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- [00:04]
A
Welcome to Shareholder Primacy from Free Float Media, a podcast about activist investing, securities law, and all the ways the financial and legal woes intersect and collide in real life. Ann and I are here for you. Ann is a law professor. Ann Lipton is a law professor at the University of Colorado who teaches and researches securities and business law. She holds up the legal end of the podcast.
- [00:25]
B
And that's Mike Levin, an activist investor who lives and works in Chicago. He covers the financial side of our podcast.
- [00:30]
A
So. So our podcast is about activist investing, securities law, and Elon Musk.
- [00:35]
B
Apparently. We should just retitle it
- [00:41]
A
because we're going to spend this podcast talking about his latest adventure. It's out, the S1 for SpaceX. It's available. So I don't know how much you've actually read the whole thing.
- [00:55]
B
I've skimmed and then read the parts that made. Or in words and not in numbers.
- [01:00]
A
Right. I've read parts of it and I've probably read. Skimmed a lot more than I read because it's, It's. It's a big deal anyway. So it's hundreds of pages long with all sorts of stuff that kind of confirmed a bunch of things that were kind of rumored. And there were. I don't know if there were some surprises, but there were some interesting things that. Go ahead.
- [01:25]
B
No, I haven't seen anything that contradicted a rumor.
- [01:28]
A
Oh, yes, there's nothing. Yes. Right. But there were some. You know, there's. As with anything he touches, there's always some novel stuff that pushes the boundaries of not only securities law and corporate governance, but, you know, just logic.
- [01:47]
B
Yeah, fair enough.
- [01:48]
A
And sense. So anyway, we're going to talk about that today, so. And we'll talk about corporate governance, shareholder rights, all that stuff. And then. And then some of the financial elements.
- [02:02]
B
But first, first, just a reminder, we have a mailbag you can email us. Shareholder PrimeCyreeFloat LLC.
- [02:10]
A
Right. Let us know what you think of the SpaceX S1. Once we're done taking it apart here, though, we could. Man, we could spend 10 shows talking about all sorts of. Well, just on this S1. There's so much there.
- [02:25]
B
I know.
- [02:25]
A
Yeah. So just figuring out what to, like, talk about is. Takes. Takes a lot of selective curating. So anyway, SpaceX, the S1 came out. It's in draft form. We knew about it a couple weeks ago because the confidential version was filed. And Edgar. And now the unconfidential, not even unredacted, just the draft form is out. So we learned a lot about what the company plans to do for or really do to its prospective public shareholders. A couple other quick things as we knew. We call it SpaceX, but it's space Exploration Technologies Corporation. So if you want to do an EDGAR search, which I tried, and you type space X, you'll. You won't get it.
- [03:14]
B
You won't find it.
- [03:15]
A
Yeah, you won't find it. You will find its ticker spcx. And they set a list in the nasdaq, which I think everybody kind of knew.
- [03:25]
B
Everybody. That's why NASDAQ changed its rules for fast entry so that they would list on the nasdaq.
- [03:30]
A
Right, right. So that was sort of an open secret that it was going to be a NASDAQ listing and not the nicee. But anyway. And as everybody knew from two years ago, it's a Texas corporation. After moving from Delaware about a year and a half ago. I can't remember right after the.
- [03:47]
B
Yeah, right after Turnetta decided took away his pay package, he moved his private companies to Texas.
- [03:52]
A
Right. So it remains a Texas corporation. So anything we talk about here legally is in the context not only a federal law, but Texas corporation law. Texas corporate law. Right.
- [04:02]
B
Yep.
- [04:03]
A
So what do we got? What, What Texas corporation laws do we have to do we have to address here?
- [04:08]
B
Okay, well, let's first. Yeah, so we'll start with corporate governance and some of the basics. So there will be three classes of stock. The A shares, the B shares and the C shares. The thing about the C shares is they're authorized in the charter and apparently something like $10 billion of that looks like it's still being worked out. 10 billion shares. Sorry, but there won't be any C shares outstanding. And I mean issue.
- [04:33]
A
They're issuing no seashares right now.
- [04:35]
B
They're issuing no seashares at this time, but they're be authorized in the charter. The A shares will be authorized in the charter. Those are what they're selling to the public. And the B shares are going to be held exclusively by Elon Musk. And of course they have different voting rights, so they all have the same financial rights. You know, if there are dividends, which there won't be, but if there are dividends, they all get paid the same dividends. If there's a merger, they all get the same considerations.
- [05:00]
A
If there's a split, All the shares get split the same way.
- [05:08]
B
Yeah, exactly. So financially they're equivalent. But of course, they have different governance rights. The A shares have one vote per share. Those are the ones that the public gets the B votes. The B shares, which are Elon Musk shares, they get 10 votes per share. And so that gives him voting control. And the C shares, well, we'll get to their purpose. But they have no votes.
- [05:29]
A
Oh, they're, they're non voting.
- [05:31]
B
They're non voting, but they're not being issued at this time. So anyway, so he obviously is going to have control of this company because he has the B shares and the B shares are 10 votes per share. But that's apparently not enough. He's really like gilding the lily on this. In addition to the fact that his B votes have 10 votes per share, there are special rights given to the B shares in the charter that are addition to this.
- [05:53]
A
Oh, interesting. Oh, I didn't catch this.
- [05:55]
B
Okay, this is on top of this. So first, when you vote for however many people are on the board, the B shares get to vote by themselves for half the board.
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A
Oh, so there's, there's, there's, there's directors by class.
- [06:08]
B
Exactly. So there are going to be like constituency directors who are only elected by the B shares and that's actually 51% of the board. The remaining directors are all the shares voting together, A and B. But of course, Since B has 10 votes per share, the B will control that as well. So it's very like he's really cementing like it's not good enough that he has 10 votes per share. He's gotta designate certain directors. Majority of the directors have to be only B elected. And then also in the charter is that as long as he's playing the role which he is of CEO and a director and chair of the board, he can only be removed from those positions by the B shareholders. So like for example, which is him,
- [06:47]
A
it's one shareholder, right?
- [06:49]
B
Yeah. Although theoretically there could be more at some point. So I mean, so if you think about this like the way it works technically is the board selects the CEO. So theoretically there could be two seconds when the board that he controls kicks him out as CEO. That's not going to happen. But I mean, in history it has happened that sometimes controlling shareholders get into feuds with their directors. So just in case his board was upset and decided to kick him out as CEO, they actually can't. Because the only way he can be removed as a CEO or as a director or, or as the chair of the board is if the B shares
- [07:21]
A
is it by a vote of the B shares. And they, because of their 10 votes per share, they have a dominant vote. I mean, however, that.
- [07:30]
B
Yeah, well, on this. Like the A shares don't even get a vote. But like, they like. I mean, it's just, it's unnecessary.
- [07:36]
A
Oh, it's a. Oh, it's a vote. It's a vote within the class of B shares.
- [07:39]
B
Just the, just the B class. Now, now the number of B shares. Yes, I know. It's just like he really wants to make sure there's no possible universe in which there are five minutes when the directors may not. May be able to get rid of him. Even though he could immediately then get, turn around and get rid of the directors. He doesn't want to take the chance that there's a whole five minutes when he's not CEO. So now the number of B shares he actually has is kind of funny because he owns 4.3 billion B shares outright and he has the option to purchase another 350 million B shares, but apparently that's not enough because there are these moonshot pay packages, we've all heard about them, where he gets more B shares if he meets the milestones. And what are the milestones? Well, it's complicated. He has to have reached certain market capitalization and operational. And there's operational and operational. The market cap. He'll hit those right away because it's like 400 billion is the first tranche. He'll hit that right away. But he has to also hit operational milestones. And what are the operational milestones? A human colony of at least 1 million people on Mars?
- [08:43]
A
Well, no, there's other operational milestones.
- [08:46]
B
There's a different one. There's a separate package. There's a separate package with a different. But this package, the operational milestone is a human colony.
- [08:55]
A
One single part of the. Oh, interesting.
- [08:58]
B
And then the, and then he gets more B shares with each market capitalization. So let us, let us say. I have my doubts about whether there ought to be a human colony on Mars with at least 1 million people, but we can say that there won't be one soon. He will not hit these soon, even though he hasn't. And with them he gets like, you know, up to, you know, just. I think it's like another billion dollar, another billion shares if he hits those milestones. But here's the thing. The board actually gave him those shares already. They awarded those shares to him already. They've been issued. And he can vote them now. He can't sell them because they're restricted until the 11 million human colony is established on Mars. But, but he can vote them. There's also a separate pay package where he has to achieve market capitalization milestones and Those started a trillion dollar trillion dollars to go up to 6 trillion. And coupled with an operational requirement that SpaceX create non earth based data data centers capable of delivering in orbit 100 terawatts of compute power per year. But those shares, another 300 million B shares have also been issued and he can vote them and both of these, even though he can't sell them and he can't pledge them for loans. He can pledge them for loans if the board approves. The board, that is of course the people he.
- [10:16]
A
His people.
- [10:18]
B
So everyone thinks like he doesn't get paid until he puts a million people on Mars. Well, technically, yes, but he gets the voting power right now. Right.
- [10:27]
A
So he's. All right, go ahead.
- [10:30]
B
Well, yeah, and then there's the seashares, which I was going to turn to.
- [10:33]
A
Right, yeah. Well, okay, let me make sure. So the A's are what you and I could go by though. We'll talk about that a little later about whether that's a good idea.
- [10:41]
B
That's a good idea.
- [10:43]
A
The B's are pretty much him alone. I don't think there's any other shareholders that have B shares at this.
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B
I don't think there are at this time.
- [10:52]
A
There weren't any listed. There weren't any listed on the preliminary.
- [10:54]
B
But he can't, what he can't do is like if he tries to sell his B shares, they become A shares.
- [11:00]
A
Right.
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B
So there's no way to sell them except he can pass them on to his family. So his kids will get them, his
- [11:07]
A
14 of them or whatever.
- [11:08]
B
Yeah. So I mean, so this is not like once he dies, they disappear. That's the way Google is set up. Once the founders die, there are no B shares anymore. But not with Elon Musk. With Elon Musk you can pass them on to his family.
- [11:20]
A
Right. And so, so that was my question about this particular aspect of this that we're going to talk about. Another important part of governance and a second related litigation. But before we depart from the ownership, the cap table as we say.
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B
Yeah.
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A
What do you think? What's the purpose of these C shares? What do you think's going on with the C shares?
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B
Well, that's the thing, the C shares, they're no vote shares. And I don't know for sure, but I know what they've been used for in other companies. They're used to pay employees or make acquisitions because that way the company can use stock to pay employees or make acquisitions without diluting founder control. So this became a real issue at Google. They went public with just one vote shares, the A's and the 10 vote shares, the B's. But they kept acquiring companies using Google stock, Google A shares, and they paid their employees in Google A shares. And every time more A shares issued, that diluted the founder control just a little bit. So over time it was looking like there could be a point where they no longer had majority control and they created a class of no vote C shares to deal with that. So my guess though, I don't know, is that the reason the Sea shares are there in the charter is so that at some future point SpaceX, if it wants to make stock acquisitions or pay employees and shares, it can issue seashares. It's not doing that right away. It's going to acquire.
- [12:40]
A
Don't be so sure.
- [12:42]
B
Well, it's acquiring.
- [12:44]
A
It could use the Sea shares to acquire Tesla.
- [12:47]
B
Oh right, yeah, if shareholders vote in favor of that.
- [12:50]
A
I mean the Tesla shareholders, well, they
- [12:53]
B
really do have to vote in favor of it. But like cursor, it's already been reported, it's in their filings that after the IPO they may acquire. And that's going to be A shares. But Right, yeah, the C shares could be for Tesla.
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A
Right? That's kind of my guess. And when you say dilution, you're referring to dilution of voting rights, not dilution of economic value.
- [13:17]
B
The C shares have the same economic rights as all the other shares, right?
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A
Yeah, the C shares are just, it's equivalent to A's and B's in terms of dividend.
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B
But yeah, if there were dividends, whatever, whatever, whatever claim to profits, whatever profits exist. The C shares are equally in the A's with the A's and the B's.
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A
All right, cool. So that's the cap table, which is really, you know, that was something people kind of speculated about. But this really confirmed and extended our knowledge of kind of the, the economic structure of ownership. That was really rumored. Yeah, in ways.
- [13:52]
B
Well, I would have, I mean I would have bet body parts it was going to have dual class shares a year ago.
- [13:56]
A
Oh yeah, right, right, exactly. But you know, the idea that he's, I think his voting control at this point is, and I don't know if this includes the grants, it's like 85% or something.
- [14:08]
B
Yeah, but that includes the 1.3 billion that he hasn't earned. But they're letting him vote anyway.
- [14:13]
A
That's okay. That was my question is that it does, it does.
- [14:16]
B
And I Should mention just, you know, to remind people in case they've forgotten the reason like this, companies cannot go public with. Sorry, they can't switch to dual class shares after they're already publicly traded. Those are exchange listing rules, NASDAQ and New York Stock Exchange. So a Tesla, he wanted to get voting control, but once it had already gone public with, he couldn't put in
- [14:35]
A
a double cloud dual class.
- [14:36]
B
Right, right. So SpaceX, there was no question he was going to make that mistake.
- [14:39]
A
Of course. So. All right, so that's the captain. We're actually returning that in a little while when we talk about some of the broader investment implications of this. But anyway. Yeah, all right. And then there was the other thing. And we actually talked about this aspect, rumored aspect, when we covered this. Was it three weeks ago? I can't remember.
- [14:56]
B
Well, yeah, but mostly we were talking about like just the implicate. The legal implications of everything.
- [15:02]
A
Yeah, but we touched on the litigation part of this. Or shareholders enforcing, let's talk broadly. Shareholders enforcing their rights.
- [15:11]
B
Yeah. So there.
- [15:12]
A
Using law.
- [15:13]
B
Using litigation. There are. So let's just say that in general, there are three kinds of claims shareholders bring. There actually could be more, but most of the time we're talking about three kinds of claims. So I want to distinguish between them. The first would be fiduciary duty litigation. That's state law, so it's Texas law. And those are usually a claim that the board had some kind of conflict of interest. Like in Delaware, a board beholden to Musk gave him a $56 billion pay package. So that's one kind of litigation. Another kind of litigation is Federal Law, Section 10B, and that's general fraud. That's for intentional or at least recklessly false statements. You have to show intent.
- [15:50]
A
So misleading, basically lying.
- [15:52]
B
Lying to shareholders intentionally or recklessly to
- [15:55]
A
boost about your financials, about your business plans, about whatever.
- [16:00]
B
Okay, exactly. And then the third kind is federal section 11 litigation. Now, section 11 is usually for IPOs like the IPO we're about to see, and it's about false information in a registration statement specifically. But one major difference between section 11 and section 10B is 10B, as I just said, you need to show intent. It's fraud. You have to show they intended to defraud you. Section 11, you actually don't need to show intent. If they have false information in the registration statement and it results in investor losses, you can sue. So those are.
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A
So 10B and 11 sort of are similar behaviors, but a different kind of premise.
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B
Yeah, a different kind of premise. Exactly. Section 11 only in. It's got to be in the registration statement, but you don't have to show intent. Section 10B, it can be in any document at all, but you do have to show intent.
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A
Got it.
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B
So those are the three main types of litigation, not the only ones. I mean, like for example, every state prohibits fraud just under state law, but most, most of the time you don't see shareholders sue under state law fraud claims because it's not really for public companies.
- [17:03]
A
Right, exactly.
- [17:04]
B
They're weird for public companies. So are shareholders going to be able to sue under fiduciary duty litigation for conflicts, section 10B for fraud, or section 11 for false statements in the registration statement? Probably not.
- [17:18]
A
So the headline here, and we'll explore this, is that a shareholder is unlikely to be able to sue for breach of fiduciary duty under state law, unlikely to be able to sue for fraud,
- [17:34]
B
straight up fraud under section 10B and
- [17:37]
A
unlikely to be able to sue if this registration statement that we are evaluating or looking at here has something wrong with it.
- [17:45]
B
Exactly. Probably all those avenues are pretty foreclosed. So first of all, SpaceX is taking advantage of a provision of Texas law which we've mentioned. Well, actually, no. Well, actually, there's a provision of Texas law which, to be fair is Delaware has the same thing where the directors like Elon Musk are allowed to take corporate opportunities as long as they put that in their charter or their bylaws.
- [18:05]
A
So this is. And it was in there that I read that I saw.
- [18:08]
B
Yeah, exactly. So they put that in their charter. We can take corporate opportunities. So let's say Elon Musk encounters a new business opportunity that would be good for SpaceX. Elon Musk is allowed to say, no, I'm going to develop it privately, so I get the full benefit. Much like he did at Tesla with AI and she.
- [18:25]
A
So this is, this is a duty of loyalty problem.
- [18:27]
B
This is a loyalty problem. And shareholder sued Tesla over that because they hadn't put that advance opportunity waiver in their corporate documents. And he took this AI opportunity and the shareholders sued over that. And I think they would have won. But we talked about this before it got dismissed because Tesla moved to Texas.
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A
Right.
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B
So but now he's putting it in the charter that he can take corporate opportunities.
- [18:50]
A
So that's a specific flavor of the fiduciary, the state level fiduciary duty claim. Yeah, right.
- [18:57]
B
An opportunity is considered an asset of the corporation. He can just take it then. And we've talked about this is that Texas has a lot of general limits on shareholder litigation. The main one being SpaceX will take advantage of a Texas law that lets it block any derivative action unless the shareholder holds 3% of the stock. So you have to own what apparently at reported numbers will be $52 billion worth before you can sue over a conflict. That's not going to happen. SpaceX even warns about this. It's actually hilarious. This is, I'm quoting this registration statement. The interests of Mr. Musk and entities owned by or affiliated with him may differ or conflict with the interests of our shareholders. They say we may enter into transactions with entities affiliated with Mr. Musk in lieu of pursuing other opportunities that some other shareholders may prefer or that may prove to be more accretive than the opportunities we elect to pursue. Nothing you can do about it. Then there's federal law, so that's okay.
- [19:54]
A
So we've talked about two limits and the ability to sue. First, for this huge potential conflict, given that Elon Musk has a vivid imagination and could get all sorts of stuff. And the basic threshold that in order to file a derivative litigation. Derivative lawsuit, someone's got to own 3%.
- [20:18]
B
Exactly.
- [20:18]
A
Okay. And those are written into the charter, written into the bylaws. Texas allows it. So the likelihood of there being any kind of litigation along these lines is next to none.
- [20:30]
B
Exactly.
- [20:31]
A
Okay, go ahead.
- [20:32]
B
And then we get to federal law, right? We start with section 11 claims, false statements and a registration statement. Now, part of that has to do with section 11. If there are false statements in a registration statement, the only way you can sue is if you show your shares were registered. You can't just say there was a registration statement, it was false. You have to show that your shares, the one that you obtained, were registered. Why does that matter? SpaceX already has a lot of shares outstanding that were not registered. They issued share to the early investors. They issued share to employees. Because the securities laws allow you to do that. You don't have to. You only have to file a registration statement if you.
- [21:08]
A
When you're. When you're going public. That's the whole point of the ipo, right? We're registering the shares.
- [21:13]
B
So they're selling. They've been selling shares to the early investors. They've been selling shares to the employees, you know is payment for their compensation for years. And those earlier. Once those earlier issued shares mix in with the shares that are available for public trading, the registered shares, there's no way. If you just buy shares of stock, SpaceX, you have no way of knowing Whether your shares were the registered ones
- [21:37]
A
or shares are fungible, you don't like.
- [21:40]
B
Exactly. We don't keep track of them that way. Which basically means that you have no Section 11 claim. Once those early issue shares mix in with the registered shares. Nobody who buys after that point can bring a section.
- [21:54]
A
Because. Because you'll be unable to prove that the shares that you bought from in. In the open market from you don't know who the seller was, you'll be unable to prove that these in fact were registered.
- [22:06]
B
That's exactly it. And as far as I can tell, the SpaceX documents are a little tough to parse on this, but it looks like some shares, some of those early issued shares, some of them especially to employees, may become available for trading on day one.
- [22:20]
A
Oh yeah, there's no.
- [22:22]
B
Well, there's no employee lockup.
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A
There's no lockup.
- [22:25]
B
There's a lockup for the, for the Neos. Yeah. And maybe some big investors, but there aren't lockups for the line employees. So if they got their shares a while back, they may be able to trade them right away. Plus the lock. See? Plus. Exactly. There's a lockup. A lot of the insiders are not going to be able to trade right away. So at that point their shares aren't mixing in. But some of those shares are going to be released from lockup right after the first earning statement comes out.
- [22:54]
A
Right. It's not the six month lockup that we are accustomed to. Yeah.
- [22:58]
B
In an ipo. Yeah. So some of those shares get. And their earnings statement covers through like this is an IPO that's going to start at some point in June and the earnings statement is going to be after June 30th. So like it's really, I think only a couple of weeks of trading before the lockup is partially released. So between that and the fact that some early shares held by employees may become available for public trading right away, nobody's going to be able to bring a Section 11 claim because they won't be able to show that their shares were the registered shares.
- [23:26]
A
Wow. All right.
- [23:27]
B
But there's more.
- [23:29]
A
Go ahead.
- [23:30]
B
There's a provision.
- [23:30]
A
Section 11. More in section 11.
- [23:32]
B
Section 11. That's not enough. Like, as I said, everything is like dual protections to make sure there's no possible way anyone can sue. There's a provision in the SpaceX documents that says if you bring these Section 11 claims, you have to bring them in the Texas Business court, which is not the problem. And then it says that you have to bring them Individually, not as a class.
- [23:53]
A
These are federal. This is federal law.
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B
Yeah. Section 11 claims can be brought in state or federal court. So they're saying, well, you have to bring it in state court. That part is not particularly controversial. It's the part where they say that you have to bring them individually, not as a class, which means small shareholders who only have, like, small losses are not going to be able to bring claims. If that's enforceable. It's not clear that it is, but it may very well be. So that's the Section 11 claim.
- [24:17]
A
All right. So any kind of misrepresentation or inaccuracies or problems with this massive. This registration document, and there's all sorts of other documents that people are going to have as part of this issuance are pretty much precluded, pretty much under
- [24:37]
B
section 11, if they're without intent. If you buy on the open market, you're just not going to have a claim. But then we're left with the Section 10B claims for fraud.
- [24:45]
A
That's where intentional, willful, whatever. Fraud.
- [24:48]
B
Fraud. All right, Exactly. Well, first, SpaceX says you have to bring those in Texas business court, too. But that's impossible. 10B claims can't be brought in the Texas business court. The state courts can, for reasons that only are known to the 1934 and 1933 Congress. You can bring Section 11 claims in state court, but you can't bring Section 10B claims in state court. But SpaceX says you have to try anyway. And then you have to wait for. For the Texas business court to say,
- [25:16]
A
we can't do this.
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B
You don't have jury. Exactly. After that, you have to go to arbitration on an individual basis. No class actions, individualized arbitration. Now, we had a whole show about securities arbitration, right?
- [25:29]
A
Yes, right, right, right.
- [25:29]
B
But just really quickly, for a long time, the SEC's view was that if you required arbitration that was so unfair to plaintiffs that it amounted to a waiver of their right to sue, and the SEC made it very clear that it would challenge those provisions, so no one even bothered trying it. This SEC decided, you know what? Actually, we're completely fine with arbitration. In fact, we encourage it. But still, no companies had. Except for one, the crazy oil and gas one. No companies actually tried to put arbitration provisions in their charters and bylaws.
- [26:00]
A
Until now.
- [26:01]
B
Until now. But it's interesting why they didn't, because it wasn't clear they'd fare any better in arbitration. Because first of all, one purpose of arbitration is to do exactly what SpaceX is doing, which is Require individual arbitration one person at a time. And if it's a consumer arbitration, that's a big companies, because if you lost 30 bucks on your AT and T bill, you're not going to bring an individual arbitration over that. But with investments, even if most retail investors don't have enough losses to justify, there are always going to be some large, many large institutions who might, or
- [26:34]
A
large individual holders who just own a few million dollars worth of shares.
- [26:38]
B
And if they have losses big enough, they're going to bring them. And if they have to bring them individually in arbitration, what companies were facing was discovery, discovery, discovery, discovery with mass claims and a deposition, and then another deposition, and then another deposition as each individual investor went through. And they were kind of afraid of that. And the other issue that they didn't like is that right now in federal court, there are a lot of protections for companies if you sue in federal court, basically, it's very hard to bring a securities fraud action these days. And a lot of them get dismissed right off the bat. And they were afraid that if they went to arbitration, those protective states standards would go away. So they'd actually be facing more liability than they would be facing in federal court. So corporate boards seem to be leaning against arbitration because they like the idea of federal court where they have all these protections of where they can, and
- [27:26]
A
really kind of procedural protections.
- [27:28]
B
Exactly. Pleading standards. The complaint has to be really detailed and so forth. But SpaceX, I think, may have come up with a hack to get around these drawbacks. To force arbitration that will actually avoid these problems. They selected the expedited arbitration rules of the International Chamber of Commerce. Those rules allow for arbitration with a very limited record, essentially almost no discovery. So they don't have to worry about having discovery after discovery after discovery. Plus SpaceX says in their bylaws, if more than three investors bring arbitration claims, only the first one gets arbitrated and the others have to be stayed. And that way they can avoid having to deal with claim after claim after claim after claim. And then SpaceX says the arbitrators have to use the protective federal standards for evaluating claims, so they won't have to give up the advantages. They.
- [28:19]
A
So it's like the choice of, I was going to say choice of law, but the choice of procedure.
- [28:24]
B
The choice of procedure exactly is that
- [28:26]
A
the arbitrator has to use is the federal. Is the Federal 1 for 10B.
- [28:31]
B
So there's going to be a lot of question about how enforceable all this is. But I gotta tell you, I worry because I think this is gonna spread. I think other companies are gonna see that this may be the way to avoid the drawbacks of arbitration and essentially kill Section 10B claims by investors. And I know a lot of people would say good, because a lot of people think the 10 beef claims are frivolous or they think that they do more harm than good, that the few ones that are correct are not worth all the frivolous litigation. But I think we do not like a world where corporate executives don't fear the consequences of fudging their public statements. Yeah, I mean, we'll start the sec. The SEC could still bring claims, but the SEC has never been funded adequately to police the market. Congress has said it's relying on private actions to police the market. And we've said before, the SEC right now does not seem very enthusiastic about.
- [29:24]
A
At least this sec is not. No, no.
- [29:26]
B
This sec. We had a whole show when we talked about SpaceX before, what we talked about how they were like ignoring fairly easy red flags of illegal activity from SpaceX right off the bat. So I know there are lots of corporate executives who think this is a fantastic new world, but it's one that worries me.
- [29:41]
A
Right. And I would. And based. And I would want to think hard. Well, we'll talk about that in a minute.
- [29:48]
B
Yeah, we'll talk about what investors should
- [29:50]
A
think, what kind of invest, what kind of investment this represents based on everything we've talked about. All right.
- [29:56]
B
Yeah.
- [29:57]
A
All right. So why don't. We'll take a look at that in a minute here at Shareholder Primacy.
- [30:04]
C
Shareholder Primacy is brought to you by free flow analytics.com the only free database of corporate directors, their influence and their performance. If you own a stock or retirement plan, go to freeflowanalytics.com and look up which of your elected directors are performing well and which aren't. Use your vote in the alternative democracy and get your data @free flow analytics.com now back to the show.
- [30:31]
B
Welcome back to Shareholder Privacy. I'm Ann Lipton here with Mike Levin and we are talking about what investors should be thinking, Mike, when they're looking at this registration statement.
- [30:41]
A
Well, it's. We'll sort of like do this sort of activist angle.
- [30:46]
B
Okay.
- [30:46]
A
I suppose because as an activist investment, this one is a low priority. I will tell you for reasons we've talked about in terms of control. But there's other interesting nuggets here that we can sort of delve into for a little bit. And again, this company, this ipo, this registration statement contains multitudes. Okay. There's so much we could kind of talk about. So we're going to just kind of, not necessarily cherry pick, but go at a few more of the high profile, more interesting kind of facts about this that would be relevant to an activist investor to investor. Now, again, it's 227 pages total, which is long.
- [31:29]
B
Yes. And there are.
- [31:29]
A
And there are exhibits and attachments and there's a whole. There's another 100 pages. I don't know if 100 pages of exhibits. There's 38 pages of risk factors. You may read. I never read risk factors. I probably should.
- [31:40]
B
That's my favorite part.
- [31:42]
A
I probably should. I skim the risk factors. There's sometimes some governance ones that sort of confirmed what I know. 38 pages of risk factors. I mean, more than 10% of the document.
- [31:54]
B
They warn about Grok making children's sexual material.
- [31:58]
A
Exactly. And there's all sorts of. Which is a little unique here. There's probably dozens of pages like pretty pictures of rockets.
- [32:05]
B
Yeah. Artist rendering of life on Mars. They have an artist rendering of life on Mars.
- [32:10]
A
And let's set aside all the very flowy language about the purpose of the company. You know, any good IPO and, you know, registration statement is going to sort of state, you know, in very optimistic and confident terms about what the company is going to try to accomplish. Well, this takes it to a whole nother level about creating interplanetary life and redefine. I mean, there's all sorts of stuff there that just makes you. If you're not taking yourself too seriously, make sure you laugh at this. So setting all that aside, once you've kind of read it, my conclusion would be no sane person or investor that cares about their rights, as we've started talking about a little while ago, or probably about making any kind of solid return on this investment would buy a single share of this ipo. Now, that's easy for me to say because I'm not. No one's no banker out there is, you know, calling me to say you want an allocation. I'm not calling a banker, you know, kind of begging for one. This is, this, this interests me so little at this point. But. So we'll kind of COVID the latter in a bit. And, and, and the two are connected. The whole idea that, that, you know, this is basically Elon Musk's kind of baby.
- [33:36]
B
Yeah.
- [33:37]
A
And he can direct the allocation and the spending of billions and billions of dollars of, of money.
- [33:50]
B
Yeah.
- [33:51]
A
In ways that kind of really just kind of are along his whims.
- [33:56]
B
Yeah.
- [33:57]
A
It Would give any smart investor pause. Now, if you're an investor that wants to trade this.
- [34:02]
B
Yeah. I mean, okay, there's the Keynesian beauty contest, Right?
- [34:06]
A
Exactly. Well, you know, if you're trying to do the, you know, find a greater fool. Yeah, sure. You're gonna go get part of the allocation because it's probably going to get a bump.
- [34:14]
B
Yep.
- [34:15]
A
You know, but, you know, IPOs lately have, have kind of been. Had very mixed performance in terms of how they've traded like in the week or two after the first day.
- [34:25]
B
Right. I mean, you imagine there's a lot of. We know. I mean, he's planning on corralling his retail fans.
- [34:30]
A
Yeah.
- [34:30]
B
There's a whole, I think a lot of people. The interesting thing though, I mean, I just, it's interesting. I, I think it'll bump. I think it'll be successful. But he's allocating so much to retail right off the bat that you wonder, you wonder if that's going to take some of the retail demand bump out.
- [34:42]
A
But he might anyway, so. And again, it's, there's, there's this company actually has three, three. They have three businesses and three disclosed segments. Space exploration and they have different names for them, but basically the whole idea of launching and managing satellites and payloads and so forth. But the idea that they're, you know, relatively, relatively successful space business is part of this.
- [35:10]
B
Right.
- [35:10]
A
You know, and they've got a good mode around that. There's only a couple, you know, there's Blue Origin, you know, and they're big NASA contractor. So. Yeah, so that's a, that's a decent business because, you know, you forget how much heavily, how heavily we rely on satellite technology to make things run in, in, in, in this economy. Second business is the whole Starlink communication business, which of course is a cousin of the space business because it relies on all those satellites. But that's more like the selling of the, the bandwidth and the maintaining of that kind of communications network. Those are two kind of very interesting and different and relatively, if you look at the financials relative to successful businesses. The third business is Xai, of course, it's the old Twitter.
- [36:01]
B
Yeah, well, it includes, yeah, it includes Twitter.
- [36:03]
A
It's a social media site and it's, and it's his AI startup or whatever. And that's, that's really the very interesting and not a very good way part of this business. Okay, now a couple other points about this. He will have again complete control over all this. So what gets allocated among these businesses and what gets. How Much in particular gets spent on Xai is entirely up to him.
- [36:33]
B
Right.
- [36:34]
A
Okay. There is absolutely no shareholder influence over any of this. You know, he's got 85% of the votes. He only has about. Somewhere in the range of about 40% of the economic interest.
- [36:44]
B
Yeah, I'm just, I can't. I mean, I guess we'll know more when, like, we know exactly how many shares they're selling.
- [36:48]
A
Right. But that's actually, that's a, that's a huge number.
- [36:51]
B
Right.
- [36:51]
A
So. So, you know, his economic interest in this is, you know, it's not like he's got, you know, 5% of the economics, 85% of the control right now.
- [36:58]
B
That's true.
- [36:59]
A
And you know, for any one single human to have that much of one single company, one single enormous company, is kind of breathtaking. But.
- [37:07]
B
Yeah, I mean, at Tesla he only has 20% and since they don't have dual shares, he's only 20% of the economic.
- [37:12]
A
Exactly. And then, you know, we talked a little bit about, you know, his incentives here. The exact comp. No investor that I've kind of followed or really I've talked to many people about this takes any of the moonshot
- [37:26]
B
package, but he can vote it right now.
- [37:30]
A
Oh, wait a second. You can vote it, but in terms of, in terms of whether that moonshot package creates any kind of incentive.
- [37:38]
B
Yeah, no, of course it's designed to give him extra voting power without, you
- [37:45]
A
know, so no one, no one views that as anything other than kind of window dressing just on, you know, to try to say, if you do this, I'll have, you know, trillion, whatever. Unlike a Tesla where we can debate and discuss and we have the legality and so forth, it's pretty clear that the moonshot package at Tesla did create an incentive.
- [38:09]
B
Oh, certainly that.
- [38:10]
A
For him to. Right, for him to create just a shitload of value for Tesla shareholders. Okay. I think there's. That's not the case here.
- [38:20]
B
No.
- [38:21]
A
His exact comp package here, in fact, it illustrates a problem with the Tesla package, which was the Tesla packet. He. We. The idea in Tornetta and so forth is he worked as hard anyway.
- [38:36]
B
Yeah.
- [38:37]
A
Okay. And the, the. Because he owned 20% and so forth.
- [38:41]
B
Yeah, that's what she found.
- [38:43]
A
Right. Okay. He'll. He. He now has 40% of the economics here. Okay. This moonshot package is completely unnecessary.
- [38:52]
B
It. Nobody is. It's in this. What there. It's a way of handing him additional votes.
- [38:57]
A
Oh, yes.
- [38:58]
B
In terms of control, but in terms of incentives.
- [39:00]
A
Yeah. In terms of creating incentive to like, you know, make the space launches go better, to, you know, grow Starlink, to, you know, control all of, you know, voice communication in the world. I don't know.
- [39:12]
B
Yeah, yeah, he's got.
- [39:14]
A
It's not, it's not going to be really an effective incentive package. Okay.
- [39:18]
B
No, I.
- [39:20]
A
There's a couple of other interesting aspects of this kind of. Financially, the valuation is. And again, we need to wait for the final thing to come out, but it's roughly 11 3/4 trillion dollars. Okay. Which normally I would gasp. And that it will become the largest company to ipo. I think the biggest one before this was Aramco, the Saudi Arabian oil company. All right. But assuming that these numbers are work out, it's only going to become the sixth or seventh biggest public company. You know, Nvidia is 5 trillion, Apple's 4 trillion. Okay. So it's not, you know, it's not going to. I mean, as IPOs go on the other hand, SpaceX has been around over 20 years.
- [40:09]
B
Yeah. I mean this is just. The security laws changed. They made it easier to stay private longer and.
- [40:15]
A
Exactly. And you know, in another world, SpaceX would have been public for 15 years
- [40:19]
B
already if the secure. If the National Securities Markets Improvement act hadn't passed. Yes, right. Sorry.
- [40:24]
A
So anyway, so the valuation, again forgetting the valuation relative to the fundamentals. We'll talk about in a second. You know, valuation at 1.75 trillion. Huge company, really important. But not, you know, it's not going to be the biggest company in the world. World. And they're planning on raising. This is what's really interesting. They're only issuing about 5%, I think 4 or 5% of the share.
- [40:46]
B
Yeah, they're gonna. It's a relatively small float compared to the overall.
- [40:50]
A
So what's interesting is they're only gonna raise $75 billion out of this, which kind of confounds the purpose of ipos. Ipos is access to public market so you can get capital so you can make investments and build a business.
- [41:07]
B
This is access to public markets so the insiders can sell. Right.
- [41:10]
A
This is, this is basically. And which. That's a legitimate.
- [41:14]
B
That is why people go public today.
- [41:16]
A
Right, right, exactly. To be able to give liquidity to employees and early investors. Certainly Musk doesn't care. He's not going to be selling. I don't think he's selling shares. He doesn't seem to have any.
- [41:27]
B
Well, he has A's and.
- [41:29]
A
Right, right, right. But. But in terms of his own personal need for capital.
- [41:33]
B
No, no, no.
- [41:33]
A
He'll, you know, he had to sell a whole bunch of Tesla shares to go by Twitter. Okay. I don't think this is, this is going to be, you know, there's nothing, there's nothing greater than, you know, interplanetary exploration at this point. I can't think of what else he'd want to sell shares to invest in. So that's the, that's what's going to happen there in the set. And of the 75 billion, it's pretty clear that 20 of it is being applied to retired debt that was taken on to buy Twitter.
- [42:04]
B
Out of 75 billion, they're raising 20
- [42:06]
A
billion to retire alone. Yeah, something like that. So, so the proceeds, and you know there's in an S1, there's use of proceeds and the use of proceeds section is kind of useless. You know, it's not because the proceeds here relative to their business, the hundreds of billions of dollars that they're investing every year, particularly in Xai, which we'll talk about in a minute. This IPO is basically just to create a liquid market. Again, I'm convinced it's because he wants to fold Tesla into this and have a single public vehicle for him to do his stuff. And that's where those seashares come from, which is why I'm glad we talked about, about that. So in terms of the economics of three businesses, again, we don't need to go into a lot of detail about what's going on. Starlink makes a lot of money. Starlink is a, is a reasonably or very profitable business. Okay. He's managed that aggressively, he's grown it. Well, you know, that's, it's, and it's pretty cool. You know, others have tried satellite voice and data communication failed. Motorola tried this 20 years ago. Okay. And he is, he figured this out. You know, kudos to him for, and it's again, it's not just, you know, helping, you know, consumers like me get better wi Fi and United Flights, which is in fact what's happening. Okay. You know, he's been helping, you know, impoverished countries get better access to broadband communication. Great. Okay. The space business, the space business is kind of break even. Ish. Maybe it makes a little bit of money. Again, the kind of part of the issue is Starlink's kind of piggybacked on this, which is why it's able to make so much money. The space business is break even. Ish. Is kind of, you know, not great. There's, they're still not in a full revenue. You know, they're largely a government contractor at this point, you know, launching some satellites for other people. But so that business still has a ways to go in terms of making money. Okay. But it's, you know, if it were to IPO just on its own, it wouldn't surprise me. It probably wouldn't keep the valuations. This brings us to Xai Xia. XAI is a hole in the money you, a hole in the ground you dump money into. Xai is a loser. Twitter is doing half to two thirds of the revenues it used to do. And that's after, you know, all sorts of boosts and all sorts. Okay, yeah. The AI business is just incinerating money. Okay. So much. And it's not that good. Okay. So much so that this deal with Anthropic, you know, they built all this extra infrastructure and only the best way to monetize it was to sell it to another AI competing AI company because XAI doesn't have. Right. You know, they're going to make, I think it's, it's 18 million. 18 billion a year in rental fees from Anthropic for selling its compute. Okay. So XAI is just a horrible, horrible business. You know, they're, you know, anything's possible. Things change in the AI and I don't follow AI that closely. Things can change a lot. So there's, you know, who knows, in two years from now we could be talking about Xai dominating the AI marketplace in the way that Anthropic is now. And we thought GPT was going to know two years ago, but for now, it's, it's, it's a loser. And what's so interesting is you look at the context for where these businesses are going to go because he put in the S1, this TAM, you know, TAM, total addressable marketplace. Okay. That's an old, that's an old phrase from. Do you know where TAM came from? Do you have any.
- [46:16]
B
No.
- [46:18]
A
Jack Welch, when he was at George, popularized it. I'm not sure he invented it. He may have like borrowed it from some B school professor.
- [46:27]
B
Okay.
- [46:27]
A
But it became very. Because he, what he, what Jack Welch used to do is he used to challenge his business unit heads to dominate the total addressable market of their business. So, and, and there used to be this whole game that used to take place at GE where you'd try to game the, the TAM to try to show you were in fact bigger than you were anyway, so he, he showed that The TAM for SpaceX writ large SBC X is $28.5 trillion. Now, he doesn't put any context. There's no calculation here. Almost all of the TAM, like 26 of the 28.5 trillion is for XAI.
- [47:16]
B
It's all XA.
- [47:17]
A
Okay, okay. So, so basically the entire Marketplace that, that SpaceX is, and the reason they put the TAM in there is in part to show you can kind of grow into your valuation, right. That, you know, if you're valued at 1.75 trillion, you know, that there's room for the revenues, which you know are in the hundreds of billions right now, to, to kind of grow into that. Okay. And again, it's like 26 of 26 trillion, sorry, trillion with a T of the TAM is for xai. It's basically for artificial intelligence. And it's like enterprise applications or something like that. It's very vague just for context. Do you know what the TAM, what the GDP in the US is? It's $30 trillion. So we currently, you know, have the world's largest, at least per capita economy. I think China's still a little bigger, but ours is about $30 trillion of GDP. That's the value of all the goods and services that we produce. And again, there's a bit of a timing issue. That's. The 30 trillion number would be a, you know, a 20, 26 number. I don't. There's no time frame for the 28.5 trillion that he basically attached.
- [48:34]
B
He absorbed the entire U.S. economy.
- [48:36]
A
But he's saying, he's basically saying that the, that the entire, that the marketplace for SpaceX is at some probably near term timeframe going to be the size of the US economy. Even though the US economy has a lot more than communication, space travel and
- [48:57]
B
people do still need to eat.
- [48:59]
A
Right? There's still, you see, they'll make crops, still need to make clothes, still to make homes. So anyway, so for all these reasons, I think that, and again, not, not just from a, you know, governance and a, you know, shareholder rights perspective, but from a shareholder value perspective. Unless you're planning and just trading this, which I am incapable of doing. All right, trying to find a greater fool. I, I have my doubts that this is gonna, this is going to have a whole lot, deliver a whole lot of value. Yeah, that, especially on the, you know, given that so much of the company is dominated by the XAI business. You know, if this was just an IPO of space exploration in the Starlink, that would be pretty cool. That would be a really interesting. And, you know, not that Xia isn't cool. It's interesting in some really weird and unfortunate sad ways. But those two businesses together as a. Would be very novel and unique. You know, there's nothing really similar. There's Boeing and, you know, some other aerospace companies. But no, no, no, because his, he's got these dreams of an AI business. He kind of, kind of chunked it together. Eventually, I'm guessing that Tesla will be part of this and that would actually not be totally interesting given Tesla's competencies in like, power management and batteries and so forth. You know, forgetting vehicles, they're not going to do much there over time. So anyway, so that's, that's kind of some comments about what kind of investment this looks like.
- [50:33]
B
Yeah, well, I hear hedge funds are trying to snap it up and I'm guessing they're thinking trading it.
- [50:40]
A
Well, yeah, they're pro. Well, yeah, they're trying to trade it. But there's also, you know, there's some ego here. If you're able to say, oh, I got, I got a, you know, million share allocation, it means that, you know, you, you were talking, you got to good relationship with some banker at Goldman Sachs. Oh, so anyway, all right, so that's what's going on with, with the investment side of this combined with the shareholder. Right side, I think there's a lot to worry about. How's that? Yeah, Anyway, I think we've, we've kind of killed this one, don't you think?
- [51:10]
B
For now. I'm sure there will be more. There always is.
- [51:12]
A
Well, well, maybe, maybe if the s, if the, when the final version, the S1 comes out. All right, maybe after, after a. It launches, we can kind of COVID it for a little bit and sort of see what it looks like.
- [51:21]
B
Okay.
- [51:22]
A
Anyway, this is Shareholder Primacy, hosted by Ian Lipton and me, Mike Levin. I'm an independent activist, investor and advisor to investors about their activist situations and is professor of law and The Lawrence W. DeMuth Chair of Business Law at the University of Colorado Law School. You can find me mike@theactivistinvestor1word.com and you can find Ann at Law Colorado. Edu. Our podcast is produced and distributed by Free Float Media. Thanks for listening. We'll talk again soon.