Tesla Motors, the electric car startup aiming for a $100 million initial public offering, relies heavily on its CEO Elon Musk. He’s the company’s largest stockholder and his continued leadership and ownership of Tesla shares figure into the startup’s agreement with the Department of Energy for hundreds of millions of dollars in direct loans.
As a result, Musk’s ongoing divorce settlement case has sparked questions and speculation about what the proceedings and Musk’s personal financial situation (he said in court filings that he “ran out of cash”) could mean for Tesla.
Amid this hubbub, Tesla — which is now in a “quiet period,” in which federal securities laws limit what information a company can say publicly leading up to a planned IPO – has now moved to disclose the divorce proceedings in its S-1. The gist of Tesla’s latest update to the S-1 (a document filed with financial regulators in preparation for an IPO) is that the company does not expect the divorce proceedings to have a significant impact on Tesla’s business or on Musk’s ability to serve as CEO and Chairman, for a number of reasons.
Here’s some of the nitty gritty of how the startup arrived at that conclusion. Tesla explains that its agreement with the DOE requires Musk “and certain of his affiliates” to own 65 percent of the capital stock that Musk and those affiliates owned at the time of the loan agreement, until at least one year after the completion of the Model S project (one of two Tesla projects being supported by DOE loans).
Tesla also notes that Musk entered into a post-nuptial agreement providing that his shares of Tesla capital stock (held in a personal trust) “shall remain solely his property.” The Los Angeles Superior Court has upheld the post-nup agreement, although Tesla acknowledges in its amended S-1 that this decision may be appealed.
Nonetheless, Tesla writes that it does not believe the divorce proceedings will result in Musk’s ownership falling below the 65 percent threshold, “or otherwise result in a material reduction of Mr. Musk’s holdings” of Tesla’s capital stock. In addition, Tesla writes that it does not anticipate that Musk “would have to liquidate a significant percentage of his holdings in order to satisfy any settlement reached in connection,” with the divorce proceedings.
As for the question of whether Tesla or potential investors need to be concerned about Musk’s personal financial resources, given his record of pouring huge amounts of capital into the startup in times of need, Tesla says in its updated S-1 that this shouldn’t be a problem going forward. Referring to the $465 million DOE loan and the $50 million that Toyota has agreed to invest in the startup following the close of its IPO (if the offering takes place before December 31), Tesla writes:
“While Mr. Musk has historically provided a significant amount of the funds required for our operations, we have not received any funding from Mr. Musk for the past 12 months and are no longer dependent on the financial resources of Mr. Musk to fund our expected growth given the funds available under DOE Loan Facility and the expected proceeds of this offering and the concurrent private placement with Toyota. We do not believe that Mr. Musk’s personal financial situation has any impact on us.”
Here’s hoping Tesla’s right about the startup’s future being unhitched from its chief executive’s personal finances and divorce settlement, so we can focus on the less fraught and sticky questions of how a small and ambitious startup with heavy government backing is seeking to reinvent the auto industry.
Photo courtesy of the North American International Auto Show
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