The California Public Employees’ Retirement System, the New York State Common Retirement Fund and the New York City Comptroller’s Office (which oversees the city’s five public pension funds) are raising objections to SpaceX’s proposed governance structure as the aerospace giant prepares for its initial public offering this summer.
In a letter to SpaceX executives, CalPERS CIO Marcie Frost, NYC Comptroller Mark Levine and New York State Comptroller Thomas DiNapoli criticized the proposed dual share-class structure, which they wrote would give company founder Elon Musk outsized control.
Under the proposed share structure within the company’s confidential draft registration statement, Musk and “a small group of insiders” would carry 10 votes for each of the Class B shares they own, while Class A shares—those offered to the public—would only carry one vote per share. Musk would retain 79% of voting power and a 42% ownership stake in the company, according to the letter.
“Under this structure, public shareholders would acquire the majority of the economic exposure without a corresponding proportional voice in the governance of the company, including the election of directors and/or the potential removal of management,” the letter stated.
The three pension systems manage more than $1 trillion in assets. SpaceX is reportedly eyeing a $1.75 trillion valuation.
The letter also stated that SpaceX intends to include in its offering a provision that would require shareholder claims arising under federal securities laws to be resolved through mandatory binding arbitration, hindering the ability of institutional investors to participate in or benefit from securities’ class action litigation.
“The reported governance structure for SpaceX presents significant risks to long term-investors. As reported, these provisions include super voting shares for a select few, mandatory arbitration of shareholder claims, nearly insurmountable barriers to executive accountability, and limits on shareholder legal actions,” DiNapoli said in a statement. “This structure would leave shareholders with virtually no recourse over how the company conducts business.”
Additionally, the letter took aim at SpaceX’s reincorporation under the amended Texas Business Organizations Code, stating that it would increase the procedural hurdles to initiate tender offers, proxy contests and shareholder proposals, while also complicating the removal of incumbent directors and officers. SpaceX had been incorporated in Delaware.
Under Texas law, companies incorporated in Texas can require shareholders to own shares equal to at least $1 million in market value or 3% of the corporation’s voting shares to maintain standing to submit a proposal requiring shareholder approval, significantly more than the ownership levels required by the Securities and Exchange Commission. At a proposed $1.75 trillion valuation, investors would need to hold billions worth of shares to initiate a shareholder proposal.
“The current proposed structure makes it nearly impossible to ensure strong safeguards are in place to preserve the company’s financial and reputational value, limits transparency, thwarts the opportunity for accountability, and overall dangerously undermines investor rights,” Levine said in a statement. “If SpaceX is committed to starting off on the right foot, and earning the trust of potential shareholders, they will adopt governance practices that support their sustainable and long-term growth in earnest.”
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Tags: CalPERS, New York City Comptroller’s Office, New York State Comptroller’s Office, SpaceX