May 4, 2020

Elon Musk’s Big Week: “What an Eccentric Performance!”

I think it’s fair to say that America’s favorite James Bond villain had quite a week. It started on Tuesday, when Tesla dropped this little disclosure tidbit in a Form 10-K/A:

Tesla determined not to renew its directors and officers liability insurance policy for the 2019-2020 year due to disproportionately high premiums quoted by insurance companies. Instead, Elon Musk agreed with Tesla to personally provide coverage substantially equivalent to such a policy for a one-year period, and the other members of the Board are third-party beneficiaries thereof. The Board concluded that because such arrangement is governed by a binding agreement with Tesla as to which Mr. Musk does not have unilateral discretion to perform, and is intended to replace an ordinary course insurance policy, it would not impair the independent judgment of the other members of the Board.

There are obviously no issues with this little cost-saving move, right? Elon followed that up on Wednesday with an earnings call featuring an expletive-laden tirade against “fascist” Covid-19 stay-at-home orders.

Musk’s grand finale came in the form of a bizarre Friday tweetstorm that started with a tweet to the effect that he was selling almost all of his possessions. Elon then provided some eyebrow-raising investment advice – “Tesla stock price too high imo.”  He segued into excerpts from “The Star Spangled Banner,” then came a little “Braveheart” riff, followed by a brief bit of existential musing. He wrapped things up with by letting us know that “my gf @Grimezsz is mad at me.”

Girlfriend’s mad, huh? Well, she must be a Tesla shareholder. The company’s stock price plummeted 10% after the tweetstorm. Isn’t there supposed to be somebody responsible for pre-clearing Elon’s potentially market-moving tweets? Yeah, well we told you that wasn’t going to work.

So, that was the week that was. It’s really a shame that Elon Musk is an immigrant & isn’t allowed to channel his energies into a run for president like literally every other billionaire egomaniac in America. Overall, I think King Arthur put it best in “Monty Python & The Holy Grail”  – “What an eccentric performance!”

“Funding Secured”: Tesla Can’t Shake Lawsuit Over Last Batch of Musk’s Tweets

I know some of you may be scratching your heads about the Tesla board’s willingness to sign-off on the company’s – ahem – “unorthodox” D&O liability protection arrangements. After Friday’s tweetstorm, many of those directors also may be second-guessing that decision – if for no other reason that they’re all still knee deep in the mess Elon created the last time that he let loose on social media.

That’s because a California federal judge recently refused to dismiss a lawsuit filed against Tesla, its board & Musk arising out of his August 2018 tweetstorm. This excerpt from a recent Shearman & Sterling blog on the case has the details:

Defendants moved to dismiss for on several grounds, including that the tweets were merely aspirational and not factual, that they were made by the CEO in his individual capacity and not on behalf of the Company, and that the complaint failed to adequately allege scienter. The Court disagreed. First, the Court opined that even statements of opinion could be misleading if they conveyed facts, which the tweets allegedly did by referencing a specific price of $420 and by identifying specific financial and legal advisors. The Court also found that the complaint had adequately alleged that a reasonable investor would read the tweets as statements of facts based on the affirmative nature of the statements and subsequent exchanges on Twitter confirming those statements.

Second, the Court found that the CEO’s statements from his personal Twitter account were made within the scope of his authority, relying on the fact the CEO co-founded the Company, was on its Board, and that the Company had notified its investors in 2013 that additional information regarding the Company could be found on the CEO’s and Company’s Twitter accounts.

Finally, contemporaneous correspondence that allegedly showed that the CEO was aware of significant hurdles to the transaction and that he harbored animosity against short-sellers, as well as the swift settlement reached with the SEC within a few days of the SEC’s complaint, in the eyes if the court, all supported an inference of scienter sufficient to survive the motion.

Meanwhile, Elon’s not faring any better in Delaware, where back in February, Vice Chancellor Slights denied the Tesla defendants’ motion for summary judgment in the fiduciary duty lawsuit arising out of Tesla’s acquisition of SolarCity, a company in which Musk owned a 21% stake. The Tesla directors settled out – so Elon finds himself the last man standing as the case heads to trial.

PPP Loans: Tax Deduction? If They’re Forgiven, Forget It

One of the things that makes the Payroll Protection Program so attractive is that if a borrower spend its loan proceeds properly (on items such as payroll, rent and utilities), the loan will be forgiven. Furthermore, Section 1106(i) of the CARES Act, provides that the forgiven loans are excluded from gross income, which means that the borrower receives the loan amount (without a repayment obligation) entirely tax-free.

But what about the tax deduction that would ordinarily apply to those business expenditures made in order to obtain loan forgiveness? According to this recent memo from my colleagues at Calfee, there’s a limit to Uncle Sam’s generosity:

The question arises because Section 265 of the Internal Revenue Code provides that a taxpayer cannot take tax deductions, even if otherwise allowable, if the deductions are allocable to income that is exempt from tax. The general purpose of Section 265 is to prevent taxpayers from enjoying a “double” tax benefit (i.e., tax-exempt income generating tax deductions).

In Notice 2020-32, released today, the IRS clarifies that Section 265 does in fact apply to PPP loans and prevents taxpayers from deducting expenses that lead to forgiveness under the CARES Act. This interpretation will have the effect of negating much (if not all) of the tax benefit Congress provided with the exclusion under Section 1106(i). Given the larger goal of Congress to inject cash into struggling businesses, this result had some wondering (before today) whether the IRS would apply Section 265 to PPP loan forgiveness.

John Jenkins