The Government Picks Winners And Losers
Two Separate Decisions Show How The Free Market Doesn't Work
This week has been a great week for anyone who loves wrecking capitalistic businesses. There are a lot of those kinds of people all over America.
The first was the Europeans. European bureaucrats never saw a business that they didn’t want to control. They killed the deal between Amazon ($AMZN) and iRobot, makers of the robotic vacuum cleaner Roomba. If you haven’t read “The Rotten Heart of Europe” by Bernard Connelly, you should. It will help you understand do-nothing agencies like the World Economic Forum.
The result. The CEO of iRobot is stepping down and will be laying off 350 employees. They don’t have the cash flow to plunge into research and development and have an operating loss of $265 to $285 million. They are a dead duck.
Earlier this year, Adobe ($ADBE) abandoned a $20 billion dollar buyout of Figma. Nvidia ($NVDA)abandoned a $40 billion deal to acquire Arm . In early 2022, Meta ($META) was unable to buy Giphy. All cited huge regulatory challenges.
Yesterday, a Delaware judge ruled that a pay plan that was approved by the Tesla TSLA 0.00%↑ board of directors and voted on by shareholders was illegal. A recalcitrant communist shareholder who owned 9 shares of stock filed suit on a plan approved in 2018.
Judges should not be ruling how much companies can pay their employees. Period.
If the governments of the world wanted to see the rich get richer, this past quarter was a good primer on how to make it happen. What’s the incentive to go public?
The public markets are unrestricted. Any Tom, Dick, or Harry can buy stock and hope it appreciates in value. The private markets are heavily restricted. Only the wealthy can play and even if you are wealthy, you need access to deal flow and to network to make something happen. The wealthier you are, combined with being active, you get to take a look at a lot of pitches.
The average schmuck is frozen out.
I don’t care if you hate Elon Musk’s guts or not for turning X into a free speech platform. Tesla went public at $19 per share. If you invested $10,000 on the IPO day, it is worth over $2MM today. The company went public at a market capitalization of $1.7 billion. Today it’s worth $600.34 billion. Elon created value for shareholders and employees of 35214.12%. Name any CEO who has done that since 2010.
Musk was going to be paid $55 billion in stock options. Not cash. Not salary. Stock options. He had incentives he had to hit. This was not a free lunch.
But, the long hand of the government, a centralized judge’s decision, swiped away an arms-length negotiation between a board and a CEO. In this climate, it’s hard to say the decision is not political.
This is not a lot different than the Stalinesque charges and verdicts out of NY State courts against Trump. Trump valued his property at arm’s length with bankers and actually paid off his loans. Based on the value of the properties, he paid more property tax than he should have to the state given that they think he overvalued properties. What gives the government any right to get in the middle of that transaction? Trump is a private company as well, so there are few shareholders.
In the “rape” case, Trump never met the women and there was no tangible evidence that anything ever happened. It was a “show me the man and I will show you the crime” judgment.
Hopefully, both will not win on appeal but my guess is it will have to go over to the federal courts for Trump to get a modicum of justice.
You might think $55 billion is obscene. That’s not a positive economic judgment. That’s a normative economic judgment. What if Tesla becomes the #1 robot maker in the world with all the software to boot? Does the company double in value? Triple? Quadruple?
No one knows.
Musk will certainly appeal and will have the board of Tesla on his side I would assume. I do not know anything about chancery law in Delaware, so I can’t speculate on what might happen. I do know that we will see more lawsuits like this from recalcitrant shareholders against CEOs who negotiated pay with their boards.
I also predict that companies will stay private longer, and more companies will try to leave the public marketplace and go private if they can.
I should have added that I disagree with Musk on Delaware incorporation.....it's simply the best place to do it given all the choices. There is a ream of case law and precedent that doesn't exist in other states. Nevada is second best, but not a close second best.
The Delaware Chancery Court gives and the DCC takes. It is the preferred venue for a public company (it's good for companies which is why most public companies are chartered therein), but it is a fierce protector of the individual investor (Sec 220 Books and Records disclosure rules) when it comes to the actions of management and directors.
In the Musk issue, a minority investor protested the Musk comp package was excessive, the product of a process fraught with conflicts of interest, the product of a flawed, inadequate negotiation, inadequately disclosed, and failed to alert shareholders to the magnitude of dilution it created.
The defense to those charges was that it was approved by shareholders (it was) but that does not neutralize the charge the company and the board failed to make adequate disclosures as to amongst other things how it was negotiated and the magnitude of dilution for the shareholders.
In the Judge's ruling there is the question -- after the obvious size, conflict, disclosure, dilution issues -- as to whether such a gigantic package was actually necessary to retain and motivate the CEO of Tesla.
The story told is this: Elon Musk made a proposal for his own comp package, ran it by a board packed with his pals, had it approved, it was run by the shareholders but with inadequate and incomplete disclosures.
Nothing wrong with Musk proposing the comp deal. The rest of it is in the eye of the beholder. In this case, the Judge cried, "Foul!"
The Musk deal was the largest comp package in the history of comp packages and #2 was his 2012 comp package.
I do not like courts messing with the comp affairs of public companies (full disclosure I ran a public company and I used to write my own comp deals).
Having said all of the above, one is forced to say, "Hmmmmm."
Not taking a side, but just wanting everyone to know the real details.
JLM
www.themusingsofthebigredcar.com