Tesla Inc. is turning to its legion of small shareholders as it seeks to gain support for Elon Musk's contentious $56 billion pay package, a move that could significantly influence the outcome of the company's annual meeting on June 13. With major institutional investors divided over the issue, the electric carmaker is leveraging its unique ownership structure, heavily populated by retail investors, to sway the vote in Musk's favor.

The upcoming vote is seen as a critical referendum on Musk's leadership following a Delaware court ruling that struck down his substantial compensation package. Should shareholders reaffirm the pay deal, Musk could control more than 20% of Tesla. A rejection, however, could have unpredictable repercussions.

In addition to the pay package, Tesla is proposing to reincorporate in Texas, moving away from Delaware, and re-elect two directors, including Musk's brother, Kimbal. Despite the dozen items up for a vote, the focus remains firmly on Musk's compensation and the relocation proposal. Tesla's outreach to small shareholders has included a dedicated website, engagement with online influencers, and even factory tours for those who participate in the vote.

Big investors have shown mixed reactions. T. Rowe Price has expressed support, stating the package aligns well with investor interests. Conversely, the California Public Employees' Retirement System and Norway's sovereign wealth fund have opposed the pay deal, citing it as disproportionate to Tesla's performance.

The reliance on small investors, who generally favor management but often do not vote, is strategic. Bruce Goldfarb, president of Okapi Partners, notes that while retail investors typically support management, their low voting participation poses a challenge. "Retail shareholders are wildly apathetic even if they're supportive," he said. Data shows that only about 30% of retail shareholders voted their shares in 2023, compared to 80% for institutional investors.

Tesla Chair Robyn Denholm framed the vote as an issue of "fairness, respect and the future of Tesla." In a June 5 letter, she emphasized Musk's limited time and diverse interests, urging shareholders to retain his focus on Tesla. "We want those ideas, that energy and that time to be at Tesla, for the benefit of you, our owners. But that requires reciprocal respect," she wrote.

As of June 5, about 43% of Tesla's common stock was held by the "public and other" category, which includes retail investors, the highest among the top 15 companies in the S&P 500. Musk himself holds around 13% of Tesla, with Vanguard and BlackRock owning 7.2% and 5.9% respectively. Both Vanguard and BlackRock have not publicly disclosed their voting intentions.

The major proxy advisers, Institutional Shareholder Services (ISS) and Glass Lewis, have recommended against ratifying Musk's pay package, labeling it as excessive. Historically, when both advisers recommend against a "say on pay" resolution, only 66% pass compared to 99% when they support it, according to University of Utah finance professor Chong Shu.

Musk still enjoys considerable online support from influential users, such as Omar Qazi, who believes there is only a 50% chance the pay package will be re-ratified. "Many support Musk and see the importance of compensating him but many are also upset about a variety of factors: politics, slowing sales, stock price etc," Qazi said. Tesla's stock has struggled, closing Friday at $177.48, significantly down from its 2023 peak, amidst increasing competition and questions about future models.

Despite these challenges, some shareholders remain steadfast in their support. Troy Dillon, a retired U.S. Air Force officer and Tesla shareholder, stated, "The deal was the deal," and is voting for it. Ron Baron, CEO of Baron Capital, a significant Tesla shareholder, defended Musk's compensation, arguing that his achievements justified the package. "He performed under his compensation contract. He earned his pay. Elon is the ultimate 'key man.' Without his relentless drive and uncompromising standards, there would be no Tesla," Baron stated.

The shareholders' meeting will also decide on relocating Tesla's state of incorporation from Delaware to Texas, a move some see as an attempt to avoid Delaware's judicial scrutiny. Despite this, Tesla attorneys have argued that the proposed move is not intended to evade the court's jurisdiction.