Transcript
Welcome to shareholder Primacy from free float media podcast about activist investing Securities Law and all the ways, the financial legal worlds intersect and Collide in real life. I'm here with and Lipton a law professor Tulane in New Orleans, she teaches and researches Securities and business lot. And she holds up the legal end of our podcast and that's Mike Levin an activist investor who lives and works in Chicago. He covers the financial side of our podcast. Yes, thanks. Well Ian lots to work on today. A couple subjects we've thought, both of us have thought in written extensively about to test Tesla. I'd be interesting and fun to look at what happened there in the last few weeks. Also, we just finished a second year of annual shareholder, meetings and board director votes under Universal proxy. And when can look, back on what we've learned in the past few months. All right, that'll be fine. Let's start with Tesla, though. Earlier this month, there was a hearing About a particular matter, involving Tesla and Elon, musk's compensation. Why didn't you briefly describe for us? What that hearing concerned? Okay so as the world knows at this point earlier this year Chancellor McCormick rule that Elon musk's 54 billion dollar pay package paid in Tesla stock represented. A breach of fiduciary duty by musk and the Tesla board she found that when the board approved, this much pay for him. It was under musk's thumb and when shareholders voted in favor of it which they did back in 2018 but they were misled they didn't have sufficient information in the proxy statement. So she ordered that the whole PayPal package to be rescinded. Now that decision is going to be able to the Delaware Supreme Court. No question. So her findings are going to be reviewed but before that happened Tesla wanted to belt and suspender it by holding a second. Shareholder vote on the PayPal package on the theory that if Cheryl holders, approve it again this time, there can be no doubt. This is what shareholders want they had full information. So Tesla put the pay package. Yeah. Don't just there was a hair. That was the herring in Delaware about this vote. Go ahead. I'm sorry. Yeah, so exactly. So the Tesla put the PayPal package to a shareholder vote. Again, the shareholders voted in favor of it again and Tesla's back before, Chancellor McCormick. And they saying see we did it right? This time, you should modify your original order and give the money back but they're still this plaintiff, Who challenged it originally and Richard tornado. And he's arguing through his attorneys that the new vote has no effect and therefore the original verdict stance. And that's what this hearing was about. Does the new shareholder? Vote, restore, musk's pay, got it. So the The hearing took place and what, what was Tesla arguing about this argument? Yeah, there is really, it's very simple. It's originally, she rescinded the pay package because Elon Musk the board of directors who authorized it. And because the shareholder vote in favor was based on this misleading proxy statement and Tesla says, we fixed all of it. A new independent director who wasn't on the board when the original package was granted. She reviewed everything, she recommended the payback of being stated and now fully informed shareholders voted to ratify it. They had the old opinion of the new other was to know, done and done. That's Tesla's argument. So so Tesla. You know, they I you know, I'm testing holders. So they I received the proxy statement for the shareholder meeting which was in June, in June. It was the children meeting was in doing the first note. They first sent out the project materials like in April and those proximately materials included a 200-page opinion. Yeah but before you can see everything that she found so there's no argument that anybody was misled about anything. That's their client, right? So what did what what the plane of say To that, what was their argument and their argument is subtle and Technical? I understand, but it's really worth trying to. It's, it's not, it really isn't that text? I mean, there are different aspects to it, but they have a, their arguments basically boil down to. That's not how any of this works. The chancellor already concluded that the original pay package was painted by fiduciary breaches and you can't just fix all of that with a do-over. This isn't something shareholders can override post trial, so like you can sort of back into this. So, there's plenty of reasons to question this new vote, the single director, is receiving over 100 million insects into Tesla stock, which means she's very reliant on maintaining her position and staying at Elon Musk. Good graces. So maybe we can't trust this new director either and the shareholder vote may have been cold worse in the sense that musk more or less explicitly threatened shareholders that. If they didn't approve his compensation this time, it's still Tesla's data and develop artificial intelligence in his private xai company. So if the shareholders were core, so the new director really wasn't independent. Then you can't take the new vote at face value. Nothing was fixed. So that's, you know, basically, there are so there's this classroom arguments. Tesla saying we now have a vote that I love that Delaware terminology that I'm familiar with that the new vote cleansed. Yes. The earlier decision and the plaintiff tornado the drummer are arguing or his lawyers arguing that no way you can't you can't vote you shareholder vote. Can't override a breach of fiduciary duty and can't override Delaware. Statute right? Well it can't override a breach of the new Sherry Duty that's already been adjudicated, right? Okay that's it. They should have done it before trial not after Right now what was the idea that's been thrown around that if another part of the coercion basically, the second vote was you know Tesla Cheryl. There's like me are hands were tied. There was another part of this about the new the new Grant If Tesla were to go back and what did that have to do? Okay, so one of the weirder things about this situation is they were Tesla's, argument, is this restores the old pay package, it's the exact same pay package that the chancellor McCormick took it away, and we're just giving it back to him. That's what that was from, like, 2018. It was great for six years ago. Okay, exactly. Because when they granted it to him in 2018, it was just this option. It was if you hit certain milestones in the stock, you get this, you get this stock and they want to give the old paper package back. Literally, Nothing is Stopping them. Absolutely nothing from today saying. All right fine. The old payback is gone. She took it away. We are awarding Elon Musk. Our CEO. A whole new pay package a 2024 PayPal package of 54 billion dollars. Now that Tesla has reincorporated. It's a Texas there, a Texas company, the fiduciary obligations. It was challenged would be a judici under Texas law. Nothing is Stopping Tesla from saying Give them 56 billion. Give Elon Musk 56 billion dollars today and of course, but Tesla says, doesn't want to do that because that would incur all kinds of tax liability for Elon Musk different tax liability. And it would be an expense on Tesla's balance sheet that we'd be very bad for the company and so part of the coercion. So this explains why they wanted to go back and do over 2018 rather than give him a new pay package but also it's part of the coercion argument like Tesla suggesting if you don't ratify it, that is what will do will give him 56 billion dollars today and won't that be terrible for the company, in the value of the company. So that was another argument as to how shareholders would be in Coors that they were being told. If you don't ratify the old award which looks better as an accounting matter, we'll give him a new award which works as an accounting Matic, right? So instead of the two million dollar, fare value, granted fair value, 2018 billion, two billion dollars billion billion. Me, um, instead this year the number was closer to, like, 25 billion with a B. Yeah, charge. And, and that's that much, I know, is that, that would soak up the last several years of like Tesla's accounting profits. Yeah, exactly. So it was really saying we're gonna give him the same stock one way or the other is just it can have a horrible accounting charge or not a horrible accounting charge shareholders. It's your choice. So, that was another argument for why this was Corey and shareholders. You know, they did approve it, they knew all this. They did approve it. So, but yeah, I mean, there are all kinds of subsidiary, arguments. I mean, the plaintiffs are saying, look how do we know the new proxy was fully truthful? We don't know that again, because we don't know if this new director was going to. So maybe so they definitely approved it knowing the financial terms. But whether the, you know, everything else was all the relationships and all the love for Elon that was not disclosed in 2018, that presumably was disclosed now, but we don't know, you know, but the place I'm pretty sure we're not conceived everything that we know everything. There is know about the new directors. And so. So what did what a chance for McCormick of the Delaware Chancery Court think or what do we think? She thought about what she heard? Okay, so yeah, until she rules. We won't know for sure, but she did Express. Lot of skepticism of Tesla the idea being that nothing's ever been done. Like this there's no case where after a judgement by a court that there's been a breach of fiduciary duty, the defendants went back and said wait will hold a new vote and do the same thing again. And from a practical perspective, the problem boils down to this. As we said, Tesla's position is now the new shareholder vote is fully informed but the plan is position is we don't know that. Tesla's position is this was fully and a free vote. But the plan is position, is this new vote was coerced. The only way you can determine that is by having a whole new trial to see if the second vote was fair. And so, how many times you gonna try this one case? That's why you should do this before the trial, so that if you want to have a whole second vote, that can all be tried. At the same time, lots of muscles. She does not want to see him again. Exactly. And I think that, that is ultimately, you know, sort of her concern that like that. You'd have to start all over again. And just keep trying the same case over and over, and that just or do you think about it this way, right? In originally, there were two parties that were interested, sort of like it was the stockholders, the planets versus Tesla and Elon Musk. But now there's a third interested party. That third interested party is the court. The court is concerned about its own judicial resources, its own time and effort and that's real. Like, of course, really do care about, making sure that things happen are handled efficiently. And they are and they aren't as unnecessary skirmishing and so forth. And now you've wasted the Court's time and that's very valuable to the court. So the court she seemed to think and you know we won't overshore that Tesla had it had its chance and if it wanted to get this right with a shareholder vote, the time to do that was earlier and it's too late now. But and now after trial that it's stuck with that at all, it can do is appeal. And so, we'll see if that's actually how she'd hold, but that seemed to be how she seemed to be leaning, any guess at what? Or from yourself or what other. Observers think. How she'll how she'll handle this? Is she gonna? Yeah, I mean, I find it hard to believe that she would simply accept the new voted face value because I think there are enough questions raised about it. So that would mean either she has to say, you can't do this at all. We're done or she has to hold some kind of hearing. Whether there was coercion, whether the new director was independent something because it's very hard for me to believe and maybe I'm wrong. But it's hard for me to believe that she would take this new Stitch. Quite. Colorable. So it seems very difficult that the new vote would be taken at face value and she just say, whoops, okay, I got it wrong. We're Delta I get it back right. But so she may have to unlikely giving your observations about judicial resources, unlike you, she's going to want to hear a lot more facts. Yeah, but yeah, there's latinx vote. She may just say, let's let the let's let the next court. Hear it. Well, she might very well. Yeah, the teleport. Like the way I know, right? The more likely it seems to me that the easiest path for her is to Simply say you just you don't get a do-over and then let the whole and you do do, is that roughly how you would The direction you might want to take, I mean what do you think is the right based on your understanding of the law on the facts? I definitely think the laws against Tesla here. So I mean all kinds I think that the claim of coercion is quite strong. There may be all kinds of reasons to question the independence of directors and you can't I I think that it just doesn't make sense to create a rule that says you can have endless trials over the same thing. But so I think that from a legal perspective, existing law is against Tesla and Elon Musk here. But that raises the really the bigger question whether this entire system does in fact serve shareholders because it's also very clear that must and Tesla all the certainly violated like every technical standard Delaware has as far as how a CEO and chair or former chair should conduct himself but Tesla shareholders, still love him. We could argue about the technical standards for what counts as coercion or not. But with also true is the Tesla shareholders, really like Elon Musk. They really want to pay him this money. Yeah. So there's a conundrum for Delaware, law itself and it really begs. The question whether these standards are in fact, the right standards for Tesla and maybe that means Tesla was right to move to Texas where probably the same standards. Don't apply right. Wow. All right, so next move is probably almost like he will hear a ruling from Chancellor McCormick. Hopefully, sometime soon. Yeah, I mean I would imagine within the next 30 days or so and but I, you know, I don't want to like, you know, put it in blood. But, you know, it shouldn't take, you know that one, but she also has to settle on attorney's fees, and once she makes that relationship like this, assuming she doesn't hold a hearing assuming it ends because she says, the new vote doesn't matter and then she just Awards attorney's fees. Then there's going to be an appeal. Like once we're done in Chancery, whatever she holds when she's completed her findings, then it gets appealed and then straight the Delaware Supreme Court. There's no intermediate step, and the Delaware Supreme Court will get hold of was she right originally, which it hasn't waited on what was she right. Whatever she holds about the new vote and was she right about attorneys Matthew and you're right. And the original hearing too. Yeah, exactly. Like and if it decides the original decision was wrong, it doesn't have to worry about whether a new vote matters. And if it decides the new vote cured, whatever problems may have existed, it doesn't have to ask whether the original finding, you know, Like so there are a lot of paths are dealers from working go. And how long will that take at least a year? I mean this is just not going to be. Sorry, gosh, there's no rush now. I mean it's not like there's a pending deal on the table. No, that's true. All right, cool. Hey um this is this is this is quite cool. All right let's let's take a quick break and we will return in a minute to talk about Universal proxy here at shareholder Primacy. This is the free flow media podcast Network, where we cover the, who of the business news? Because investing isn't a, what it's a, who check out our other podcast business pants for fact-based snark, covering companies and Executives and the proxy Countdown. The only podcast that treats company meetings like sporting events find them on iTunes Spotify or wherever you get your podcasts back to the show. Welcome back to shareholder Primacy. I'm an here with Michael van. So, Mike, let's talk about Universal proxy and as a refresher, what is universal proxy, Universal proxy. It's the age-old question. It is a way. I mean, strictly speaking, the short answer a question. It's a way for sure, holders to cast vote. For corporate directors in the US and like, you know, direct or election. So once a year in public companies, everyone gets to vote on who their directors are and Universal. Proxy is just a means of displaying the names of the people who you're voting on. But it's a lot deeper than that. So what happened was a couple years ago, starting in really beginning of 2023 the SEC required companies to start implementing this means of showing how proxies look in. Okay, so what was the rule before the SEC changed it? So, so for years or decades, the way corporate elections worked Was that a company and this is only when there's what's called a contestant election you know, most elections. It's just a bunch of incumbents that the company just designates. There's nobody knows and there's just there's no disputes so forth in a handful in summer between 10 to 30 companies, a year, an activist like me goes in and nominates. Sometimes it's called distant and sometimes, you know, competing directors. So there's more directors running for the available seats. So, the activist has, they think these people should be directors and their support and combined company. They say, no, no, no, our existing directors are fine. Right. So, so the way you used to work, so we have a board at 10 people. okay, an activist could nominate 10 Which is unusual. So you'd have 20 people 10 for the company, 10 for the activists running, for 20, people running for 10 seats, or what usually happens is the activist still nominate fewer than 10? Let's say three out of 10 so then there'll be 13 people to choose from running out of 10. Well, before Universal proxy, we used to worry. It's a great question is that you could either vote for all 10 of the companies? Nominees or or an only or just for three of the activists. Now I'm going to pick one or the other so vote for 10 or vote for three. And then at the end of the day, they'd add up, and the 10 out of the 13 that got the, most votes would be declared the winner. So, it would be. And this is because the shareholder literally got a physical card physical. Yeah, right, exactly. And there was always this fun, fun deal between, you know, the white card in the pink cart or something ballots from each side, and each one would list only their candidates and you had to return one of the other. So you couldn't exactly right. Right. And you could, if you were a really determined shareholder and you want to vote for only two of the activists and eight, in our example of the company, you could go to the trouble of getting the right legal paperwork together, and submitting your own. Ladder and so forth and almost nobody ever did that. So you're just, it was just an either-or situation, well, University of proxy change that dramatically, And allowed. Shareholders, just voting shareholders, to kind of pick and choose. So the Practical effect, we'll go into the mechanical change. In the Practical effect was to literally allow in our example of 10 and 3, a shareholder to pick one of the Shareholder nominees, the activists nominees and nine of the company nominees are three and seven or whatever. Yeah. And this is because the ballots all have all the names of all the people running instead of just one group's Ballot or the other groups ballot, right? Right. So when you, if you're voting shareholder, And again, it's, it seems like a really Arcane change, but we'll talk about some of the things, like an obvious change. Yeah, there's there's been agitating for this for years is just totally sensible. And they're finally took the SEC a long time to get their act together that to do it. But you used to, you know, that now, if you get the companies, white Ballot or proxy card, as we call it, it will list all 13 people. And if you get the activists blue one, it'll list all 13 people. So it doesn't matter which one of the two that you pick That you submit that you send in, and we talked about this as it being mailed, but it's practically, it's all not electronically. Yes. But then you can sort of pick and choose. You could, you know, if you, if you don't like anybody, you want to vote for two people out of 13. You can do that, too vote for one of the companies and one of the activists, if you totally like how the company is going, you think the activist is is full of baloney? You can still vote for all 10. If you like everything, the activist is doing. And, you know, can't stand the company, even though you're still a shareholder, you can vote for their three, the activist three and vote for none. So you have a lot more flexibility. So Taylor how you vote and you can calibrate your vote to sort of the degree of change that you want. So, if you're really, really are unhappy at the company, you could vote for all three of the activists candidates, none of the companies and wish the activists nomin. At 7 more? Yeah, okay. If you like if you only want sort of some change you could vote for two of the activists in a to the companies. So anyway, so this is this is kind of the Practical impact. That this that this has had and it's actually reverberated in some really kind of cool ways. Yeah, exactly. Yeah, exactly. So what, what are the implications? Like, how are people running? Proxy contests. Okay, that's a great question. Um, first, Proxy contest to become a lot more personal. Okay, it used to be. That. You would only you'd vote kind of the company or the activist because it was all or nothing, either your support of the companies case. That even though our stock is down, you know, we got a good plan and just have faith in us or you'd have to vote for the active case, that throw the bums out, they're all a bunch of losers vote. For all of our people. Okay. Now, you can compare and contrast individual candidates a lot better. Okay. So in fact, true activists not only in our example of 10 and 3, not only identify, you know, nominate the three, they have to do that. But they'll identify the three company in companies that they want to Target. The kind of voting math and voting logic, which we don't have to delve into here. Suggests that an activist will maximize its results. By targeting by trying to guide the shareholders to voting against three specific incumbents. And so you're in a situation where a lot of proxy materials, a lot of this stuff that's being sent to shareholders by the companies and the activists is getting kind of personal we're saying, okay, here's the three that we like and here's the three that incumbents that are that are that need to go. And here's the reasons why, because this person's been on the board too long because this one's in the pocket of the management because this one has no expertise. Get, you know, for the committee there on or whatever and it gets, it gets a lot more touchy I suppose. But that's, that's, that's, that's, that's, that's expected because you're helping people. Not just choose between the company's case and the activist thesis But choose among these candidates so you can pick and choose. That's one of the first series implications. The second has to do with companies wanting to companies inactive, but really companies, wanting to avoid dealing with universal proxy in the first place. Okay, we're only in the second year. Of this, there's still being kind of tried out in a sense about how it works and I followed, you know, bunch of contests to sort of see how the actual voting actually outcomes. Look and companies in particular really want to avoid seeing that. So settlements of these contests have increased dramatically in the past two years that companies that there's a much greater percentage of activists of proxy, contests are settling, and they're also settling quickly. I think that time to settlement based on various measurements, like twice as fast as it's been before. Yeah. Because you know, no company wants to be on the wrong end and there's been some Where activists have, you know, one everything there is a couple smaller contest this year, parks America was one, and another one was LL flooring, the old Lumber Liquidators or activists came in and when every seat they were looking for and and that's that tends to be in previous years that would have been a very unusual outcome and for two out of the 14 or 15 I've looked at so work out that way would be considered a little unusual. So So companies don't even want to get there. So they've been settling these and, you know, giving activists, you know, some are a lot of what they were looking for. So that was one of the implications. One of the things that didn't happen, that's worth mentioning you know, it was, it was thought that a universal proxy would make proxy contest a lot easier. A lot cheaper and it actually you know because the company is showing the names of your activist, you can do a lot less solicitation so forth. There's a lot we can go into but essentially the sentiment was oh man. It's gonna make a lot easier for activists to do proxy contest. And sort of it reminds us that you don't have to spend a lot of money of money to run a proxy conscious. But you really do need to spend some money to win. And we just did analysis in the past week or two that showed the proxy, contests are costing more than ever You know. Disney. Which was the biggie cost the party 71 million dollars because I had three different like that, the incumbent, and two different Challengers. So like the car was just full of names. Yeah, it was just, it was, it was very intricate and that one, you know, try and nominated to candidates. Now, some pelts and then the former CEO of Disney Junior And try and and neither candidate. They got some folks. They did, you know, respectively. Well but they didn't win. That was unbelievably expensive. So anyway, go ahead. So what do you see upcoming? Then if If that's what the incentives are now. Yeah um well we thought there'd be a lot more kind of newer single issue. Activists, that wanted to kind of push an agenda. We didn't really see that in the first year, when I saw one example of that, this year, that was Starbucks, ran a proxy contest for three, you know, trying to nominate three labor. Friendly the union SEIU tried to nominate three labor, friendly, activists, A candidates and they walked away from that contest. It was getting costly and Starbucks look like they were going to win. We may see a little more of that, finally, but I I'm expecting just to continue on a lot more settlements, you know. Right now there's there's a couple of kind of pending contests already. Elliot has announced the intent to try to basically replace all or most of the board at Southwest Airlines right? That'll be run. Assuming it gets that far. Yeah and you know Southwest seems determined in Elliot is not someone to take it because when you're running like I mean I just it occurs to me that when you're running a full contest like for the full board Dorothy's, is I need to take over none of these people, all the need to go and that's to be like the case where, if shareholder, as a short slate, where you're only running a two or three. So it makes sense. There it makes more sense for a shareholder voting to pick and shoes like well you ran three candidates. And I like these two. But not the third one and I think those two can get, you know, your fresh boys on the board. But if it's so weird to think of Elliot running, say a full replacement board and what if you Universal proxy means they only get three seats. You know, like it's seems like like a mix and matching that scenario is very odd. Yeah, and that actually happened. So Elliot has a president to look at that happened in Norfolk and Southern this year. Oh, right, a very experienced activist named in Colorado, Heflin ran, you know, Norfolk Southern has a lot of problems. They're the ones that were responsible for the huge accent in Ohio, and so forth. Anyway, and car nominated eight. I think out of 12 or 13, directors, looking for majority. They want to majority. Yeah, and they look for, but they won only three seats. That has got to be in. My interesting in the boarding. Yeah. Right. You know what? There's three, it's not just one, it's not just some lonely person and it's three people in the Norfolk and Southern boardroom that were, you know, they didn't want to be there. They didn't the rest of the board didn't want them there, but it's not nearly enough to exert any kind of control. Yes. So with shareholders saying we want you to think about new ideas but we really don't need a whole sale, you know exactly, right. So so anyway, so there be a little more of that, you know, again there's even a couple of contests already that are that are in process, including this one at Southwest that Will will be worth following even before the 2025 as we say proxy season kind of gets underway. So this will be, this will be kind of cool to sort of see how it continues to affect these, these contests probably a lot more settlements, you know, I would expect South Weston Elliott to get to some sort of compromise. I mean no one wants to spend the kind of money. That that, you know, that is possible here. But who knows? So all right. Well, let's wrap up there. There's more we'll cover next time. Yes, thanks Ann, it's been terrific talking about these subjects. This is shareholder Primacy hosted by Ann Lipton and me Mike Levin. I'm an independent activist investor and advisor to investors about their activist situations and is the Michael M. Fleischman professor in business law, and Entrepreneurship at Tulane law school. And also an affiliate of two lanes. Murphy Institute, you can find me Mike at the activist investor.com, and you can find Law dot tulane.edu. Our podcast is produced and distributed by free float media. Thanks for listening. We'll talk again soon.