As Tesla CEO Elon Musk prepares to take SpaceX, another of his privately-owned companies public, the governance structure proposed for the company is sparking debate over whether a CEO and a board of directors controlled by the chief executive can adequately fulfill the traditional fiduciary duties of a corporate board. Corporate directors and officers are “bound to act in the best interests of the company and its shareholders.” However, observers say the governing principals SpaceX proposes suggest that there may be obstacles preventing appointed board members from meeting their legal and ethical obligations as a fiduciary.

According to an analysis of a May 4 filing with federal regulators in a Reuters news article:

• Musk will be CEO, chief technical officer and chairman of SpaceX’s nine-member board of directors.
• Musk will own 42.5 percent of the company’s equity and 83.8 percent of the voting control.
• SpaceX plans to use a dual-class equity structure that gives Musk and other insider Class B shareholders 10 votes for every Class A share available to retail investors. This ensures that Musk and other insiders with supervoting shares will have the power to “elect, remove or fill any vacancy” on the board of directors.
• Musk will also have ⁠the power to control other issues requiring shareholder approval, including M&A transactions, potentially making it easier to merge with Tesla later if he wants.
• SpaceX plans to be designated as a “controlled company” under securities rules, allowing the company to bypass certain corporate-governance requirements such as having a majority of its nominating and compensation committees made up of independent directors.
• SpaceX’s bylaws will make it clear that anyone who owns shares “irrevocably and unconditionally” waives all rights to pursue a jury trial. Shareholders will also be prohibited from bringing class actions against the company, its directors, officers, controlling shareholders or bankers tied to the IPO, according to the filing. Instead, shareholders will be subject to mandatory arbitration, ​which had long been illegal in the U.S.

In response, a May 14 letter from New York State comptroller Thomas P. DiNapoli, New York City comptroller Mark Levine, and Marcie Frost, chief executive officer, CalPERS stated that the measures SpaceX plans to implement “would constitute the most management-favorable governance structure ever brought to the U.S. public markets.”

Additionally, the letter complains that “Musk could only be removed from the board, or from his positions as CEO and Chair, by a vote of Class B holders—votes he himself controls. Removal of the Company’s most powerful officer would, as a mathematical matter, require his own vote—essentially making him unfireable without his own consent. This level of insulation from accountability is virtually unheard of among any other large U.S. issuer whose governing documents foreclose accountability to public owners.”

So, as fiduciaries, pension fund managers and other asset managers must legally consider the risks of investing in a company that has few if any guardrails that can protect shareholders. Unfortunately, since many asset managers invest in Index funds, they will almost assuredly become holders of SpaceX shares once the company goes public. Given this reality and the restrictive governance structure SpaceX is pursuing, boards might consider asking some of the following questions at their next meeting:

• If a company’s governance structure effectively eliminates CEO and board accountability, what does a corporate director’s fiduciary duty entail? How might this change corporate board members’ responsibilities now and in the future?
• If SpaceX implements its restrictive governance structure, will that influence other companies planning Initial Public Offerings to adopt similar restrictions? How would your board vote if your company CEO suggested the company modify its bylaws to restrict shareholder rights?
• Is a director’s fiduciary duty to shareholders more important than their duty to pursue company profit? If a company can accept investor funds, yet severely restrict or eliminate shareholder rights, is this creating more of a “passive ownership” model closer to what private companies operate under rather than an “active ownership” model that public companies are currently operating under?