Tesla’s corporate governance is in shambles
Watching Tesla (NASDAQ: TSLA) CEO Elon Musk’s collision with the Security and Exchange Commission has been like watching a slow-motion train wreck months in the making. It was last August when Musk engaged in what seemed at the time like a blatant attempt to manipulate the price of Tesla stock, tweeting that he was considering taking Tesla private at $420 per share and had “funding secured.”
That was just days after the discovery that Saudi Arabia’s Public Investment Fund—the kingdom’s multi-billion sovereign wealth fund—had accumulated a significant stake in Tesla, just under the five percent ownership that would trigger an SEC filing. The ‘funding’ Musk had in mind was apparently Persian Gulf oil money, but it was far from secure. As for the share price, $420, it turned out to be an inside joke referring to marijuana.
It quickly became apparent that the deal was not going to happen, or at least hadn’t been ‘secured’—neither the PIF nor Tesla’s board had even begun negotiating a deal of that size. Then other questions began to emerge: on February 27 of this year, if TSLA is trading below about $359, the company will have to pay bondholders $920 million; if TSLA is trading above that level, then the convertible bonds would be redeemed in Tesla stock. In other words, there was a direct, financial motive for Elon Musk to manipulate Tesla’s share price, beyond the obvious (his personal wealth tied up in billions of dollars worth of Tesla stock).
The Securities and Exchange Commission investigated the ‘funding secured’ tweets and in September charged Musk with securities fraud. Tesla and Musk quickly reached a deal with the SEC: Musk would step down as Chairman of the company while retaining his chief executive role; additional, supposedly more independent board members would be added; and Musk would pay $40 million in fines. One final condition to the settlement—the pertinent one here: any material or forward-looking statements issued by Musk must be pre-approved by an internal Tesla process.
That’s where Musk fell short. On February 19 at 7:15 PM PT, Musk tweeted an impressive aerial photograph of “4000 Tesla cars loading in SF for Europe.” Under the photo, he wrote “Tesla made 0 cars in 2011, but will make around 500k in 2019.” About four hours later, Musk tweeted that he meant to say Tesla’s annualized run rate would be around 500,000 cars by the end of 2019, and that the company would produce about 400,000 cars during the year.
In a public tweet to his 24 million followers, Musk overestimated Tesla’s 2019 production projections by 25%. More than the simple failure to distinguish between run rate and actual numbers, the tweet conclusively demonstrated that Tesla and Musk were in violation of the SEC settlement agreement. Surely that tweet would not have gotten past an internal review, and, in fact, there had been no such review, the SEC found.
“On February 20, 2019, SEC staff asked Musk and Tesla to confirm whether Musk had complied with Tesla’s pre-approval procedures as required by the Court’s Final Judgment before he published the 7:15 and 11:41 tweets,” the SEC wrote in a filing on Monday.
“On February 22, 2019, in correspondence on behalf of both Musk and Tesla, counsel confirmed that Musk’s 7:15 tweet had not been pre-approved, as required by Tesla’s Policy and the Court’s Final Judgment,” the SEC continued.
A little remarked-upon personnel move at Tesla the morning of February 20 gave an early clue into Tesla’s legal position. Tesla general counsel Dane Butswinkas, who had been on the job about two months, abruptly left the company “due to a poor cultural fit,” returning to his law practice at Williams & Connolly in Washington, D.C. Jonathan Chang, 40 year old vice president - Legal at Tesla, was named Butswinkas’ immediate replacement.
The shakeup in the legal department came just a few weeks after Tesla’s fourth quarter earnings call on January 30, at the very end of which—after analysts were dismissed—Musk announced that Tesla’s chief financial officer Deepak Ahuja was retiring. Ahuja served as the Tesla CFO from 2008-2015, and rejoined the company in February 2017. Zach Kirckhorn, the 34 year-old financial analyst whose name Musk couldn’t actually remember during the call, will replace Ahuja, though there will be a transition period.
In our view, it is clear that the goals of the SEC settlement—to rein in an outside-the-box CEO who thinks the rules don’t apply to him—have not been met. That Tesla’s current C-suite will be able to have a meaningful impact on the way the corporation is run and the way it communicates with investors is far from obvious. It’s still Elon’s world, and his employees and board members are just living in it.