CRA Insights

The stock price that didn’t react: Tesla reaction to Court’s ruling

February 15, 2024

On January 30, 2024, the Delaware Chancery Court rescinded a compensation package that Tesla had agreed to provide CEO Elon Musk in 2018.[1] This package included options to purchase 303,960,630 shares of Tesla stock at an exercise price of $23.34 per share (as adjusted for subsequent stock splits). The options, which were divided equally among 12 tranches each equal to 1% of Tesla’s common stock at the time of the award, had a maximum term of 10 years and the shares received on the exercise of the options were subject to a five-year holding period. The options would vest based on various revenue and profitability milestones. As of 2023, all 12 tranches had fully vested and become exercisable.[2] As of the court ruling, none of the options in question had been exercised.[3]

When the stock market closed on January 30, 2024, prior to the announcement of the Delaware court ruling, Tesla shares were trading at $191.59. If exercised at this price, the value of Mr. Musk’s options would have been $51.1 billion, after paying the exercise price. This amounted to 8.4% of Tesla’s $610 billion market value at that time, or about $16.04 per existing share of Tesla stock.

A consequence of exercising employee stock options is that existing shareholdings are diluted. Rescinding employee options would mean that each outstanding share of company stock would have a larger claim on Tesla’s equity value. Thus, as a plaintiff attorney stated in this matter, the rescission would “redound directly to the benefit of Tesla investors, who [would] see the dilution from this gargantuan pay package erased.”[4] For a stock as widely followed as Tesla, one would expect information that changes shareholder value to be quickly and clearly reflected in share prices.

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