Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance at Harvard Law School. Kobi Kastiel is Professor of Law at Tel Aviv University and Senior Fellow of the Harvard Program on Corporate Governance.
According to media reports, in what is expected to be the largest IPO of all time, SpaceX is seeking to raise as much as $75 billion at a valuation of more than $2 trillion. SpaceX could well have assets with very high value and exceptional growth prospects, and investor enthusiasm about it might thus be fully understandable. However, SpaceX also has poor governance arrangements which would have considerable adverse effects on public investors.
In this post, we examine some key governance defects in the SpaceX structure. We explain how they should be expected to (i) provide Musk with substantial value at the expense of public investors and (ii) produce value-decreasing inefficiencies by distorting incentives and decisions. Public investors seeking to determine the price at which they would be willing to purchase SpaceX shares should recognize and take into account these governance flaws.
(The prospectus of SpaceX was not publicly available as of the time that this post was written; the discussion below is based on media reports based on reviews of the draft of the prospectus.)
In particular, we discuss below in turn:
(a)The risk that Musk would over time become a controller with a small-minority or even very-small-minority stake which would involve a poor alignment of his and public investors’ interests;
(b)The perpetual nature of the small-minority control structure, which should be expected to remain in place even if this structure proves highly inefficient; and
(c) Why Musk may have had incentives to adopt a governance structure that provides him with private benefits even if it is substantially inefficient.
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