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As expected, the Tesla stock got crushed on Friday, closing down 13.9%! Then in the early hours on Sunday morning, Saturday afternoon in California, I received a notification on my phone saying that Musk had settled with the SEC. The first question I asked myself was, why not settle the first time around? Delaying things by a day resulted in the steep drop in the stock, and the new settlement is worse than the old settlement.
Under the new agreement, both Musk and Tesla each need to pay a $20 million fine, Musk needs to step down as Chairman for at least three years and then the company needs to appoint two more independent directors. I would argue this is a win for Tesla shareholders. In South Africa, CEO's are not appointed as Chairman of the board too, which improves corporate governance. By having a non-executive chairman, the CEO becomes accountable to the board, instead of having a board mostly rubber-stamp decisions.
Through this ruling and settlement, the SEC has set a precedent around senior management using Twitter to announce inside information. The company is liable if management says things they shouldn't, which means companies will now implement policies of what can and can't be tweeted. As a Twitter user, this is not great, but as a shareholder, it is better not to have management tweeting things off the cuff.
When I heard the fine of $20 million, I thought that is a drop in the ocean for Musk. I then started to think about how much money it is. Converting to Rands, it is R290 million! Ouch! One tweet cost him R290 million. Yes he is a billionaire, but most of that wealth is tied up in the stock of Tesla and Space X. Not many people have $20 million just sitting in cash.
This chapter is now behind us. It means Tesla will have improved corporate governance, and Musk can now focus on running operations and not have to worry about board-level policy. We should hopefully see a bounce in the share price this week. As we have said before about this stock though, it is a very risky holding. Elon will either succeed or go down in flames, sort of a '1' or '0' scenario; we back Elon.