03 February 2024
Tesla chief Elon Musk wants to move the company's incorporation, or registration, from the American state of Delaware to Texas. Musk said he will ask Tesla shareholders to vote on the move after a Delaware judge ruled against his 2018 pay deal valued at $55.8 billion.
"Never incorporate your company in the state of Delaware," Musk posted on social media service X shortly after the ruling.
Tesla and many major companies, including Amazon, Google, Disney, and Walmart, keep their headquarters in other states. But they all register in the small eastern state of Delaware because of its tax laws and business courts.
The financial publication Forbes reports that 68 percent of the top American businesses are incorporated in Delaware. Companies that are registered in Delaware do not pay corporate income tax if they do not do business in the state. Even if they do business in the state, companies can also avoid paying corporate tax by setting up what is called a "shell" company. A shell company legally owns property but does not carry out any business.
Dan Coatsworth is an expert at AJ Bell, a British investment company. He told Reuters that Musk's plan is the kind of behavior from someone "who always looks for an alternative if he can't get what he wants."
Musk's idea, should he go through with the vote, is not without risk. Legal experts said investors might take legal action if he tried to move the state of incorporation to Texas. Legal action is even more likely if it was seen as a move to get his pay deal rather than to help Tesla.
Musk's pay package
In 2022, the research firm Equilar carried out a study for The Associated Press. The study said that the median pay deal for a chief executive officer, or CEO, of a company in the Standard & Poor 500, an index of top companies, was valued at $14.8 million.
It would take an average worker at one of those companies more than 185 years to earn what their chief executive gets in just 12 months.
Musk's pay package of $55.8 billion, set in 2018, was much larger than usual. So, a shareholder brought legal action. His lawyer argued that it was proposed by company directors with ties to Musk. And shareholders were given misleading and incomplete information.
In 2018, Tesla estimated the value of Musk's compensation package at $2.28 billion. But its value has grown as Tesla's stock price increased. Under the plan, Musk would receive stock options each time Tesla's market value rose by $50 billion. That means Musk would have the chance to buy nearly 304 million shares for $23.34 each.
Tesla stock is now trading at about $190 a share compared with $21 at the start of 2018. By comparison, in 2022 the median worker at Tesla made $34,084.
Last week, Chancellor Kathaleen St. Jude McCormick of Delaware ruled that the process to set Musk's pay package was "flawed" and the price "unfair." She ruled that Tesla's directors lacked independence from Musk and the big pay package was not needed for Tesla to keep Musk or meet its performance goals.
McCormick's ruling moved Musk out of the top spot on the Forbes list of wealthiest people. The publication removed $25 billion from his wealth putting him below French businessman Bernard Arnault.
How do companies decide on CEO pay?
To decide how much to pay their CEO, company directors often look at how much other companies are paying theirs. General Motors, for example, looks at Boeing, Ford, IBM, and other large companies to set its pay.
In 2022, General Motors gave its CEO, Mary Barra, a pay package valued at $29 million. And Jim Farley, the CEO of Ford, another car company, received $22 million that year.
Although Tesla makes automobiles, investors often compare its stock with technology companies. Musk is often compared to Mark Zuckerberg of Meta and Apple's Tim Cook.
In 2023, Cook's pay was valued at $63.2 million. A year earlier, Cook received about $99 million.
Musk's supporters argue that he is not like any other CEO and should not be paid like other CEOs. They said he has built Tesla into the most valuable automaker in the world. Last year, Tesla sold more electric vehicles than any other company. And the company's success has forced the rest of the auto industry to plan for electric vehicles.
Business law experts say any new pay package for Musk will likely be back in court again without independent directors or changes in the decision process for pay.
Before the ruling, however, Musk wrote on X that he wanted Tesla company directors to double his share to give him 25 percent voting control of the company. If not, Musk said he would develop artificial intelligence and robotic software outside of the company.
I'm Mario Ritter Jr. And I'm Faith Pirlo.
Hai Do adapted this report for VOA Learning English from The Associated Press, Reuters and other sources.
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Words in This Story
alternative –n. another possible choice that is different from the one currently under consideration
median –n. the middle value in a group of numbers
stock option –n. a contract that gives the owner the right to buy stock at a set price
flawed –adj. containing a mistake or something that should not be there