Elon Musk the insurer


Now here’s something you don’t read in a corporate filing every day:

Tesla determined not to renew its directors and officers liability insurance policy for the 2019-2020 year due to disproportionately high premiums quoted by insurance companies. Instead, Elon Musk agreed with Tesla to personally provide coverage substantially equivalent to such a policy for a one-year period, and the other members of the Board are third-party beneficiaries thereof. The Board concluded that because such arrangement is governed by a binding agreement with Tesla as to which Mr. Musk does not have unilateral discretion to perform, and is intended to replace an ordinary course insurance policy, it would not impair the independent judgment of the other members of the Board.

That’s from Tesla’s 10-K/A, which was filed Tuesday morning with the SEC.

A company taking on liability insurance on behalf of its officers and directors is not unusual. We all know the US is a particularly litigious nation, so should a spurious lawsuit against a board, or its directors, succeed, it makes sense that some allowance is made so that the targets of any litigation are not left out of pocket, particularly if they’re not responsible.

What is less common, in our experience anyway, is for the company’s largest shareholder and chief executive to be underwriting this insurance. So what does this say about the electric car company on a mission to save the world from itself?

There are a few threads to unpick, but it’s probably best to start with some context. In January, Tesla’s board settled to the tune of $60m over an investor lawsuit relating to the propriety of the company’s $2.6bn takeover of stricken solar-financing company SolarCity in 2016. Although we don’t know whether this caused the premiums to rise, or even whether insurance covered the settlement, it is not unfair to speculate that this, along with Musk’s erratic behaviour, are why the costs to insure Tesla’s directors suddenly became “disproportionally high”.

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Musk taking on the liability could be spun either way. One might argue that it shows both Musk’s confidence in the company and his willingness to tame his Twitter-antics that he’s willing to put his own net worth on the line to protect his colleagues. (As he’s also done, to a smaller extent, by contributing to recent capital raises.)

Yet the deal also naturally increases Musk’s exposure to Tesla. On top of the $14.5bn worth of stock he’s pledged as collateral to secure personal loans, Musk is now potentially on the hook for any successful lawsuits against the company’s directors. For a man who told lawyers in a Los Angeles court last October that he was financially illiquid, it seems like quite a heavy cash-responsibility to take on.

The other thread is Musk’s egregious compensation package, the first $750m tranche of which Reuters reported Tuesday morning was close to being paid out (FT Alphaville calculations say similar). Musk, historically, has waived taking a cash salary from Tesla, presumably so his stock-based compensation is aligned with shareholders’ interests, but at least he now has some below-market-rate insurance premiums to rely on for day-to-day cash flow.

There is also the tail-risk of things going pear-shaped at Tesla for the directors. It’s not normal to worry about the solvency of your insurer. But theoretically, if Tesla’s shares collapsed and Musk’s net worth evaporated, the board might not have the insurance should an investor lawsuit (or any lawsuit) prove successful.

This is all in the realms of the speculative but, as the last few months have proved, risks once reserved to the realm of fiction can turn out to almost unerringly accurate. For the moment, however, it’s a pretty cushy arrangement for all involved, particularly with Tesla’s market capitalisation once again above $140bn.

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