After Elon Musk announced this month that he was considering taking his auto company private, he sent an email to employees giving this as a reason: “As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla.”
Yet corporate governance experts say things became dramatically more complicated for chief executive Musk and Tesla’s board because he sent out an unorthodox Twitter message Aug. 7 saying that funding was “secured” to take the electric car company private. The added complications include a U.S. Securities and Exchange inquiry and investor lawsuits initiated by the tweet.
“The expressed reason why Musk wanted to take the company private was because of the distraction of volatility,” said Charles Whitehead, a professor at Cornell Law School who studies corporate governance and financial regulation.
“But he has made that distraction 10 times greater than it ever was,” Whitehead said, compounded by the SEC inquiry, the lawsuits and “the inherent problems around going private in general.”
Tesla’s directors face not only the fallout from Musk’s tweet, but also, for a special committee of three independent directors, the thorny evaluation of a management-backed buyout. The process can lead to conflicts of interest and clashes with the company’s management, corporate law experts say.
“This is a very busy board of directors,” said Joseph Grundfest, a Stanford University law professor and former SEC commissioner. “They’re dealing with issues at ludicrous speed,” an allusion to a feature of top-end Tesla cars that enables them to accelerate very quickly.
Buyouts backed by management, Whitehead said, are “inherently troubling” because they raise questions about whether investors will get a fair price in a sale.
“It begs the question: If the price the managers are prepared to pay today is greater than the price the stock is trading today, why isn’t the stock there in the first place?” he said. “And even that isn’t necessarily full value, because you expect managers to make something for themselves.”
The independent directors evaluating the deal, meanwhile, have to negotiate with managers they may know well to get the best price for shareholders.
“It puts the board in a terrible position,” said Charles Elson, the director of a corporate governance program at the University of Delaware.
On Tuesday, Tesla said in a statement that the company had formed a special committee of three of its nine directors: Brad Buss, Robyn Denholm and Linda Johnson Rice. Tesla also said it had retained the law firm Latham & Watkins as legal counsel and plans to retain an independent financial adviser. The company said the committee “has the full power and authority of the board of directors to take any and all actions on behalf” of the full board “to evaluate and negotiate a potential” deal to take Tesla private as well as alternatives.
The company also said it had not received a formal proposal from Musk, “nor has it reached any conclusion as to the advisability or feasibility of such a transaction.”
In a statement made the day after Musk’s tweet, several members of the board said Musk had “opened a discussion with the board about taking the company private” and had met “several times over the last week,” but they provided no further details about the proposal or its funding.
Rice, who joined the board last year, is chairman and chief executive of Johnson Publishing Co. and chief executive of the parent company of the Ebony and Jet brands. Denholm is a telecom executive. And Buss is the former chief financial officer of SolarCity, the solar-panel maker. Musk is the former chairman of SolarCity, and Tesla acquired the company in 2016.
In a report this year, proxy adviser Institutional Shareholder Services said Buss did not meet its “more stringent criteria” as an independent director because he had served as an executive at SolarCity. ISS also said it considers only five of Tesla’s nine directors, or 56 percent, to be independent. Among companies in the Russell 3000, ISS said, 83 percent is the median proportion of board members who meet ISS standards for independence.
In response to an email seeking comment, a Tesla spokesman pointed to the company’s proxy, which says the board identifies seven of its directors as being independent as “that term is defined in the listing standards of Nasdaq.” The proxy says “the board undertook an analysis for each non-employee director and considered all other relevant facts and circumstances, including the director’s commercial, accounting, legal, banking, consulting, charitable and familial relationships.”
Representatives for Musk and the company either did not respond to emails or provide comment about other recent events or questions raised by governance experts.
The way in which Musk announced his proposal and described how it might work could also make things harder for the board. In an email to employees, Musk said he wanted to “structure this so that all shareholders have a choice,” adding that “either they can stay investors in a private Tesla or they can be bought out at $420 a share.”
Governance experts were somewhat baffled by Musk’s proposal.
“Needless to say this is the most unconventionally proposed management-led buyout I’ve seen,” said Gregory Shill, a professor at the University of Iowa’s College of Law who studies corporate governance and securities regulation. “It’s also the largest by a considerable margin. He dropped it on Twitter the way a pop star might hint about a new album.”
Others said the board is not bound by Musk’s proposals. “Presumably there are people trying to take what he’s said and box it in a way that makes sense,” Whitehead said. “They’re not handcuffed to this, but are they going to have to take it into account? Absolutely.”
In a blog post published Monday, Musk said he decided to go public about his desire to take Tesla private because he felt “it wouldn’t be right to share information about going private with just our largest investors without sharing the same information with all investors at the same time.” He clarified that in all his communications about the topic, “I am speaking for myself as a potential bidder for Tesla” and said the $420 price quoted for going private was a 20 percent premium over the current price.
Yet shares were trading more than 8 percent lower in midday trading Friday after the New York Times published a deeply personal interview with a tearful Musk, who called the past year “excruciating,” said he was taking the sleep aid Ambien and said “from a personal pain standpoint, the worst is yet to come.”
Finally, there is the matter of Musk’s tweeting. For all the problems his erratic social media commentary have caused in the past, errant tweets during the process of a go-private deal could be far more consequential than, for instance, an April Fool’s bankruptcy joke, governance experts say.
Tesla and Musk are also facing several investor lawsuits alleging that Musk’s tweet was either false and misleading or intended to manipulate Tesla’s stock price. (The company did not immediately respond to an email seeking comment.) Whitehead noted the investor lawsuits could also make valuation more difficult to assess for the independent board members and financial advisers.
Grundfest suggested the board insist on some kind of social messaging filter or require that his tweets be approved by someone before they’re posted.
“The federal securities laws are not built for people with impulse-control issues,” he said. As for the board members, “the challenge they face is how to manage Musk, who may, at some levels, be unmanageable.”