Tesla Board’s Independence Is Tested by Musk’s Buyout Idea

Tesla Board’s Independence Is Tested by Musk’s Buyout Idea

August 10, 2018 0 By news club


The people tasked with overseeing

Elon Musk’s

plans for

Tesla
Inc.


TSLA -4.83%

—its board of directors—have received solid support from shareholders over the years but criticism from some investors and advocates who say they lack independence.

Boards have enormous responsibility in corporate deals, especially ones as complex and fraught as the buyout of Tesla that Mr. Musk suggested this week. Most of Tesla’s directors have close business or personal relationships with Mr. Musk that they would have to balance against their obligation to ensure that any deal serves the interests of Tesla shareholders beyond its famous leader, corporate governance specialists say.

The board’s role in the possible buyout was clouded by Mr. Musk’s unusual way of announcing the idea—in a sudden, very brief tweet on Tuesday. That tweet was followed more than 20 hours later by a short statement from six directors saying the board had met several times since Mr. Musk told it of his go-private idea last week, and that it was “taking the appropriate next steps to evaluate this.”

The sequence of events suggests that “the board review has been very, very informal,” said Adam Epstein, who heads corporate-governance consultant Third Creek Advisors.

Mr. Musk’s announcement attracted scrutiny from the Securities and Exchange Commission, which has asked Tesla whether Mr. Musk was truthful when he said in his tweet that he had secured funding for the buyout.

Tesla didn’t respond to requests for comment on the SEC queries.

On Thursday, Tesla shares fell for a second straight day to $352.45, leaving them below their level before Mr. Musk’s announcement and about 16% under the $420 target price he set for a buyout of the electric-car maker.

Tesla’s board has nine members. Mr. Musk, who owns about a fifth of Tesla, is chairman as well as chief executive. He and his brother, Kimbal, are the only directors the board doesn’t label as independent.

Tesla says that it evaluates numerous factors in determining directors’ independence, including their commercial, accounting, legal, banking, consulting, charitable and familial relationships.

Several other directors are close to Mr. Musk, including

Brad Buss,

who was previously chief financial officer at SolarCity, the renewable energy company Mr. Musk led and that Tesla acquired in 2016.

Lead independent director

Antonio Gracias,

founder of Valor Equity Partners, has invested in several Musk ventures going back to

PayPal
,

which Mr. Musk co-founded. He was a SolarCity director and is a director at Mr. Musk’s rocket company, Space Exploration Technologies Corp., or SpaceX. The Musk brothers have invested with Valor, according to Tesla’s proxy statement.

Ira Ehrenpreis,

who heads Tesla’s compensation committee and its nominating and governance committee, also is a SpaceX investor, as is

Steve Jurvetson,

a venture capitalist who is on leave from Tesla’s board. Both have been associates of Mr. Musk for years.

Messrs. Gracias, Buss and Ehrenpreis didn’t respond to requests for comment. Mr. Jurvetson declined to comment about the proposed deal and didn’t respond to questions about the board’s independence.

Board independence has received more attention in recent years. Governance specialists point out that regulatory requirements for independence have limited scope.

Todd Henderson, professor at the University of Chicago Law School, says the value of independence can be overstated. Still, he says following normal procedure for cases like Tesla’s—such as forming a special committee on the board to consider the buyout—would improve the reception for any deal.

Boards normally play active roles overseeing major transactions, and in management-backed buyouts their importance can be greater because directors must negotiate against CEOs on behalf of other shareholders.

Six months before PC-maker Dell announced founder

Michael Dell’s

plan to take the company private in 2013, its board formed a special committee to negotiate terms with him, according to company filings. When the deal was announced it came with a detailed financing plan including backing from the equity sponsors and debt underwriting from Wall Street banks. Afterwards the board clashed with Mr. Dell and his partners as directors sought a higher price for shareholders. They won a slight increase.

Shareholder advocates have frequently challenged Tesla’s board, with little success.

Glass Lewis, one of two major shareholder advisory services, strongly opposed the proposal for Tesla to buy SolarCity, calling it a “thinly veiled bail-out plan” and saying the Tesla board was “rife with conflicts.” Shareholders approved the deal.

Last year, under pressure from shareholders including California State Teachers’ Retirement System to add two independent directors, Tesla announced the addition of

James Murdoch,

CEO of

21st Century Fox
,

and

Linda Johnson Rice,

CEO of Johnson Publishing Co. (21st Century Fox and News Corp, parent company of The Wall Street Journal, share common ownership.)

This year, when Mr. Murdoch was up for re-election, Glass Lewis and rival adviser Institutional Shareholder Services recommended against him, saying he had too many other board and executive commitments to provide effective oversight. Mr. Murdoch was re-elected with 90% of the votes.

A spokeswoman for Mr. Murdoch declined to comment. Ms. Johnson Rice, who wasn’t up for reelection, didn’t respond to an email.

Also this year, the Tesla board’s compensation committee—composed of Mr. Buss, Mr. Gracias, Mr. Ehrenpreis and

Robyn Denholm,

chief operating officer of Telstra Corp.—recommended a 10-year compensation package for Mr. Musk that Tesla valued at $2.6 billion. Tesla said the package would incentivize Mr. Musk to remain and would help Tesla achieve its goals.

The two advisory services both blasted the proposal, with ISS saying “the grant value is unprecedented and sets the new high-water mark for an individual executive equity award at a U.S. public company.”

Shareholders approved the package in March with 85% of the vote.

Write to Rolfe Winkler at rolfe.winkler@wsj.com



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