Why TSLA Pumps the Vote

TSLA has taken proxy solicitation to a new level, at least new for a company without a proxy contest or other serious challenge:

• It stood up a voting website for the 2023 AGM with a video of BoD Chair Robyn Denholm pleading for shareholders to attend the AGM
• Elon Musk tweeted several times urging shareholders to vote, including linking to a TSLA "fangirl" with voting advice
• TSLA filed numerous additional proxy solicitation documents
• Denholm started a media tour.

A company does this only when they really, really want and need a lot of shareholders to show up and vote at an AGM. TSLA and Elon Musk really, really want and need shareholders to show up and vote for two items: to ratify the 2018 exec comp plan and to approve moving the TSLA corporate domicile to Texas.

A look at the makeup of the TSLA shareholder base and past votes reveals why Elon, Denholm, and the company need this effort. It will take significant, unprecedented support from retail shareholders for TSLA to win the votes.

Even more interesting, the structure of the two proposals creates an possible dilemma, in which support for one proposal might mean defeat of the other. Finally, we wonder how much this whole thing is worth to Musk - would he spend $130 million himself to prevail?

How the vote works

The two proposals have different voting standards. The 2024 proxy statement indicates the domicile proposal requires approval from a majority of the common shares outstanding. The exec comp ratification proposal requires approval from a majority of the common shares represented at the 2024 AGM.

Also, Elon and Kimbal Musk cannot vote on either proposal. The proxy statement shows they own 413 million common shares. Elon also owns options on another 303 million shares, the very ones that the exec comp ratification proposal seeks to affirm.

Let's do some voting math

As of March 31, TSLA has 3.19 billion common shares outstanding. This should approximate the outstanding shares for the AGM, with a record date of April 15 and an AGM on June 13.

Various sources indicate institutional investors own 45% of the shares (we use Yahoo! Finance), or 1.44 billion shares. Thus, retail investors own a whopping 55%, or 1.75 billion shares. Accounting for the Musk family holdings of 413 million shares (13%), there are 1.34 billion retail shares available to vote.

What Elon needs

For the redomicile proposal, a majority of outstanding shares is 1.60 billion shares (half of 3.19 billion). We guess at most half of institutional investors will support the proposal. It represents a serious hit to their rights, and we expect both ISS and Glass Lewis will oppose it. Half of the institutional holding of 1.44 billion shares translates to 718 million shares. To get the remaining shares, Musk needs affirmative votes of 877 million shares from retail accounts (1.44 billion - 718 million).

For the exec comp proposal, a majority of voting shares depends on how many shareholders and shares actually show up to the 2024 AGM. At the 2023 AGM, 76% of outstanding shares attended (more below). At least that proportion should attend the 2024 AGM, so let's say 2.42 billion shares attend (76% of 3.19 billion). Also, at the 2023 AGM, about 78% of the shares in attendance in fact voted (more below), so 1.90 billion shares cast a vote (78% of 2.42 billion). Musk needs a majority of those 1.90 billion shares, or 948 million. If the same 718 million institutional shares support the exec comp proposal as the redomicile proposal, he'll need affirmative votes from 230 million shares from retail accounts (948 million - 718 million).

What Elon has

We can look at how retail shareholders voted at the 2023 AGM, on May 16, 2023.

In 2023, 2.42 billion shares were present at the AGM, or 76% of the outstanding shares of 3.17 billion shares. Let's assume the same 45% institutional shareholding voted in 2023, or 1.43 billion shares (45% of 2.42 billion). That seems reasonable, as funds mostly need to attend and vote, and that 45% probably didn't change materially in one year.

Thus, 993 million retail shares attended the 2023 AGM (2.42 billion - 1.43 billion). Of those, the Musk family surely voted their 413 million shares, leaving 580 million retail shares not named Musk in attendance (993 million - 413 million).

How many of the 580 million retail shares actually voted, and didn't merely attend the AGM? We see from the 2023 voting results 527 million broker non-votes. Surely almost all of these came from retail accounts, where custodians could vote uninstructed retail shares on non-controversial matters, such as appointing the external auditor. If so, then that means 53 million retail shares actually voted at the 2023 AGM (580 million - 527 million).

We see why TSLA pumps the vote

The 53 million retail shares voting in 2023 becomes critical to understanding what's going on.

We expect most retail shares voted in favor of TSLA in 2023, but not all. At the 2023 AGM, 95% of the shares voted to elect Elon Musk to the BoD, but only 74% voted to elect Denholm. The annual executive say-on-pay vote received 91% support. Of course, these percentages don't distinguish institutional and retail votes. Still, Musk can expect to receive substantial but not complete support from retail shareholders.

Look again at the 877 million retail shares needed to approve the redomicile proposal. It's probably a little more than that in light of the possibility that not every last share will unhesitatingly support Musk. So, that's a kind of lower bound on what he needs.

Well, it's 65% of outstanding shares held by retail accounts as of March 31, a significant goal. It's also about seventeen times the affirmative votes received from retail investors at the 2023 AGM. That seems like a near-impossible vote to achieve.

These aren't long-time, loyal shareholders of a company like GM or PG, ones who always vote at the AGM. Most of TSLA individual investors are younger, relatively recent owners, many of whom don't understand proxies or AGMs. Sure, a huge number of TSLA retail shareholders adore Elon, which is why they own the stock. Translating that adoration into an affirmative vote at an AGM at the magnitude needed takes a heroic effort, and would represent an historic outcome.

We don't envy Innisfree, the proxy solicitor for TSLA. It will earn every cent of their $500,000 base fee, and has a questionable chance to earn all or even part of the $500,000 incentive fee. On the other hand, as much as a million dollars for proxy solicitation for a routine AGM doesn't come every day.

The exec comp proposal seems relatively (relatively!) less of a heavy lift. First, Musk needs only(!) 230 million retail votes in favor, four or so times(!) what retail investors voted in 2023. Second, it seems more likely that institutions will support the exec comp proposal than support the redomicile proposal.

In 2018, 73% of shares voted in favor of the original exec comp proposal, more than the 50% support we assume in our voting math. Perhaps most of those institutions would support it again. The more institutions support the proposal, the less Musk needs to rely on retail shareholders. For example, if 73% of institutions support the exec comp proposal, instead of the 50% we assume above, he will receive 1.05 billion votes in favor of the exec comp proposal (73% of 1.44 billion). This exceeds the 948 million votes needed to ratify the exec comp plan. If he can replicate the 2018 vote outcome, he won't need a single retail vote.

A voting dilemma

Ideally (for Musk), thousands of individual and institutional shareholders representing millions of shares flock to the AGM and overwhelmingly support both proposals. Realistically, the voting math suggests a bit of a dilemma, where a likely outcome for one means failure for the other.

Clearly, the exec comp plan proposal can win approval with votes largely or even only from institutions. Persuade them to attend and vote for the proposal, and don't worry about retail shareholders.

Yet, the domicile proposal needs significant retail votes, as the voting math reveals. Win the hearts and minds of Elon fanboys, and worry only a little about filling in what they need from institutions, who might not like the domicile proposal anyway.

The more TSLA succeeds with institutions, the less likely it is to win the domicile vote. Or, the more retail shareholders attend the AGM, winning a majority of all shareholders attending and thus the exec comp vote becomes incrementally more difficult.

Pay for votes!

We wonder how much this is worth to Musk. Would he personally spend $130 million to win the domicile vote?

Elsewhere we mused about the value of votes. We guess a vote here should cost 5-10 basis points on the TSLA share price. It trades at about $175 per share lately, so a vote might cost $0.10-0.20 per share.

Musk (but not TSLA) could offer shareholders $0.15/share for an affirmative vote. For 877 million shares, he would spend about $130 million. Now, he could personally offer that deal, although TSLA absolutely cannot buy votes in this way. We expect with 877 million retail shares voting in favor of the domicile proposal, the exec comp proposal would also easily win approval.