people were Again, getting a little tired of and so I think that leaked over. To a lot of this, you know, anti-esg or anti Dei. proposals, they were seeing so That was kind of my take after that and you know, reading a bunch of stuff and looking at quotes and and so forth. You know, Vanguard, you know, Vanguard has been supported this stuff in a long time and I know vanguard's. Evidently got some sort of reputation for this kind of thing. you know, there have been other observers that have said, hey, you know, I think there's this kind of proposal fatigue So I was trying to make something a very specific point there. I don't don't think that this is a big deal that people really love that. The big institutions really love. They may love Dei They may like it for their own shops or something like that. But that's not really how to interpret this. This very low level support for the anti ESG proposals. Yeah, well, I mean, I think there's, I mean, I think you're right. I mean, I think in general and it's not just that they're tired. I mean, we're in a different political environment, like right now, a court just sustained. The this multi-state. Complaint against Black Rock Vanguard State Street arguing that they can inspired to reduce coal outfit by their climate change issues. We saw that American Airlines thing where America Airlines, we talked about this before, which is pretty good, 401K holders because it included Black Rock on the planet. Black Rock was against climate change, like these predatory, proposals are putting the funds in a political crosshairs that they were like they thought that this was like, you know, everyone's like I think a lot of them thought that this was like publicity, you know, good public relations and it doesn't matter if it's predatory, they thought it was, you know, like happy talk and it was and and it was fun to go for it. But now they're in a Situation where the Trump Administration is treating support for Dei as the equivalent of violating employment discrimination and violating employment discrimination. and so, one of the things Seen the big. Three or, you know, this is black recognized are done this. Anyway, is their experimenting with pass-through voting. It's what? Because I was more than an experiment. It's happening. They're doing it, like, but they're doing it this weird way. It's not like you can actually pick what to vote on. You have to pick up policy but basically they just want this political Hot Potato off their plate. Right. And so, right? So this You know, opposing. The. Anti-esg stuff again. Is, is another way to take it off their plate. Yeah, not. Yeah, right. And I have long thought that look, you know, the big, all these big investors are happy to have stewardship teams that really reach out and do this kind of thing, but even the stewardship teams. And it's you know, unfortunately it's it's a bit of a cost center. They don't make money from this the big funds. Um, so, you know, the idea that they could focus on proxy contest, focus on corporate governance, stuff and so forth and not necessarily have to research and pay the proxy advisors to research one or another climate proposal or diversity. Proposal. It is, you know, the Dirty Little Secret is they're not like, I don't think they're two unhappy about that. Yeah, so, yeah. So anyway, so, like I said, I, I wanted to sort of make that comment for all the, you know, people who were, who saw the post. You know, we can put a post, the post in the show notes for people, who care that I was trying to make a real specific point about You know what investors? Think of all proposals rather than They seem to really like the ice stuff. We don't know, it's not, it's not the right kind of evidence for this for the kind of a, for the at least the kind of kind of happiness that people were expressing over these little levels of support. So that's that's mostly what I really wanted to say there about that. So I think we can probably well, we have to definitely return to the Tesla stuff. We're going to talk about that. Why? I imagine we'll probably put something on the, on our production schedule. For Once the meeting gets, gets what's the meeting yet? There's there's a We should wrap up, but before we wrap up, we have a couple things, we should mention our mailbox. We keep talking about that, I don't know if you want. Yeah. Yeah, yeah. Um, yes, we keep saying that we are accepting emails with suggestions and questions. We do get to the mailbox, we get slowly because we're, you know, we do this once a week and August also schedule, but we are getting right slowly through the mailbox. So, if you have a question or something you would like us to talk about, you can email us at shareholder Primacy one word at freefloat LLC. So yes, please send those emails, right? And then let's quick comment about our production schedule. I think unless there's some emergency that comes up this will be our last podcast for August We will be back. After Labor Day, I think I can't. But if you're if you're so everyone should take a break, I'm going away for a couple weeks and it's going to kind of get ready to teach ya. And so, so this is this is it for August and we look forward to seeing everybody when we resume at the end of this month, beginning of next month, right? Okay. All right. This is it. We'll see you an in three four weeks. But for the meantime, this is shareholder Primacy hosted by Anna. Lipton and me Mike Levin. I'm an independent activist investor and advisor to investors about their activist situations and is the incoming professor of Law and Lawrence W demuth chair of Business Law. At the University of Colorado, law school, you can find me Mike at the activist investor.com. And Anne at new website waweb one word La WWE dot. Colorado.edu once again law web.com colorado.edu. Our podcast is Distributed by freefloat media. Thanks for listening, we'll talk again soon.