Tesla has filed its annual proxy statement with the Securities and Exchange Commission (SEC). In it, the all-electric and renewable energy company revealed that it plans to offer a three-for-one stock split at the August annual meeting. The Tesla stock split will appeal to smaller investors who may have wanted to invest with Tesla but were blocked out by the higher stock price per share.
Shares of Tesla [NASDAQ:TSLA] were up by more than 1% after-hours at the time of this writing, having closed at $696.69 on Friday.
The Impact of the Tesla Stock Split on Small Shareholders
The most important news out of the SEC filing was that Tesla will seek to increase the number of authorized shares of common stock by 4,000,000,000 shares. The 3-for-1 stock split will be executed via a special dividend given to investors.
If you are a Tesla stockholder, this means that your financial stake will be the same — the difference is that you’ll be holding 3 times more shares if stockholders vote to approve the measure.
One of the most important reasons for such a stock split is to positively impact investor psychology. As a share price goes up, it can start to seem unaffordable. A less expensive stock can be perceived as a weaker value — even if the market cap for the company is the same.
For investors with a few thousand dollars for the market, choosing a stock priced at hundreds and hundreds of dollars might mean that a big percentage of the portfolio would be invested in a single company. Investment managers tend to frown on such a move and usually direct clients to have a variety of holdings.
A stock split has the potential to increase share affordability. With what is perceived to be a more accessible stock price, investors who might not have otherwise chosen a particular stock could find it appealing. Such a draw could heighten demand and, eventually, even elevate the stock price.
Forbes notes that companies that do stock splits have generally seen a nice run-up in their share price, which is often a big factor in deciding to split in the first place. This will usually mean that they’ve been doing well as a business and were probably already outperforming the S&P 500 before the split.
Tesla shares have dropped 34% so far this year. Questions have emerged about the validity of the stock valuation in comparison to the quality of production. A Tesla stock split may assuage those concerns.
Tesla announced a similar 5-for-1 stock split in August 2020. The company executed a 5-for-1 stock split in 2020, leading to a 60% surge in the share price from the day of the announcement to the execution date.
UBS has upgraded Tesla to a Buy position, saying it now sees more than a 50% upside for the electric vehicle stock.
Cathie Wood has been buying the dip in Tesla stock following the EV company’s 40% pullback.
The Real Audience for the Tesla Stock Split
Small investors hold a mere fraction of Tesla stock shares. Major institutions are the primary shareholders.
It seems the largest audience for the Tesla stock split is the company’s employees, who may find a lower stock price makes it easier to manage their equity. Stock shares are frequently used as a recruiting tool, and employees can get paid in company stock.
“Our success depends on attracting and retaining excellent talent,” the company wrote in the SEC filing. Noting that “highly competitive compensation packages” help them achieve company goals, Tesla affirmed, “we believe the stock split would help reset the market price of our common stock so that our employees will have more flexibility in managing their equity.”
The Tesla stock split may enhance the liquidity of the stock for employees, as smaller chunks can be sold off by investors.
What Else Should You Know from the Tesla SEC Filing?
Shareholder proposals: Shareholders have suggested multiple proposals for review at the annual meeting. These include the request to examine and disclose more information about the company’s anti-harassment and discrimination efforts, lobbying practices, supply chains and labor, and details about its own water use and water-related climate impacts and risks. Tesla recommends that shareholders vote against these shareholder proposals.
Board member changes: On June 2022, Oracle co-founder Lawrence J. Ellison, a Class III director, determined that he will not stand for re-election to the Board when his current term ends at the 2022 Annual Meeting.
The Board currently expects to reduce the number of Board seats to seven upon the expiration of Ellison’s term at the 2022 Annual Meeting. The Board and the Nominating and Corporate Governance Committee will continue to frequently evaluate the optimal size and composition of the Board to allow it to operate nimbly and efficiently, while maintaining new ideas, expertise, and experience among its membership.
Statement of major stockholders: The filing says that Ellison currently owns 1.5% of Tesla shares. Tesla CEO Elon Musk currently holds 23.5%, and Vanguard holds 6% of Tesla shares.
Clarification of Musk’s 2018 Tweet and its consequences: The filing also disclosed again how, on October 16, 2018, the US District Court for the Southern District of New York entered a final judgment approving the terms of a settlement filed with the court on September 29, 2018.
This was done in connection with the actions taken by the SEC relating to Elon Musk’s August 7, 2018 Twitter post that he was considering taking Tesla private. On April 26, 2019, this settlement was amended to clarify certain of its terms, which was subsequently approved by the Court. Musk did not admit or deny any of the SEC’s allegations, and there is no restriction on Musk’s ability to serve as an officer or director on the Board — other than as its Chair for a specified time.
Big Tech and the broader market have taken a beating from rising interest rates this year, and perhaps also inflation. 2022 is likely to see stock splits from Alphabet, Amazon, GameStop, and Nintendo.
Tesla, in particular, has seen its stock value tumble over the last several months, with Musk’s professed concerns about free speech rights and Twitter a distraction to many Tesla stockholders. Questions continue to loom about whether Musk should focus less on Twitter and more on Tesla. Meanwhile, he sold $8.5 billion worth of Tesla shares to raise cash to be used towards the Twitter purchase, which put additional downward pressure on the Tesla share price.
Want to join in the fun at the Tesla annual meeting on August 4? You may attend the 2022 Annual Meeting virtually via the Internet at www.meetnow.global/MJKP2QF. Tesla will also webcast the 2022 Annual Meeting live via the Internet at www.tesla.com/2022shareholdermeeting.
A limited number of shareholders will be invited to attend in person at the new Tesla factory in Austin, Texas.
Will the Tesla stock split cure all that ails the formerly robust Tesla stock? Tune back in around August 4 to see.
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