Tesla CEO and chairman Elon Musk blocked an initial settlement offered by the U.S. Securities and Exchange Commission (SEC) last week. The deal they got instead, after a lawsuit and 14% drop in stock price, was worse for both Tesla and Musk, who will step down as chairman for at least three years as a result.
As usual, the outcome hinged on Musk’s outsize personality, the New York Times reports in a timeline story.
The SEC’s tentative terms did not require Musk to plead either way to misleading investors but did prevent him from stating publicly that he did nothing wrong. That rubbed him the wrong way: Musk preferred to call his $420 tweet “negligence.”
So Thursday Musk told Tesla’s board that he would step down if they went forward with the deal, which experts have called generous. He also goaded them into releasing a statement saying they were “fully confident in Elon, his integrity, and his leadership of the company.”
The Tesla board has enabled Musk, Yale management professor (and Fortune contributor) Jeffrey Sonnenfeld told CNBC Thursday. “What it tells us is this board, as a strategic plan, must be using the Jim Jones Jonestown suicide pact. They are drinking the Kool-Aid of the founder. It is completely as self-destructive as Musk is,” Sonnenfeld said.
The SEC responded that day with a lawsuit against Musk that sent investors into a panic.
Saturday, Tesla lawyers were back at the SEC’s offices, where they agreed to keeping Musk out of the chairman role an additional year, to a doubling of Musk’s fine to $20 million, and a separate $20 million fine to be paid by Tesla. Musk will buy an additional $20 million in Tesla stock as well. Tesla will also add independent directors to its board, one of whom will act as chairman. Perhaps worst of all for Musk, Tesla must now review any communications that might contain material information, including his tweets.
“As courts and governance researchers have long recognized, the presence of a dominant shareholder is likely to reduce the effectiveness of independent directors as overseers of the C.E.O.’s decisions and behavior.” Harvard legal scholar Lucian Bebchuk told the New York Times.
Still, investors are back. Stocks rose 15% on the new deal’s terms.
Corrections, Oct. 4, 2018: An earlier version of this article misidentified Jeffrey Sonnenfeld and misstated the date of the SEC’s filing. We regret the errors.