WASHINGTON -- The Securities and Exchange Commission said Saturday that Tesla and CEO Elon Musk agreed to pay $20 million each under a settlement that will also see the company's co-founder step down as chairman after a tumultuous two months for the EV maker.
But Musk, who is synonymous with the Tesla brand, will remain as CEO under the settlement over tweets he posted on Aug. 7 about taking the company private, the SEC said.
The SEC alleged in a lawsuit on Thursday that the tweets about financing for a go-private plan Musk abandoned just weeks later had no basis in fact, and said the market chaos that ensued hurt investors.
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 will also be required to appoint two new independent directors to its board.
“As a result of the settlement, Elon Musk will no longer be Chairman of Tesla, Tesla’s board will adopt important reforms -- including an obligation to oversee Musk’s communications with investors -- and both will pay financial penalties,” Steven Peikin, co-director of the SEC’s Enforcement Division, said in a statement. “The resolution is intended to prevent further market disruption and harm to Tesla’s shareholders.”
Saturday's settlement saw the SEC pull back from its demand that Musk be barred from running Tesla, a sanction that many investors said would be disastrous for the unprofitable company.
Rattled investors
The SEC charges against Musk rattled investors and shaved about $7 billion off Tesla's market value in New York trading on Friday. The company's market value -- $45.2 billion at Friday's close -- is now below General Motors' $47.5 billion.
The SEC charged Tesla with failing to have required disclosure controls and procedures for Musk's tweets. The SEC 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.
Neither Musk nor Tesla admitted or denied the SEC's findings as part of the settlement, which must still be approved by a court. Tesla did not immediately respond to a request for comment and Musk could not immediately be reached for comment.
But Musk, who has often turned to Twitter to promote Tesla and confront critics, said on Thursday that the SEC's actions were unjustified.
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.
The settlement now tasks the Tesla board, which many critics have accused of failing to rein in 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 criticized as being too close to 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.
Uncertainty
The deal eases uncertainty over Tesla’s future while removing Musk from a key role at the automaker he’s led to become one of the most valuable in the world.
“This is a good resolution for Tesla stakeholders,” said Ben Kallo, an analyst at Robert W. Baird & Co. “I expect the stock to trade materially higher on this and into the quarter where we can focus on the fundamentals.”
Musk will purchase $20 million worth of the company’s stock in the next trading opportunity, Bloomberg reported, citing a person familiar with his thinking. He’s Tesla’s largest investor and owns a 20 percent stake in the company.
Cash burn
While the 15-year-old company has never earned an annual profit, Musk has vowed it’s on the verge of making money and stemming cash burn that’s exceeded more than $1 billion in recent quarters. He’s made these assurances in large part due to progress Tesla has made in producing more Model 3 sedans -- the first EV Tesla has tried to mass produce.
In addition to two new independent directors, the settlement requires Tesla to establish a committee of independent board members. Tesla had come under criticism for years prior to Musk’s take-private episode for lax governance, though shareholders sided with the board in June by voting against a proposal to establish an independent chairman and approved the re-election of two directors.
“Both sides have pulled back, taken a deep breath and realized that in the interest of the company, its shareholders, they need to put this behind them,” said Stephen Crimmins, a former SEC enforcement lawyer who’s now a partner at Murphy & McGonigle. “Shareholders with Tesla will be able to go to sleep tonight knowing the Musk will remain at the helm of the company. At the same time, there will be appropriate restraints in place.”
The lawsuit came less than two months after Musk tweeted -- falsely, according to the SEC -- that he secured funding to take the company private. He arrived at the $420 a share figure by assuming a 20 percent premium on Tesla shares and rounding up one dollar because “he had recently learned about the number’s significance in marijuana culture,” and to impress his girlfriend, according to the SEC’s complaint.
The settlement doesn’t resolve investors’ lawsuits, which were significantly strengthened by the SEC’s complaint. It revealed facts based on emails, documents and interviews that private lawyers haven’t gained access to yet, giving them a better chance of withstanding Tesla and Musk’s attempts to get the shareholder suits thrown out, legal experts say.
Reuters and Bloomberg contributed to this report.
