Joe Gebbia, the Tesla director who exited a board committee that made key decisions about the car maker’s future, told Reuters that CEO Elon Musk had discussed purchasing a house from his start-up and that he was concerned their friendship could be seized on to attack the committee’s independence.
Gebbia, whose start-up Samara makes tiny prefabricated houses, was one of two directors that Tesla’s eight-member board deemed independent enough to serve on a “special committee” that deliberated on the company reincorporating from Delaware to Texas.
The board formed the special committee after Musk called in January for Tesla to move its corporate domicile out of Delaware, where a court shot down his $56 billion pay package.
The special committee was initially comprised of Gebbia, an Airbnb co-founder, and Kathleen Wilson-Thompson, a former Walgreens Boots Alliance human resources chief, according to a regulatory filing.
Gebbia stepped down from the committee in March after its mandate was expanded from deciding on the redomestication to also considering what to do about Musk’s pay package, the filing states. His exit left behind a special committee of one, an unusual corporate governance setup that has been criticized by some of Tesla’s shareholders.
Gebbia left the special committee “out of an abundance of caution”, citing his personal relationship with Musk and a “potential business transaction” involving Samara that was “currently on hold”, according to the filing.
Gebbia told Reuters that the transaction the filing was referring to was about Musk potentially buying a house made by Samara.
“I did not want Elon’s status as a potential customer of Samara to be used against the committee, so I disclosed that I had put that potential business transaction on hold,” Gebbia said in a statement.
The special committee’s lawyers at Sidley Austin concluded that Gebbia’s ties to Musk did not constitute a conflict of interest that jeopardized Gebbia’s independence, according to the regulatory filing. Gebbia, however, chose to step down from the special committee regardless.
“I believed I was and am independent, but decided to step down because I did not want my relationship with Elon to be used to unfairly attack the committee,” Gebbia said in a statement to Reuters.
Tesla chair Robyn Denholm said in her own statement to Reuters that the board followed Delaware law in setting up the special committee, and that it was committed to strong corporate governance. “Whether and where to reincorporate was clearly a board decision, not a CEO decision,” Denholm said.
Musk and Wilson-Thompson could not be reached for comment.
The previously unreported details on the circumstances of Gebbia’s exit from the special committee shed new light on Tesla’s efforts to counter criticism that many of its directors are beholden to Musk.
Convincing investors that its board can deliberate without influence from its larger-than-life CEO will be key to Tesla securing shareholder approval for its move from Delaware to Texas and for reinstating Musk’s pay package in a vote at the company’s annual meeting on June 13.
Proxy solicitor Glass Lewis and a group that represents the interest of workers invested in union pension funds last month questioned the special committee’s findings and called on other Tesla shareholders to reject both moves. Institutional Shareholder Services, another proxy adviser, also recommended against reinstating Musk’s pay package, but sided in favor of the move from Delaware to Texas.
“Several legal experts expect Texas to prove more forgiving to directors and executives when it comes to reviewing corporate acts such as the approval of pay packages,” Glass Lewis wrote in its recommendation. Tesla’s special committee, on the other hand, found that the litigation rights of investors are “substantially equivalent” in Texas and Delaware.
Wilson-Thompson, who also sits on the boards of drug wholesaler McKesson and footwear maker Wolverine Worldwide, made decisions for Tesla’s special committee in consultation with several advisers she tapped, the regulatory filing shows.
Special committees are deliberative bodies responsible for deciding some of a company’s thorniest issues independent of management or controlling shareholders. Having a special committee of one director is rare and could make the company more vulnerable to legal challenges, four corporate governance experts said in interviews.
“Tesla has employed something akin to corporate governance-lite… a board substantially comprised of the CEO’s friends and family,” said Adam Epstein, whose firm Third Creek Advisors advises company boards.
Delaware ruling
The Delaware judge who in January ruled that Tesla’s $56 billion payout to Musk should be rescinded, because it was unfair to shareholders, questioned in her ruling the independence of the board that approved it.
“At least as to this transaction, Musk controlled Tesla,” the judge, Kathaleen McCormick, wrote in her ruling, referring to the board’s decision to grant Musk’s pay package. The package was worth as much as $56 billion, but is now valued at about $43 billion based on Tesla’s current stock price.
Since the approval of Musk’s payout in 2018, five directors have remained on Tesla’s board: venture capitalist Ira Ehrenpreis, former Twenty-First Century Fox Chief Executive James Murdoch, Denholm, Musk, and his brother Kimbal.
McCormick criticized Ehrenpreis, Murdoch and Denholm as beholden to Musk, and said she expected Musk’s brother to be loyal to him. In its regulatory filings, Tesla has stated that JB Straubel, a Musk protégé and former Tesla chief technology officer who has since joined the board, owns a company that provides scrap materials to Tesla.
That left only two out of eight directors – Gebbia and Wilson-Thompson – as independent enough to serve on the special committee, well below corporate America’s average of 85% of directors in a board deemed independent of the chief executive, according to corporate consulting firm Spencer Stuart.
Precedent
Delaware courts have found that one-member special committees are permissible, if the director can be shown to be independent.
In November 2023, for example, a Delaware judge upheld drug distributor AmerisourceBergen’s decision to form a one-member special committee to decide on litigation facing the company, ruling that the director involved was independent. In April, in a case involving online dating company Match Group, Delaware’s Supreme Court ruled that every member of a special committee should be independent, showing that having more than one independent director does not shield the committee from legal challenges.
The corporate governance experts Reuters interviewed, however, said that staffing special committees with one director was a risky choice, because courts in Delaware have ruled that the sole member has to be above reproach “like Caesar’s wife”.
“The court is likely to be particularly suspicious of whether the single director was truly independent and acted with care and might allow, for example, more discovery into that issue if there is a suggestion of lack of independence,” said Ann Lipton, a corporate law professor at Tulane University.
—Rachael Levy, Reuters