Complex Made Simple

How Saudi’s PIF rep meeting with Tesla led to Musk’s downfall

Elon Musk’s uninhibited behavior has finally gotten the better of him, as he and his company have reached a settlement in regards to the “market disruption” lawsuit by the US Securities and Exchange Commission (SEC).

He and Tesla each face a $20 million fine, and Musk has effectively been removed as Chairman of the Tesla board. He remains as CEO, however.

Elon Musk’s actions catch up to him 

(Graph by Statista)

Musk never had a clean track record with investors and the market in the first place. His spontaneous behavior and middle-of-the-night tweets were controversial and often had the media and shareholders in a frenzy.

This latest SEC debacle resulted in a now infamous tweet from the troubled CEO. Back in August, he had tweeted that he was taking Tesla private, and that funding was “secured.”

This announcement came soon after it was revealed that the Saudi sovereign wealth fund, the Public Investment Fund, had acquired a 5% share in his company, making it a major shareholder. This Gulf backing supposedly boosted Musk’s confidence and made him share that tweet with the world, only now he’s paying the price.

Why? It’s because funding was in fact not secured, and Musk knew there was a possibility that his privatization plans would not come to fruition.

According to a press release by the SEC, “Musk knew that the potential transaction was uncertain and subject to numerous contingencies.”

Furthermore, what truly ignited this lawsuit in the first place was the effect the CEO’s unsolicited tweet had on the market. “Musk’s misleading tweets caused Tesla’s stock price to jump by over 6% on August 7, and led to significant market disruption,” the SEC’s statement said.

Shareholders were also wronged, the Commission highlighted: “Musk had not discussed specific deal terms, including price, with any potential financing partners, and his statements about the possible transaction lacked an adequate basis in fact.”

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So what does the settlement entail? 

According to the SEC statement, Musk and Tesla have agreed to settle the charges against them without admitting or denying the SEC’s allegations.

The highlights of the settlement include the following:

-Musk will step down as Tesla’s Chairman and be replaced by an independent Chairman.  Musk will be ineligible to be re-elected Chairman for three years;

-Tesla will appoint a total of two new independent directors to its board;

-Tesla will establish a new committee of independent directors and put in place additional controls and procedures to oversee Musk’s communications;

-Musk and Tesla will each pay a separate $20 million penalty.  The $40 million in penalties will be distributed to harmed investors under a court-approved process.

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How will Saudi be affected?

Saudi’s 5% investment, supposedly worth between $1.7bn and $2.9bn according to the Financial Times’ estimates, could be at risk. After news broke regarding the lawsuit, Tesla shares fell 14% on Friday September 28 the next day, Vox noted, landing at $264.77. Ever since Musk shared his tweet, Tesla shares have been on a bumpy ride, rising and falling repeatedly as the market tried to make sense of what the future held for the electric automaker.

Yesterday, however, it seems that Tesla stocks had witnessed a resurgence. The Financial Times reports that the company’s stocks rose 16.5% to $308.68. It could be that perhaps shareholders have found renewed confidence in the company now that Musk is no longer Chairman, but this remains speculation at this point as more updates break out.

It would seem that Saudi’s stake is secure for now. Regardless, the Gulf country has secured its investment. Last month, American electric automaker Lucid Motors revealed that it had secured $1 billion in funding from the PIF, giving it the necessary boost to bring its first electric vehicle, the Lucid Air, to the market by 2020. The company is poising itself to stand as a rival to Tesla.

In the end, Saudi is in a win-win situation, no matter who comes out on top.

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Saudi proposed a Middle East production facility

According to the SEC complaint document, Musk had a meeting in January 2017 with a lead representative of the PIF. This representative had suggested the prospect of Tesla opening a production facility in the Middle East, as well as providing “a verbal desire to make a large investment in Tesla.”

Musk met with the PIF again on July 31 2018. According to Musk in the SEC’s document, the PIF representative “expressed interest in taking Tesla private, and confirmed that he was empowered to make investment decisions for the Fund.”

According to the document: “Musk later stated that he assumed without confirming that the lead Fund representative was proposing a ‘standard’ going-private transaction, but the terms of any such deal were not discussed.”

This is where Musk’s mistake started. “According to Musk, he expressed openness but made no commitment; Musk assumed that whether a Tesla production facility in the Middle East was a precondition to the Fund’s willingness to take Tesla private would depend on the amount of capital the Fund was required to commit to the transaction. Musk did not discuss his assumption with the representatives of the Fund.”

Essentially, Musk’s aspirations to go private were not founded by any concrete documentation or official discussions. In fact, the SEC highlighted that “the July 31 meeting lacked discussion of even the most fundamental terms of a proposed going-private transaction.”

A few days later, Musk’s assumptions led him to share the infamous tweet, and he is now facing the consequences.

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