Tesla has a bruising fight ahead after Musk’s $40m settlement

While Musk and Tesla have agreed to bury the hatchet for now, given the troubles that the CEO and the company are mired in, it’s a bumpy ride ahead for both

Los Angeles

It looked like it was curtains for Elon Musk.

The Securities and Exchange Commission (SEC) charged Tesla Inc.’s chief executive with fraud, and it seemed to some like an airtight case: Musk tweeted to his 22 million followers on August 7 that he had a deal to take the company private at a premium price, though no such deal existed. But a swift settlement of the government’s lawsuit — with Musk staying on as CEO as part of the agreement — has given the beleaguered entrepreneur another shot at fixing the ailing Tesla.

The company he’ll continue to helm is beset with troubles and facing significant challenges, including penalties stemming from the legal settlement announced on Saturday.

Musk and Palo Alto-based Tesla agreed to pay a total of $40 million (Dh147.12 million) to settle the case, and he will give up his chairmanship for at least three years. The electric-car maker is also required to install an independent chairman and two new board members, though Musk will remain on the board, according to terms of the settlement.

Musk and Tesla will each pay $20 million to settle the case; both reached the deal without admitting wrongdoing. The company declined to comment.

The SEC had charged Musk with fraud last Thursday, alleging that his tweets about taking Tesla private — at $420 a share — were “false and misleading”. As part of the lawsuit, the agency asked a federal court to remove him from the company’s leadership and ban him from running a public company.

Several observers believe Musk and his company struck a good deal, given the circumstances. “In three words, the SEC blinked,” said Lloyd Greif, CEO at Los Angeles investment banking business Greif & Co. “This is clearly a back-off; it’s a victory for Tesla. The SEC had him with an open-and-shut case. But maybe they went too far with the original complaint.”

In recent months, the billionaire inventor has smoked marijuana on a comedian’s podcast livestreamed on YouTube, feuded with countless Twitter users and made derogatory comments about a diver involved with the rescue of boys trapped in a cave in Thailand, prompting a lawsuit from the man. Musk, who had founded rocket company SpaceX in 2002, is considered a visionary. He joined Tesla as a startup in 2004 and became its CEO in 2008, producing powerful, attractive vehicles that forced the auto industry to take electric cars seriously.

Poor service, slow deliveries

But his personal foibles come at a crucial time for Tesla: It faces significant cash shortage issues and problems surrounding the rollout of the Model 3 sedan.

Musk had told investors the company would be making 10,000 Model 3s a week by now, but it is turning out less than half that amount. Twitter, Facebook, Reddit and Tesla online forums are filled with customers complaining about poor service, slow deliveries and quality problems that range from poor paint jobs to dead batteries to software glitches that won’t let them start their cars.

Meanwhile, the company has been roiled by high executive turnover. Dozens of executives have left Tesla. The most serious issue the company faces is a cash shortage. Tesla, which had $2.2 billion in cash on hand at the end of the second quarter, will need billions of dollars of outside capital over the next year just to keep the Model 3 programme running and pay down debt.

Next month, $230 million in convertible debt comes due. Another $920 million must be repaid in March — unless Tesla stock hits $359.87 after December 1.

Although the SEC settlement brushes away some clouds for potential investors, the company remains under a Department of Justice criminal probe.

Musk and Tesla may have not been the only parties keen on making a deal. Greif and others believe that SEC, which had sought in its lawsuit Musk’s removal from the company, likely felt the need to come to a settlement. “The SEC is a government organization subject to political pressure, and you can bet they received a lot of pressure since announcing the penalty,” Greif said, adding that if Musk had been kicked out “it would have been the death knell for the company.”

— Los Angeles Times

TIMELINE:

What really happened when Musk claimed to take Tesla private?

Last month, Elon Musk took to Twitter to announce that he was considering taking Tesla private for $420 per share and had secured funding. Last week, the US Securities and Exchange Commission (SEC) in a lawsuit outlined a detailed timeline of events leading to Musk’s going-private tweet and its aftermath, as follows:

January 2017: Musk began a series of three or four in-person meetings with representatives of a sovereign investment fund. Reuters later identified it as Saudi Arabia’s Public Investment Fund. During these meetings, according to Musk, the lead representative of the fund verbally expressed interest in making a large investment in Tesla.

July 31, 2018: In the first meeting in months, lasting 30-45 minutes, the fund’s lead representative told Musk that the fund had recently bought almost five percent of Tesla’s stock, expressed interest in taking Tesla private and confirmed that he was empowered to make investment decisions for the fund. Musk later said he assumed that the lead fund representative was proposing a “standard” going-private transaction, but acknowledged that the terms of any such deal were not discussed. Nothing was exchanged in writing, and there was no discussion of confidentiality. The SEC said the meeting lacked discussion of even the most fundamental terms of a proposed going-private transaction.

August 2: After the US market closed, Musk sent an email with the subject, “Offer to Take Tesla Private at $420,” to Tesla’s board, chief financial officer, and general counsel. The SEC said that according to Musk, he had calculated the $420 price per share based on a 20 percent premium over that day’s closing share price, because he thought 20 per cent was a “standard premium” in going-private transactions. Musk also picked $420 because he had recently learned about the number’s significance in marijuana culture and thought his girlfriend “would find it funny”. Before Musk’s July 31 meeting with the sovereign investment fund, Tesla’s stock had closed at about $298 per share and a 20 percent premium over that price would have indicated a price of about $358, the SEC noted in its lawsuit.

August 3: In response to Musk’s email, Tesla’s board had a telephone meeting, where Musk told board members that he wanted existing investors to stay with the company. At least one board member told Musk that it would be “really difficult for small investors” to remain shareholders in private Tesla.

August 6: Musk discussed a potential going-private transaction with a private-equity fund partner with previous experience in such deals. The SEC noted that according to the partner, the transaction structure that Musk was contemplating was “unprecedented”.

August 7: Musk tweeted at about 1248 ET, during market hours: “Am considering taking Tesla private at $420. Funding secured.” He went on to post several tweets and engaged with other Twitter users regarding his go-private plans. He did not notify Nasdaq prior to publishing his tweets, as required by the stock exchange’s rules. At this point, the SEC noted, Musk had not made several necessary checks, including not having further discussion with the sovereign fund, providing the board more details, or contacting existing Tesla shareholders. Twelve minutes after Musk’s first tweet, Tesla’s head of investor relations sent a text to Musk’s chief of staff asking: “Was this text legit?”

August 10: Musk contacted the sovereign wealth fund for the first time since their July 31 meeting, the SEC said.

August 13: Tesla published a blog post attributed to Musk called “Update on Taking Tesla Private”. In the post, Musk attempted to walk back his August 7 tweets, saying when he first tweeted his intention, it was based on his impression that there was “no question” that a deal with the sovereign fund could be closed and that it was “just a matter of getting the process moving.”

August 24: Post published on Tesla’s public blog announced that Musk had abandoned the process of attempting to take Tesla private.

September 27: The US Securities and Exchange Commission filed a lawsuit against Musk for fraud and sought to remove him from Tesla.

— Reuters & AFP

 

Founders who lost control of their own companies

Elon Musk had himself sacked his predecessor Martin Eberhard, who founded Tesla in 2003. We look at five other founders who resigned or were sacked from their company:

Jack Dorsey: Twitter

Dorsey was fired from the company he had co-founded in 2008 by its board for mismanagement.
Jerry Yang: Yahoo

Yang stepped down as CEO in 2009 and later from the Yahoo’s board in 2012, after a turbulent reign.

Steve Jobs: Apple

A power struggle with John Sculley, the CEO he had recruited, led to Apple’s board of directors exiling founder Steve Jobs from the firm.
Kevin Systrom and Mike Krieger: Instagram

Chief executive Kevin Systrom and Mike Krieger, Instagram’s chief technical officer, are leaving the company in the next few weeks.

Travis Kalanick: Uber

Kalanick resigned after pressure from shareholders over several complaints of sexual harassment.

— Compiled by Siddesh Mayenkar/Senior Reporter

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