Money Stuff: Elon Wants His Votes

Tesla Inc. will hold its annual shareholder meeting this afternoon, with the main item on the agenda being shareholder approval of Elon Musk’s new $1 trillion stock compensation package. Will the shareholders vote yes? I mean? Yes? You have come this far. To hitch your wagon to Elon Musk for all these years and then be like “nah, this time he is asking for too much” seems a little silly. If this pay package is approved, maybe Elon Musk will turn Tesla into an $8.5 trillion robot company over the next decade, which will be great for shareholders. But if this pay package is not approved, (1) he probably won’t and (2) he might leave in a huff and turn Tesla into a, you know, $300 billion not-robots company over the next week. You don’t really have a choice. Bloomberg’s Kara Carlson writes:

If shareholders vote against the proposal, Musk “will take it as a negative sign on his leadership,” [Tesla board chair Robyn] Denholm said last week at Bloomberg’s office in New York. She warned it’s likely that Musk will leave, or not be an active executive at Tesla, if the measure fails. …

Corporate governance experts say the offensive leaves investors with little choice, even if they don’t support a trillion-dollar payday for the CEO.

“If you’re a rational shareholder of Tesla, you’re stuck between a rock and a hard place,” said Brian Quinn, a professor at Boston College Law School. The referendum on Musk, he said, is “basically a coercive vote.”

Right, if you are a shareholder of an Elon Musk company, the deal is (1) you give him whatever he wants whenever he wants it and (2) the stock goes up. Obviously corporate governance experts hate that; it’s terrible governance; really it’s no governance at all. Some investors hate it too, but the remedy for them is not to invest in Elon Musk companies, and they mostly don’t. The people who invest in Elon Musk companies are mostly fine with the deal, and that really is the deal.

Obviously if the shareholders vote no things will get interesting! Money Stuff does not normally publish on Fridays, but if Musk’s pay package gets voted down and he trashes the place and storms out tonight, I might have to see you back here tomorrow. But I’m betting he’ll get his money.

I have written a few times about an oddity in this package, which is that, according to Musk and Tesla’s board, the point here is not to give Musk $1 trillion of value, but rather to give him sufficient control over Tesla’s planned “robot army.” Musk wants at least 25% of the vote so that he can control the robots, but he only owns about 15% of the shares, and the only way to get him to 25% is to give him a huge new slug of economic ownership. And the only way to give him a huge new slug of economic ownership is to make the new shares contingent on aggressive operational and stock-price targets, which in turn means that the nominal value of the new shares, in the state of the world in which he gets them, is $1 trillion. Embarrassing for everyone.

And so we have talked about various potential approaches to give Musk 25% of the voting power of Tesla without giving him new economic ownership. For the most part those approaches seem impractical, and Denholm told the Financial Times that Tesla “searched high and low” for a way to give Musk more votes without more economic ownership and couldn’t find one.

But a couple of readers have emailed me with one more idea. The idea is a shareholder agreement: Tesla could sign an agreement with Musk saying that, as long as Musk is a 15% shareholder of Tesla, he has certain control rights. He gets to designate some board members, say, or he gets veto power over certain business decisions, or he can decide on Tesla’s robotics investments. Give him veto power over the board firing him as CEO. You give him contractual control over the robot army, control that can’t be overridden by a shareholder vote. [1]  That gives him the control he wants, without any more shares.

Can Tesla do that? Well! The precedent is that Moelis & Co., the investment bank, had a shareholder agreement a bit like that with Ken Moelis, its founder and chief executive officer. (Not robots, I mean, but Ken Moelis got to pick the board of directors and had a right of approval over financing decisions, budgets, new business lines, executive hiring and firing, etc.) A Moelis & Co. shareholder sued, arguing that the company couldn’t give up that much power to one shareholder-CEO. A Delaware court agreed, finding that those decisions have to be made by the board, not a shareholder; we talked about the ruling last year. It was controversial, and ultimately it was overturned by statute: Delaware’s legislature passed a new law saying that companies could have shareholder agreements handing over control rights to a shareholder. [2]  So, yes, a Delaware public company could do that. 

But Tesla is not a Delaware public company: It was, but then a Delaware court struck down Musk’s previous big pay package, so Tesla reincorporated to Texas in a huff. Everyone assumes that Texas law will generally be friendlier to Musk than Delaware was, and that the move to Texas will generally give Tesla more power to give Musk whatever he wants.

But not this! Texas’s law about shareholder agreements is more restrictive than Delaware’s; Tesla could enter a shareholder agreement like that, but only if it is approved by all shareholders, which is practically impossible in a public company. [3]  Because it is a Texas company, Tesla can’t just hand Musk control over its robot army. It has to hand him a huge pile of stock instead.

The problem of bond market liquidity is that sometimes I want to sell a bond, and sometimes you want to buy the same bond, but they are rarely the same time. There are a lot of bonds out there, and the probability that I will want to sell $10 million of one particular bond at the exact moment that you want to buy $10 million of that exact bond is low.

So traditionally dealers have intermediated bond trades: If I want to sell a bond, I call up a trader at a big bank and ask for a price, and she buys the bond from me, and she holds onto it for a while, and an hour or day or week later you call her up and ask to buy that bond, and she has it and sells it to you. She ties up her bank’s capital and takes market risk (if the bond goes down while she holds it, she loses money) to facilitate our trading. Also she doesn’t sit there passively: She’s constantly calling me to see if I have any bonds to sell, calling you to see if you want to buy any bonds, etc., trying to make stuff happen. For putting in this effort and taking this risk, she gets paid: She buys the bond from me at, say, 99.5 cents on the dollar, and sells it to you at 100, earning a spread of 0.5 cents on the trade.

I used to write a lot that “people are worried about bond market liquidity,” and what they were worrying about was the breakdown of this system. The big bond dealers used to be investment banks, and post-crisis capital and trading regulation made it harder for the banks to intermediate bond trades using their own balance sheets, and if they didn’t who would? This worry has become a lot less prominent in recent years, largely because that question got answered. It turns out that the big proprietary trading firms will increasingly intermediate bond trades, and also, more surprisingly, bond exchange-traded funds can help with the job. (If I want to sell some bonds, it turns out I can plop them into an ETF, and if you want to buy some bonds, you can pop them out of the ETF; the ETF’s balance sheet sort of replaces the dealer’s.)

Still there is in principle an entirely different solution to the problem. Instead of a someone (bank, prop trading firm, ETF) buying from me when I want to sell and selling to you when you want to buy, the bond market could just put out an announcement saying “hey if you want to buy or sell bonds, meet here at 4 p.m. each weekday.” The problem of coordinating in time is not that hard to solve. Just pick a time. Make it the same time every day. And then if I want to sell, I show up at 4 p.m., and if you want to buy, you show up at 4 p.m., and we trade with each other without needing any intermediation.

This is not a perfect solution, because if I get a hankering to sell at 10 a.m. I have to wait six hours to actually do it, and I might get antsy. Also many bonds trade quite infrequently, so if I show up at 4 p.m. on Tuesday and you show up at 4 p.m. on Friday we won’t trade with each other. But it does have benefits. For one thing, if I am a natural seller and you are a natural buyer and we meet at the same time in the same place, I can sell the bond at 99.75 and you can buy it at 99.75: I’m selling it directly to you, without paying a spread to a dealer, so I get a higher price and you pay a lower price than we would in an intermediated market.

Bloomberg’s Caleb Mutua and Isabelle Lee report:

MarketAxess Holdings Inc. is seeking to bring a feature of fast-twitch equity markets to the relatively sedate $9 trillion universe of corporate bonds: the daily closing auction.

The electronic trading company plans to launch a daily “closing print” for corporate bonds — the first standardized end-of-day price in a market long defined by opaque, ad hoc quotes. The goal is to deepen liquidity and lower trading costs, but the worry is there’s a tradeoff if it squeezes dealer profits tied to the very inefficiencies it would eliminate. …

While dealers long accustomed to the profits eked out from the inefficiencies brought about by traditional voice trading and request-for-quote processes may take an initial hit, [MarketAxess Chief Executive Officer Chris] Concannon views auctions as a new way to provide and profit from liquidity by offsetting multiple clients’ supply and demand imbalances. The auction format will allow dealers to also act as principals while capitalizing on price discrepancies that emerge during concentrated trading windows, he added.

The old line is that many corporate bonds trade “by appointment,” so you might as well just set up a standing appointment.

A crude story you might tell about retail stock brokerages is that stocks are boring. Meme stocks notwithstanding, US public companies are generally bigger and older and more stable than they used to be, and their stocks trade very efficiently. Offering stock trading to retail investors won’t get them all that excited, and it won’t make you that much money. The action is elsewhere. Offer them zero-day options! Offer them crypto! Offer them sports betting! 

Or the real fun is in private markets; offer them that:

Charles Schwab will acquire Forge Global for $660mn, uniting the private share marketplace with the large stock brokerage at a time when many big technology start-ups are delaying IPOs to remain closely held. …

“Through Forge’s leading marketplace, we’re uniquely positioned to deepen liquidity, improve transparency, and further democratise access to this increasingly important source of wealth creation for investors,” said Rick Wurster, chief executive of Schwab, in a statement.

The prospective deal comes just a week after Morgan Stanley acquired EquityZen, a direct competitor of Forge Global. Groups including OpenAI and SpaceX have secured valuations in private markets reaching hundreds of billions of dollars.

This year, Texas-based Schwab rolled out an alternative investment platform that allowed clients with more than $5mn in investible assets to get access to private equity and hedge fund investments. 

Historically the main distinction between public companies and private companies was that you could buy public companies’ stocks in your brokerage account, but you couldn’t buy private companies that way. That distinction kind of made sense to me, but it is collapsing.

Remember crypto treasury companies? The idea was that, for a surprisingly long time, the US stock market would pay $2 for $1 worth of crypto. So if you had a big stash of cryptocurrency, the move was to wrap it in a public company and sell shares of that company. The shares would trade for more than the value of the crypto, and you could sell new shares to buy more crypto and push up the value of your company more, etc., in what I called a “perpetual motion machine.” Well. “Perpetual” went too far. This worked for … longer than I expected, but still only for a few months. I mean, Strategy Inc. (formerly MicroStrategy) invented it and has been doing it more or less successfully for years, but really the widespread vogue for crypto treasury companies — and their ability to sell stock at huge premiums to net asset value — got going in earnest only about a year ago.

And now it’s pretty dead. Bloomberg’s Suvashree Ghosh and Alice French report:

Bitcoin’s slide below $100,000 for the first time since June has ratcheted up pressure on shares in digital-asset treasury firms, or DATs — Wednesday’s tentative bounce around $103,000 notwithstanding. The average value of tokens held by treasury firms now barely equals their combined market capitalization and debt — down sharply from earlier this year, when the holdings offered a much larger cushion. Retail investors seeking exposure through public companies like Metaplanet Inc., KindlyMD Inc., and Strategy Inc. have lost billions of dollars in value. And that was before the latest selloff.

An oversupply of DATs, waning retail and institutional buying, and fierce competition for day-trader capital are breaking what had been the virtuous cycle of this year’s crypto rally.

Now, some firms built to hoard tokens are selling into weakness — exerting the very pressure they were meant to offset.

Ah well. Strategy still trades at a premium to net asset value. But lots of others trade at a discount to net asset value, meaning that the obvious trade is to sell crypto to buy back stock:

Metaplanet in late October announced plans to start buying back its shares, borrowing up to half a billion dollars to do so via a credit facility secured against its Bitcoin holdings. A growing number of firms whose stated aim is to stockpile tokens are taking even more drastic steps. Sequans Communications S.A. just sold 970 Bitcoin to redeem some of its convertible debt. ETHZilla recently dumped $40 million worth of Ether to shore up its shares.

True believers in a HODL-based crypto treasury strategy find this annoying, but you kind of have to admire it as a trading strategy. I wrote recently that “it’s possible that, with the right mindset, a volatile crypto treasury company premium is even better than a consistently high one.” Schematically the trade is:

1. Borrow $100 to buy $100 worth of crypto, put it in a pot, and sell shares of the pot for $200.
2. Use $100 of the money you raised to pay back your borrowing, and the other $100 to buy $100 more of crypto.
3. Now the pot has $200 of crypto in it and trades at a valuation of $400.
4. Wait.
5. Eventually people will realize this is dumb and the shares of the pot trade down to, say, $150.
6. Sell $150 worth of crypto to buy back the stock.
7. Now you have $50 worth of crypto for free.

If this is a one-off thing — if the vogue for crypto treasury companies has come and gone — then, hey, free $50. If this is cyclical — if crypto treasury companies come back next year — then you can keep doing it over and over again. A crypto volatility perpetual motion machine.

The good story is that government regulators make regulatory decisions based on their wise and well-informed views about what best serves the public interest. There are various bad stories. Perhaps their decisions are influenced by intellectual capture by the industry they regulate, or ideological hostility to that industry, or laziness, or stupidity, or empire-building, or grandstanding, or a desire to position themselves to move into lucrative private-sector jobs, or simple bribery, or complicated bribery, or I am sure you can think of other bad things. What percentage of regulatory decisions fall into one of the bad buckets? It seems hard to measure, but you probably have an estimate and it’s probably high.

Are regulatory decisions ever influenced by personal pique? Does a regulator ever say, like, “that guy cut me off in traffic the other day, so I am going to deny him a regulatory approval”? Probably? Sometimes people leave private sector jobs and go into government and take actions that favor their former employer. Surely sometimes people leave private sector jobs on bad terms, and go into government and take actions that harm their former employer? 

I do not generally see a ton of stories like that, though I have to say they have picked up a lot in the Trump administration. President Donald Trump got mad at Elon Musk, for instance, and threatened to terminate SpaceX’s government contracts; the tone at the top is very much “regulate by personal vendetta.” Here’s an unusually vivid case:

A Food and Drug Administration official who resigned on Sunday was sued by a Canadian pharmaceutical company [Aurinia Pharmaceuticals Inc.], which accused him of soliciting a bribe and tanking its stock with false statements as part of a revenge campaign against a former colleague.

Dr. George Tidmarsh was hired in July by FDA Commissioner Dr. Marty Makary to lead the agency’s drug division, a top role regulating much of the country’s pharmaceutical industry that gave Tidmarsh a prominent perch in the Department of Health and Human Services headed by Robert F. Kennedy Jr. ...

A lawyer for Tidmarsh, Joseph Galda, said that he didn’t solicit a bribe. ...

Tidmarsh in September posted on LinkedIn that an FDA-approved kidney drug, voclosporin, had “not been shown to provide a direct clinical benefit for patients,” a highly unusual move for a government official in his position. The FDA said when it approved the drug in 2021 that the medicine had shown a “clinically meaningful benefit” in trials. Tidmarsh later took down the post and said he had been speaking in a personal capacity.

But the stock of Aurinia, the only maker of voclosporin, dropped 20% in a few hours, wiping out more than $350 million of market value, according to the lawsuit.

Here is the lawsuit, which alleges that Tidmarsh had a “longstanding personal vendetta against Kevin Tang, who currently serves as Chair of the Board of Aurinia and manages Tang Capital Partners, LP,” Aurinia’s largest shareholder. Tidmarsh used to be the chief executive officer of La Jolla Pharmaceutical Co., where Tang was also a big shareholder and chairman of the board, but Tang pushed him out in 2019. And:

Over the next six years, Dr. Tidmarsh repeatedly threatened that he would exact revenge against Mr. Tang over these ousters, writing in texts and emails to Mr. Tang and his business associates that he would “be exposed,” that there was “[m]ore bad karma to come,” that “[t]he pain is not over,” and that “I’m Not powerless.”

And then he joined the FDA and allegedly seized the opportunity, posting that drugs produced by Tang’s companies were bad and that the FDA should revoke their approvals. He didn’t actually do it, but posting about it was enough to drive down Aurinia’s stock. (It has since recovered, and Tidmarsh’s resignation from the FDA was particularly good for the stock.)

Anyway Aurinia sued Tidmarsh for defamation, but a reader emailed to ask the obvious-for-me question, which is: Is it securities fraud? I mean, the stock went down. I assume that Tidmarsh wasn’t trading Aurinia’s stock, so this theory is a stretch, but still. Driving down a public company’s stock out of pique does seem bad.

One Battle After Another — The AMC Saga. Pfizer Preps Improved Offer in Metsera Bidding War. OpenAI Isn’t Yet Working Toward an IPO, CFO Says. Robinhood Bets Big on Prediction Markets. Disney Signs DraftKings as ESPN’s New Sports-Betting Partner. US Companies Announce Most October Job Cuts in Over 20 Years. Homebuilders Bet on 1% Mortgage Rates to Wake Up US Buyers. JPMorgan hit with record fine from German finance watchdog. Brussels opens probe into Deutsche Börse and Nasdaq over derivatives. Egan-Jones Probed by SEC Over Its Credit Ratings Practices. Crypto exchange Coinbase fined €21.5mn by Irish central bank. EchoStar Takes $16.5 Billion 5G Hit, Sells SpaceX More Spectrum. EU Is Set to Dramatically Rewrite ESG Rules for Fund Managers. Using Premium Credit-Card Rewards Is Becoming a Part-Time Job. End of The Line: how Saudi Arabia’s Neom dream unravelled. Somali pirates board first ship in 18 months. JPMorgan’s Billionaire Clients Want Sports Teams More Than Fine Art.

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