NYSE Listed Company Manual § 303A.02 provides a number of tests for determining whether directors of a company are independent. Most of them are fairly bright line rules, but there is a key provision that is often overlooked:
No director qualifies as "independent" unless the board of directors affirmatively determines that the director has no material relationship with the listed company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company).
Hence, even if the nominally independent director satisfies the specific requirements, the board should still treat a director as not independent if the board is unable to make an affirmative determination that there is no material relationship between the issuer and the director in question. In other words, if there is a substantial likelihood that the reasonable investor would regard the relationship as important, the board should not treat the director as independent.
All of which came to mind today when the BBC reported that:
[Tesla shareholders including] the California State Teachers Retirement System, Hermes Equity Ownership Services and CtW Investment Group, among others, ... called for action before the firm launched its Model 3 sedan later this year - its first vehicle aimed at the mass market.
"While meeting the technical definition of independence, five of the six current non-executive directors have professional or personal ties to Mr Musk that could put at risk their ability to exercise independent judgment," the letter said.
Here's what Tesla's 2016 proxy statement says about director independence:
The Board of Directors has determined that, with the exception of Elon Musk and Kimbal Musk, all of its current members are “independent directors” as that term is defined in the listing standards of NASDAQ.
Other than Elon Musk, no current director is or has ever been an employee of Tesla. In the course of determining the independence of each non-employee director, the Board of Directors considers the annual amount of Tesla’s sales to, or purchases from, any company where a non-employee director serves as an executive officer. In order to find that a director is independent, the Board of Directors must determine that any such sales or purchases were made in the ordinary course of business and the amount of such sales or purchases in each of the past three fiscal years was less than 5% of Tesla’s or the applicable company’s consolidated gross revenues for the applicable year. In addition, the Board of Directors considered all other relevant facts and circumstances, including the director’s commercial, accounting, legal, banking, consulting, charitable and familial relationships, including the transactions specified in “ Certain Relationships and Related Party Transactions — Related Party Transactions ” and the additional considerations below.
With respect to Mr. Buss, the following were among the relevant considerations:
• Mr. Buss was the Chief Financial Officer of SolarCity from August 2014 until February 2016. Tesla and certain Tesla directors and officers have relationships with SolarCity as set forth in this section and in “ Certain Relationships and Related Party Transactions — Related Party Transactions — SolarCity Agreements” below.
The Board of Directors has concluded that given the absence of any continuing affiliation between Mr. Buss and SolarCity, there are no relationships that would impede the exercise of independent judgment by Mr. Buss.
With respect to Ms. Denholm, the following were among the relevant considerations:
• Ms. Denholm was the Executive Vice President and Chief Financial Officer of Juniper from August 2007 until February 2016, as well as its Chief Operations Officer from July 2013 until February 2016. Tesla purchases networking equipment manufactured by Juniper in the ordinary course of business through resellers, but has not entered into a purchase contract directly with Juniper.
The Board of Directors has concluded that given that Ms. Denholm is no longer an executive officer of Juniper, and Juniper has no direct material business relationship with Tesla, there are no relationships that would impede the exercise of independent judgment by Ms. Denholm.
With respect to Mr. Ehrenpreis, the following were among the relevant considerations:
• Mr. Ehrenpreis is a manager of DBL Partners Fund III (“DBL III”). Each of Mr. Ehrenpreis and DBL III is a minority investor in SpaceX. Tesla and certain Tesla directors have relationships with SpaceX as set forth in this section and in “ Certain Relationships and Related Party Transactions — Related Party Transactions — SpaceX Agreements” below.
• Mr. Ehrenpreis is a co-owner of DBL Partners. Another co-owner of DBL Partners is a director of SolarCity and is a manager of DBL Investors, which is an investor in both SolarCity and SpaceX. Mr. Ehrenpreis has no direct or indirect investment control or pecuniary interest in DBL Investors. Tesla and certain Tesla directors and officers have relationships with SolarCity as set forth in this section and in “ Certain Relationships and Related Party Transactions — Related Party Transactions — SolarCity Agreements” below.
The Board of Directors has concluded that given that Mr. Ehrenpreis’ and DBL III’s interests in SpaceX are minority positions, and Mr. Ehrenpreis has no direct or indirect interest in DBL Investors, there are no relationships that would impede the exercise of independent judgment by Mr. Ehrenpreis.
With respect to Mr. Gracias, the following were among the relevant considerations:
• Mr. Gracias is the Chief Executive Officer, director and majority owner of Valor Management Corp. (“VMC”). VMC funds are a minority investor in SpaceX, and Mr. Gracias is a director of SpaceX. Tesla and certain Tesla directors have relationships with SpaceX as set forth in this section and in “ Certain Relationships and Related Party Transactions — Related Party Transactions — SpaceX Agreements” below.
• VMC funds are a minority investor in SolarCity, and Mr. Gracias is a director of SolarCity. Tesla and certain Tesla directors and officers have relationships with SolarCity as set forth in this section and in “ Certain Relationships and Related Party Transactions — Related Party Transactions — SolarCity Agreements” below.
• The Elon Musk Revocable Trust dated July 22, 2003, of which Elon Musk is the trustee, is a limited partner of Valor Equity Partners, L.P. and Valor Equity Partners II, L.P., which are funds advised by VMC.
• Kimbal Musk is a limited partner of Valor Equity Partners II, L.P. and Valor Equity Partners III-A, L.P., which are funds advised by VMC.
The Board of Directors has concluded that given that VMC funds’ interests in SpaceX and SolarCity are minority positions and investments in VMC funds by other Tesla directors comprise fractions of such funds, and Mr. Gracias’ professional experience serving on the boards of multiple companies, there are no relationships that would impede the exercise of independent judgment by Mr. Gracias.
With respect to Mr. Jurvetson, the following were among the relevant considerations:
• Mr. Jurvetson is a managing director of Draper Fisher Jurvetson (“DFJ”). Through its funds, DFJ is a significant stockholder of SpaceX and Mr. Jurvetson is a director of SpaceX. Tesla and certain Tesla directors have relationships with SpaceX as set forth in this section and in “ Certain Relationships and Related Party Transactions — Related Party Transactions — SpaceX Agreements” below.
Through its funds, DFJ is a significant stockholder of SolarCity, and another managing director of DFJ is a director of SolarCity. Tesla and certain Tesla directors and officers have relationships with SolarCity as set forth in this section and in “ Certain Relationships and Related Party Transactions —Related Party Transactions — SolarCity Agreements” below.
• The Elon Musk Revocable Trust dated July 22, 2003, of which Elon Musk is the trustee, is a limited partner of Draper Fisher Jurvetson Fund X, L.P., which is a fund managed by DFJ.
The Board of Directors has concluded that given Mr. Jurvetson’s professional experience serving on the boards of multiple companies, that Mr. Jurvetson’s other interests in SpaceX and SolarCity are not personal to him and primarily arise as a result of DFJ’s investments in them, and that investments in a DFJ fund by Elon Musk comprise a fraction of such fund, there are no relationships that would impede the exercise of independent judgment by Mr. Jurvetson.
It's hard to see how Tesla determined that a number of these folks lacked at least one material relationship with Musk outside of being a director and thus how they satisfied the NYSE rule.
- Buss: A former top employee of SpaceX, a company dominated by Musk. Very recently ceased to be affiliated with it. Surely likely to have developed relationships with Musk that may predispose him to favor Musk.
- Ehrenpreis: Both Ehrenpreis and his investment fund are investors in Space X, a major Musk corporation. Has a partner who is a SpaceX director and investor.
- Gracias: SpaceX director and investor. A trust of which Musk is the trustee has investments in Gracias' fund. Kimbal Musk is a limited partner in funds managed by Gracias.
- Jurvetson: Space X director and manager of an investment fund manager that is a SpaceX shareholder. That Musk trust is a limited partner in one of the funds.
The myriad SpaceX connections should have troubled the board, in light of the repeated conflict of interest issues that have arisen between Tesla, SpaceX, and Musk.
