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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.

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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

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a person I listened to who ran a public company which was bought by private equity and delisted said he would never ever run a public company again because of all the bull from regulators.

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I would say that 90% of the requirements for running an SEC reporting company (the SEC is not the only regulator for public companies) are good practices -- quarterly reviewed financial statements, annual audited financial statements, massive disclosures in the annual report, offsite IT backup, and the necessity to elect/configure a Board of Directors in a certain manner (committees, financial expert, cyber expert, independent directors).

Private companies are rarely as thorough. When I ran public and private companies I ran them almost identically, but in the public company I did adhere to filing deadlines with a sense of religious zeal.

The other 10% is nonsense. The DEI/ESG initiatives are nonsense.

I used to be called on the carpet for using the term EBITDA which is not a GAAP defined term. To be able to use it, I had to "derive" it every time.

Public companies get a 3 year audit from the local SEC office which was always quite good. It's free and you have to reply as to what you are going to do. This is where they were constantly bringing up the EBITDA issue.

Depending upon one's industry the other regulators one deals with may be local, state, or the Feds. I was usually dealing with state regulators and as long as you ran a clean shop, it was not a huge hassle other than the reporting.

JLM

www.themusingsofthebigredcar.com

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One of the problems with public company disclosures (as inadequate) is that hindsight is 20-20. Nearly all the class action litigation by the ambulance-chasing bar is a claim for inadequate disclosure of material events, risks, information--which becomes material after-the-fact. Companies are expected to know what is to happen in the future (the future being unknowable) and lay out what they're doing to mitigate the unknown.

The result is pages and pages of narrative disclosures of everything under the sun--and nobody--except ambulance-chasers plumbing for a lawsuit reads the disclosures. The recent effort (now turned away) regarding climate change/global warming is a case in point.

The consequence of these voluminous disclosures is the needle in the haystack problem. Time is money, and time-consuming problems of unknow payoffs get overlooked--except by those in search of infrequent though high return payoffs, like ambulance chasers.

In other words, disclosure becomes insurance against lawsuits rather than an effort to inform public investor markets.

What creates or destroys value is surprise--surprising information, e.g., creation, innovation, discovery, etc. If it is all knowable in advance, there's no need for publicly traded security markets--for the price discovery process-- as prices will be obvious.

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Those are interesting details. On the other hand, I really dislike the idea that it's fair to look back at a bet (gamble, risk, investment, speculation) that could have gone bust and deciding that *since it paid out* the reward was excessive. It's nonsensical.

I freely admit I don't know the details of this instance, but in general: if someone broke rules or laws in putting a compensation package in place, prosecute those. It's not right (and seems like it shouldn't be legal) to assert a value judgment ("excessive") on the results absent a finding of fact on the ethics or legality of the actions.

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Just to factually ground the convo -- the Chancellor of the Delaware Chancery Court went on for 200+ pages, but what struck me was the fixation on the inadequacy and defects in the construction, decision making, and lack of negotiating rigor by the board.

She protested that the board was essentially Musk cronies and those who had a high level of gratitude to Musk for having created once in a lifetime wealth for them personally.

For goodness sake, Musk's brother is on the board, so it is nearly impossible to refute that assertion.

In the testimony, every board member acknowledged that Musk was the one who controlled the dialogue on the employment agreement and that the deal did not change during the negotiations.

Little known fact: six months after the contract, Musk himself reduced some of the terms to his own detriment.

It was the inadequacy of the process that doomed Musk, not necessarily the actual terms of the agreement though they came in for their own bashing.

As to its financial fairness, the results speak for themselves, Musk delivered incredible shareholder value, but that did not make up for the issues as to how the comp plan was devised, approved, and communicated to the shareholders.

Musk's deal was the largest such contract in US history and #2 was his 2012 contract.

In the end, the Chancellor decided it was not fair to shareholders and, thus, voided it. The burden is now on Tesla to fix the defects in its board and to negotiate a new contract.

This is slightly compounded by Musk's recent insistence that he own at least 25% of Tesla to ensure his motivation. He diluted himself with his acquisition of X. Currently, he owns 13%.

JLM

www.themusingsofthebigredcar.com

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author

Recent Layoffs FWIW

1. Twitch: 35% of workforce

2. Hasbro: 20% of workforce

3. Spotify: 17% of workforce

4. Levi's: 15% of workforce

5. Zerox: 15% of workforce

6. Qualtrics: 14% of workforce

7. Wayfair: 13% of workforce

8. Duolingo: 10% of workforce

9. Washington Post: 10% of workforce

10. eBay: 9% of workforce

11. Business Insider: 8% of workforce

12. Paypal: 7% of workforce

13. Charles Schwab: 6% of workforce

14. UPS: 2% of workforce

15. Blackrock: 3% of workforce

16. Citigroup: 20,000 employees

17. Pixar: 1,300 employees

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Feb 1·edited Feb 1

Wayfair has me worried, as they are making a big investment in Wilmette, that doesn't seem to be progressing.

Not that Wilmette doesn't have more flops coming, with their copying the worst practices of Evanston to drive business away, but it would be good to get the old Carson Pirie Scott building in use again.

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Jan 31Liked by Jeffrey Carter

Great piece and another despicable decision by the socialists that are attempting a complete takeover of America.

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Jan 31·edited Jan 31Liked by Jeffrey Carter

@Jeffrey Carter

Jeffrey,

While our value systems are closely aligned, but not the same, you still hit it out of the park in terms of pointing out the strategic, inflection point issues that face democracy, capitalism, and over-regulation. You demonstrate effectively how many things are outside our control, but clearly under control by others, often with nefarious values. Thank you.

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Jan 31Liked by Jeffrey Carter

You are spot on. There are days when I think back to the great Ty Webb.....Danny, this isn't Russia, is it Danny......

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I wonder how the recently passed Corporate Transparency Act fits into all this?

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Jan 31·edited Jan 31Liked by Jeffrey Carter

General agreement. Make sure to watch the video I linked to before. They really go off on Lina Kahn for not understanding how markets work.

https://www.youtube.com/watch?v=4o-s541UKgI

On Musk's pay - I agree with the comment above. There's stink there with the BOD comp committee at least.

And also look at the Trump camp defending tariffs this week. Tariffs are attempts to pick winners too.

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author

There might be stink with that committee----but unless there is fraud it's really not the government role to get involved. There is no fraud here.

Agree 2000% on tariffs. Pure taxation on consumers, props up lame companies....

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What we have here is a basically lawless government, using the law system as a tool of oppression in a cold civil war. Probably gonna ramp up this year:

https://redstate.com/videos/2024/01/31/citizen-journalists-uncover-how-close-we-are-to-war-n2169469

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