SpaceX IPO Structure Gives Musk Unchecked Control, Limits Shareholder Rights

SpaceX has adopted corporate governance policies that will significantly limit shareholder protections when the rocket maker goes public later this year, giving founder Elon Musk virtually unchecked executive authority, according to excerpts of SpaceX’s IPO registration statement reviewed by Reuters. The company is combining supervoting shares, mandatory arbitration, stricter rules on shareholder proposals, and Texas corporate law to concentrate power with Musk and other insiders while sharply limiting investors’ ability to challenge management, sue in court, and force votes on governance issues.

Musk’s Voting Control and Board Authority

According to a May 4 filing with federal regulators, Musk holds 42.5% of SpaceX’s equity and 83.8% of the voting control. SpaceX plans to use a dual-class equity structure where Class B shareholders receive 10 votes for every Class A share available to everyday investors. Musk’s Class B stock, which will not be available to the public, will allow him to retain more than 50% of the voting power after the company goes public.

Musk will serve as CEO, chief technology officer, and chairman of SpaceX’s nine-member board of directors after the stock starts trading. The company’s filing states that Musk will have the power to “elect, remove or fill any vacancy” among board directors. The only person who can fire Musk is Musk himself, who will retain majority control through his supervoting shares. Musk will also control issues requiring shareholder approval, including mergers and acquisitions, potentially making it easier to merge with Tesla if he chooses to do so.

Supervoting shares will be immediately converted to Class A shares if sold, further consolidating power among remaining Class B holders. Although the company can issue additional Class B shares, only Musk, his family, and “certain entities” will be eligible to receive them, according to the filing.

‘Controlled Company’ Status and Exemptions

Musk’s voting power will make SpaceX a “controlled company” under securities rules, the filing shows. This designation allows the company to bypass certain corporate-governance requirements. While most publicly traded companies are required to have independent directors make up a majority of their nominating and compensation committees, controlled companies do not have to, and SpaceX said it does not plan to.

The company warned investors in its risk factors that “you will not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements.” Corporate governance experts note that this structure protects SpaceX from the kind of shareholder criticism that Tesla investors have directed at Musk, including challenges to his pay package and the acquisition of his solar energy company, SolarCity.

Mandatory Arbitration and Restricted Legal Rights

SpaceX significantly limits shareholders’ rights to sue. The company’s bylaws will require anyone who owns shares to “irrevocably and unconditionally” waive 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 is a private proceeding overseen by arbitrators. The Securities and Exchange Commission reversed its previous position in September, allowing companies to adopt mandatory arbitration policies.

Bruce Herbert, CEO of Seattle-based sustainability-focused wealth management firm Newground Social Investment, criticized the structure, stating: “It closes the voting door, the courthouse door and the proposal door simultaneously. It’s unprecedented in terms of creating a total lack of accountability.”

Texas Incorporation and Enhanced Restrictions

SpaceX moved its incorporation from Delaware to Texas in 2024, taking advantage of the Lone Star State’s largely untested new governance laws. Texas adopted amendments to the Texas Business Organizations Code that significantly curtail investor protections. The state’s securities laws make it harder for challengers to make unsolicited tender offers, run proxy contests, or remove officers and directors.

Shareholders will have a harder time getting their proposals to a vote. Under a new Texas rule, they will need to own at least $1 million in stock or 3% of the company to force a vote. Musk abandoned Delaware after a judge there ruled to strip him of a 2018 Tesla pay package worth $56 billion — a ruling that was recently reversed.

Jill Fisch, a University of Pennsylvania law professor, said: “It’s definitely one of the most restrictive IPOs. He (Musk) is taking advantage of this ownership structure and the Texas provisions.”

Investment Appeal Despite Restrictions

The restrictions may not stop investors from piling in. SpaceX eyes up to $75 billion in proceeds and a $1.75 trillion valuation, making it expected to be the biggest initial public offering in history. Some investors see relinquishing some of their rights as the cost to buy into a company led by Musk, who many investors view as a visionary. At Tesla, the board recently awarded Musk a 10-year pay package worth close to $1 trillion, and Tesla shares have risen from their 2010 debut at $17 to about $397.55 as of Wednesday afternoon, providing annualized returns of about 42% with stock splits, according to LSEG data.

Ann Lipton, a professor of law at the University of Colorado Law School, noted: “SpaceX is going to be such a huge part of the market that for most portfolio managers it’s very difficult not to buy, because it’s going to be driving the price of everything. And if SpaceX soars, and you don’t have a piece of it, then you’re going to look like you’re underperforming the market by comparison.”

Corporate governance experts warn that Musk’s SpaceX structure may set a precedent for other high-profile, founder-led IPOs expected to come to market later this year or next, including artificial-intelligence companies Anthropic and OpenAI. Shang Chou, co-founder of Dishmi Capital, said of Musk, OpenAI founder Sam Altman and other founders: “They are all complicated, potentially controversial figures that are also creating history in real time. You focus less on valuation and more on the fact that you’ve been offered a seat on a rocket ship.”

Joel Shulman, founder and chief investment officer of ERShares, which manages the $993 million Private/Public Crossover ETF, said he has no issues with the restrictions as a SpaceX investor: “I would rather have him making these decisions and be in control. He may be controversial and polarizing and he does some crazy, bizarre things sometimes, but he’s a brilliant guy when it comes to building something completely new and building wealth” for himself and shareholders.