Programming note: Money Stuff will be off tomorrow, back on Monday.
Does Elon Musk control Tesla Inc.? Colloquially speaking, sure he does: He is Tesla’s chief executive officer, the chairman of its board and its largest shareholder. He is also its co-founder, even though he didn’t found it, which is a hard trick to pull off at a company that you don’t control.
But there is also a narrower question, which is: Is Elon Musk the controlling shareholder of Tesla? That is less obvious. He owns about 22 percent of the stock, which is rather less than a majority, and it’s all just normal stock, with no super-voting rights or anything. This narrower question matters because, under Delaware law (Tesla is a Delaware company), there are limits on what a controlling shareholder can do to enrich himself at the expense of a company that he controls. For instance, when Tesla acquired SolarCity Corp. in 2016, when Musk was SolarCity’s chairman and largest shareholder (and his cousin was its CEO), and when SolarCity was financially troubled and needed to be bailed out by someone, that looked, to a lot of people, like kind of an awkward transaction.
But Delaware law does not have a category for “kind of an awkward transaction.” It has basically two relevant categories: If Musk was the controlling shareholder of Tesla, and caused Tesla to buy SolarCity, then a judge will review the transaction for “entire fairness” and, if he finds that the process or price was unfair, he can award damages for shareholders against Musk and the directors. But if Musk was not the controlling shareholder — if he was just a CEO who happened to own some shares, and who was answerable to the board of directors and shareholders — then the board’s decision to buy SolarCity is subject to “business judgment” review, which basically means that the board can do whatever it wants. (Also even if he was the controlling shareholder, he could have avoided entire fairness review “if at the outset of a self-dealing transaction the controlling stockholder effectively relinquished control over the outcome to an independent committee of disinterested directors and a nonwaivable, fully informed vote of a majority of the minority stockholders.”)
So is he the controlling shareholder? Yesterday a Delaware judge ruled on a motion to dismiss a shareholder lawsuit over the SolarCity deal and decided that it’s a “close call” but that Musk might have controlled Tesla, so the lawsuit can go forward. The reasons for Musk’s control are all the sort of obvious things: He owns a lot of shares, not a majority but enough to sway the vote; he dominates the board of directors and, in particular, dominated the board’s discussion of the proposed SolarCity deal (bringing it to the board three times, and curiously never discussing the possibility of buying another solar company instead of SolarCity); he “has demonstrated a willingness to facilitate the ouster of senior management when displeased”; and he is central to the company’s business, raising money for it and acting as its public face and authoring its “Master Plan.” (And while Tesla did require a majority of the non-Musk shareholders to approve the deal, and allowed independent directors to negotiate the price — which I thought was rather good governance, considering — Musk was fully involved in the board decisions about whether to do the deal.) You can’t really object too much to that conclusion. Intuitively, Tesla is Musk’s company, while also being a public company, and using a public company you control to bail out another public company that you also control seems like the sort of thing that controlling-shareholder rules are supposed to be suspicious of.
Still it’s a little weird. Musk is the charismatic founder-CEO-visionary of Tesla, sure. But he owns 22 percent of the shares, with 22 percent of the vote. Plenty of other tech-company founder-CEO-visionaries have found much stronger ways to formalize their perpetual control. Mark Zuckerberg owns about 16 percent of the shares of Facebook Inc., but he controls almost 60 percent of the vote, and almost got the company to give him voting control forever even if he sells more of his stock. Evan Spiegel and Robert Murphy are the charismatic founder-visionaries of Snap Inc.; they own less than 40 percent of the stock between them, but control more than 88 percent of the vote. Meanwhile, just being a founder-CEO-visionary who dominates the board, has the ideas, and is the public face of the company is not necessarily enough to keep control, as Travis Kalanick can tell you. The voting power usually doesn’t matter, when things are good for the founder-CEO-visionary, but when it matters it matters.
There seem to be two models of governance in large technology companies run by founder-visionaries: There is the founder-visionary-CEO as perpetual owner and controlling shareholder, who jealously guards his rights so that he can’t be unseated by insurgent shareholders or directors, and there is the founder-visionary-CEO who actually does give shareholders a vote, and who relies on his charisma and vision to keep the shareholders and directors in line. Those models often come to more or less the same place, but they don’t always; Musk has to wake up every day and persuade his shareholders and directors that his charismatic vision is the right one, in a way that Zuckerberg just doesn’t. It’s a little rough on Musk that he’s not actually the controlling shareholder and the law treats him like he is anyway.
In other Tesla news, its bonds are cratering. “You can see quickly that Tesla is singularly unsuited to using debt,” wrote Aswath Damodaran back in August, when it was issuing debt. But “bond investors pretty much ignored the carmaker’s prolific cash burn and repeated failures to meet production targets and lent it $1.8 billion at record-low interest rates.” I guess investors saw the unsuitability slowly: The bonds “plunged to a low of 86 cents on the dollar” yesterday, and Moody’s Investors Service downgraded them to a Caa1 rating this week. I have to say that as I spend time this month reading financial-crisis anniversary pieces, I cannot get that worked up about a low-junk-rated money-losing company’s bonds trading down to a 7.8 percent yield. As these things go, that’s still pretty good.
A warning shot.
How are things at Deutsche Bank AG? Oh great, great, except that it has been widely reported that Chairman Paul Achleitner has grown tired of Chief Executive Officer John Cryan and is openly searching for his replacement. Yesterday Cryan sent out a staff memo saying that he is “absolutely committed” to staying, which is not quite the question that was being asked:
“The fact that Cryan must write his own defense and doesn’t get any backing from Achleitner is a sign of weakness for the CEO,” said Florian Sauerburger, a portfolio manager at Aramea Asset Management, which owns Deutsche Bank stock.
It’s true. It rather seems like the intended audience for the memo was Achleitner and the board, and that its message was “back off.” “We need to focus on executing on the strategy that was agreed and signed off by both the management and supervisory boards,” wrote Cryan, who mentioned the “destabilizing effect” of “widespread rumors” and urged, “Let’s not allow ourselves to be thrown off course.” They’re all employee-appropriate sentiments, I guess, but also interpretable as an argument that the noisy search for his replacement should quiet down. Meanwhile there is this:
The person close to Mr Achleitner stressed that replacing Mr Cryan “is not a foregone conclusion at this point”, adding that the chief executive should take the debate as “a warning shot” and redouble efforts to cut costs.
Is that a thing? Is it normal for a board of directors to go around noisily auditioning replacements for their CEO in order to light a fire under the incumbent? It seems rather tough for the incumbent’s authority, not to mention his morale. Anyway as long as Cryan is still around he is going to do what he does, which is make cuts at the investment bank, though there too Deutsche seems to be of two minds about everything:
As part of the investment bank review, cuts are being discussed at both big trading businesses — equities as well as fixed income, currencies and commodities — because they are expensive and haven’t performed well, said one person. However, the extent of a potential retrenchment is unclear because many traders just got big bonuses in an effort to retain top performers, this person said.
I have to say that getting a big retention bonus and then immediately being laid off is … not the worst way to go.
Here is a profile of Zhao Changpeng, the founder of the cryptocurrency exchange Binance, who spent “several years developing trading systems for companies including Bloomberg L.P.,” and who is now maybe a billionaire, but who has apparently never met a lawyer? Or something, I don’t know, what do you make of this explanation for why Binance lists so many initial coin offerings that have characteristics of unregistered securities:
Zhao said the exchange’s client identification policies are similar to those of some U.S.-based venues and that Binance takes a venture capital-like approach to evaluating the coins it lists, favoring those that are backed by teams with a track record and real products. He also asks issuers to provide Binance with a legal opinion that the coins aren’t securities.
Look. The way venture capital works is that it invests in companies, specifically by buying securities of those companies. If you evaluate coins by examining their team and their products using a “venture capital-like approach,” that is because they are companies and they are issuing securities.
Also I have a feeling we should check in on this guy in six months:
“The less regulation, the better,” said Zachary Ising, a 24-year-old graduate student at California University of Pennsylvania who relies on virtual currency trading for all his income and has a majority of his assets in a Binance account. “I’m confident in Binance’s ability to secure its own platform.”
Elsewhere: “Russia says Venezuela has not offered to repay debts in cryptocurrency.” And: “Reddit Disables Bitcoin Payments.” Honestly I didn’t know that you could pay for Reddit, but if I had known that you could pay for Reddit, I’d have been pretty confident that you could pay for Reddit with Bitcoin. Now you can’t.
Blockchain blockchain blockchain.
Here is “Blockchain Technology for Corporate Governance and Shareholder Activism” by Anne Lafarre and Christoph Van der Elst. “Shares are usually held through complex chains of intermediaries,” they write, and “these intermediaries not only add transaction costs to shareholder participation per se, there is also high uncertainty that information, including the record of shareholder votes, is correctly channelled between ultimate shareholders and companies in remote participation.” The solution is of course the blockchain:
In a private blockchain, managed by the company only accessible for shareholders for example on the Hyperledger of IBM, the company and shareholders that hold sufficient shares can place proposals. Smart contracting allows for the private ledger to be structured so that all relevant information including majority rules and access rights that are contained in the articles of association and the law are taken into account. Once a certain proposal is placed in the blockchain, shareholders that hold shares in the company are immediately notified and can exercise their voting rights during a short period. The voting results may become instantly available after a cut-off point, and majority requirements, necessary to render the decision binding and verifiable, need to be reached in a specified timeframe. Shareholders can verify their own transactions, but none of the shareholders should be able to determine what voting decision was taken by other shareholders.
Look, you know, fine. We have talked about exactly these problems — the complex chain of intermediation in stock voting that leads to uncertainty and reduced participation — and in fact I have even gone so far as to mutter the word “blockchain” in those discussions. But what if you replaced the word “blockchain” in the paragraph above with a word like, say, “website”? What if the company had a private website where it could put proposals, and a database where it tracked share ownership, and the shareholders could log in to the website and see and vote on proposals? The call here is for a private blockchain — one administered by the company — so the trustlessness and decentralization benefits of public blockchains are not relevant. This is just an argument that companies should have better databases for tracking their shareholders, and better user interfaces to allow those shareholders to vote their shares. The blockchain has nothing to do with it, except that people want to read about the blockchain.
Elsewhere, some of the people who piloted blockchain projects realized they were pointless:
DTCC, known as Wall Street’s bookkeeper, recently put the brakes on a blockchain system for the clearing and settlement of repurchase, or repo, agreement transactions, said Murray Pozmanter, head of clearing agency services at the DTCC.
The project, which had successfully tested with startup Digital Asset Holdings (DA), was shelved because banks and other potential users believed the same results could be achieved more cheaply using current technology, he said.
“Basically, it became a solution in search of a problem,” he said.
Yes! The blockchain project worked! But also so would a database run by a trusted central counterparty such as, just to throw one name out there, DTCC. You could just about imagine someone, somewhere, saying “the blockchain is a solution to the problem that we rely too much on DTCC to clear and settle repo trades.” (I mean, it seems like a niche thing to worry about, but you could.) It is harder to imagine DTCC concluding that. And if DTCC is going to run a centralized blockchain, why not just run a centralized database instead?
Are we currently living in a computer simulation run for the entertainment or edification of some far more intelligent beings? Sure, why not. I have to say that the best evidence for it is that when people come up with virtual-reality projects, the reality always seems to be so grimly literal. Microsoft Corp., for instance, developed “a digital room where we could sit at a digital desk and interact with Microsoft programs such as Word,” which sounds a whole lot like the actual rooms at my house and my office where I sit at an actual desk and interact with Word. And if a virtual-reality desk job isn’t quite existentially terrifying enough for you, now you can virtually die at your virtual-reality desk:
Visitors could don VR glasses and earphones to experience having a seizure at work, a failed paramedic rescue, and entrance into the afterlife. Funeral parlor employee Dong Ziyi told The Beijing News that the immersive experience “enables people to better cherish the beauty of life.”
Now we just need a virtual-reality experience of eating lunch at your desk. We really are building all the components of virtual-reality life, and death, under late capitalism. I would naïvely have thought that people would build virtual reality experiences that are, you know, fun, that you can’t really get in your daily life. As opposed to, like, “do some word processing and then die at your desk.” But I guess the fact that our simulated reality is so much like our boring reality is an argument that our boring reality is itself a simulation.
CME to Buy Spencer’s NEX to Create Trading Venue Behemoth. Takeda Mulls Bid for Shire to Create Global Drug Titan. Record ‘mega-deal’ surge pushes global takeovers beyond $1.2tn. Facebook Could Be Fined Millions for Violating Consent Deal. Trump Renews Amazon Criticism After Aide Denies Policy Changes. “It’s been explained to him in multiple meetings that his perception is inaccurate and that the post office actually makes a ton of money from Amazon.” Warren Buffett Is Now America’s No. 2 Real Estate Broker. New Numbers Show the Gender Pay Gap Is Real. “A top Morgan Stanley broker was repeatedly accused of violence against ex-wives and girlfriends. Bank managers were told. But he kept his job.” What If Prosecutors Wanted to Keep People Out of Prison? The Long, Slow Demise of My Little Pony and Yoda. DMX wants judge to hear his rhymes before being sentenced for tax fraud.
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