Michelle Price and Alexandria Sage
Washington/San Francisco | Tesla and Elon Musk have agreed to pay $US20 million ($27 million) each to financial regulators and the billionaire will step down as the company’s chairman but remain as chief executive, under a settlement that caps a tumultuous two months for the car maker.
The securities fraud agreement, announced by the Securities and Exchange Commission on Saturday (Sunday AEST), will come as a relief to investors, who had worried that a lengthy legal fight would only further hurt the loss-making electric car company.
The SEC had on Thursday charged Mr Musk, 47, with misleading investors with tweets on August 7 that said he was considering taking Tesla private at $US420 a share and had secured funding. The tweets had no basis in fact and the ensuing market chaos hurt investors, it claimed.
Investors and corporate governance experts said the agreement could strengthen Tesla, which has been bruised by Mr Musk’s recent behaviour, which included smoking marijuana and wielding a sword on a webcast, and attacking a British rescue diver via Twitter.
The settlement should place more oversight on Mr Musk while not taking the “devastating” measure of forcing him out, said Steven Heim, a director at Boston Common Asset Management, which owns shares in Tesla battery maker Panasonic.
Tesla must appoint an independent chairman, two independent directors, and a board committee to set controls over Mr Musk’s communications under the proposed agreement.
“The prompt resolution of this matter on the agreed terms is in the best interests of our markets and our investors, including the shareholders of Tesla,” SEC Chairman Jay Clayton said in a statement.
The SEC charges against Mr Musk on Thursday shaved about $US7 billion off high-flying Tesla, knocking its market value to $U45.2 billion on Friday, below General Motors’ $47.5 billion.
In the settlement, the agency pulled back from its demand that Mr Musk, who is synonymous with the Tesla brand, be barred from running Tesla, a sanction that many investors said would be disastrous.
“I think this is the best possible outcome for everyone involved,” said Ivan Feinseth of Tigress Financial Partners, who rates Tesla “neutral”. He said the SEC’s penalty was only a slap on the wrist for Mr Musk.
“The fact that he can remain CEO is very important for the company.”
Neither Mr Musk nor Tesla admitted or denied the SEC’s findings as part of the settlement. Tesla and Mr Musk did not immediately respond to requests for comment.
The entrepreneur had been directly involved in almost every detail of Tesla’s product design and technology strategy, and drove the company’s employees to extraordinary achievements – much as another Silicon Valley chief executive, Steve Jobs, did at Apple.
Mr Musk is now required to step down as chairman of Tesla within 45 days, and he is not permitted to be re-elected to the post for three years. Tesla is required to appoint two new independent directors to its board, a move Mr Feinseth said should strengthen the company.
The SEC charged Tesla with failing to have required disclosure controls and procedures for Mr Musk’s tweets. It said the company had no way to determine if his tweets contained information that must be disclosed in corporate filings, or if they contained complete and accurate information.
Mr Musk walked away at the last minute from an earlier settlement with the SEC that would have required him to give up key leadership roles at the company for two years and pay a nominal fine, according to media reports.
Investors said it had been a big mistake for Mr Musk to turn down that settlement, especially at a time when the company has been pushing hard to meet production targets.
The settlement tasks the Tesla board, which many critics have accused of failing to rein in Mr Musk, with the tricky challenge of finding an independent chairman who is able to work closely with the often emotional and unpredictable chief executive.
It was not immediately clear who would be appointed to the role. Antonio Gracias, the current lead independent director and CEO of Valor Equity Partners, has been criticised as being too close to Mr Musk and his companies.
“The question is whether Musk’s buddies on the board decide to bring in a really strong chair who will stand up to Musk,” said Erik Gordon, a University of Michigan business professor who follows corporate governance.
Mr Musk has driven Tesla to the verge of profitability with a costly ramp-up of production of its Model 3 over the past year. Electric vehicle news site Electrek reported that Tesla had produced 51,000 Model 3s with a couple of days left in the quarter, hitting its goal of 50,000 to 55,000.