When Elon Musk wants cash, he can simply borrow money by putting up—or pledging—some of his Tesla shares as collateral for lines of credit, instead of selling shares and paying capital gains taxes. These pledged shares serve as an evergreen credit facility, giving Musk access to cash when he needs it. Musk currently has pledged 88.3 million Tesla shares, nearly 36.2% of his overall stake (excluding options), as of Wednesday worth more than $94 billion. Musk is one of 32 billionaires identified in the Forbes 400 list of richest Americans to be pledging public stock of companies listed on the NYSE or Nasdaq exchanges as collateral for current or potential lines of credit, as disclosed in company filings. Other pledgers include fellow mega-pledger Oracle chairman Larry Ellison, Walmart heir Jim Walton, and private equity’s richest person, Stephen Schwarzman. (Three others pledged shares of foreign companies are not included in this report.) Information on companies’ pledging policies—found in annual proxy statements—-offer a window into the murky world of billionaire borrowing. The topic entered the national microscope in June after ProPublica’s report on leaked IRS data showed that several of the richest people paid nothing in federal income taxes in certain years. Last month, a proposed wealth tax from Senate Democrat Ron Wyden failed to win political support. That measure would have taxed unrealized capital gains of America’s richest individuals. Most details on billionaire borrowing remain private. Individuals who own less than a 5% stake in a company, or who don’t work for that company, do not report stock ownership or pledging of shares to the SEC. Many of America's wealthiest people—232 billionaires from this year’s Forbes 400 list, to be exact—hold their fortunes primarily in private companies. Any pledges against diversified baskets of stock or private assets are not reported in company filings. Disclosure requirements also do not include reporting whether, or how much, an individual has borrowed against their pledged shares. A few billionaires Forbes contacted said they don’t have outstanding debt against their pledges.
When you or I want to borrow money, we'd go to a bank and put up our home or something valuable
as collateral. When the world's richest people want to borrow money, they can put up or pledge
some of their shares in public companies as collateral for lines of credit instead of selling
shares and paying capital gains taxes. Pledging shares is when an individual puts up their stake
in a public company as collateral to take on personal lines of credit. That debt can be for
any number of reasons, whether it's buying real estate, investing in other companies, or even
buying more stock of the share that's being pledged. The benefits for pledging are pretty
straightforward. It allows shareholders to access cash while preserving their power within a company
and avoiding capital gains taxes. Since 2006, the SEC has required all public companies to disclose
pledged shares of executive officers, directors, or individuals who hold more than 5% of a company's
outstanding stock. It's also important to note here that billionaires are doing the majority
of share pledging, at least in terms of value. There are currently 560 executive officers,
directors, and 5% plus shareholders who are currently pledging shares, but just 32 members
of the Forbes 400 list of richest Americans account for the vast majority of the aggregate
value of all pledged shares in the market. Tesla CEO Elon Musk is the richest and most famous
pledger of company shares, but I think the more revealing and interesting example is actually
Larry Ellison, the Oracle co-founder who boasts a fortune of over $100 billion.
Ellison has been pledging his Oracle shares to take on debt for at least two decades.
In 2018, Oracle's board of directors started prohibiting share pledging,
but Ellison, the only Oracle employee to ever report pledging shares,
was also the only individual exempted from the new company policy. For critics of billionaire
borrowing, Ellison is something of an ideal case study. The billionaire has seemingly used
pledging to finance his real estate spending spree, including an estimated $300 million
on the Hawaiian island of Bonai, while preserving his power at Oracle.
More than two-thirds of S&P 500 companies ban all company employees and shareholders
from pledging shares for debt. 22% prohibit pledging, but with exemptions for certain
individuals, and only 3.4% fully permit it. Share pledging is a corporate governance issue.
It's something that outside shareholders and institutional investors frown upon.
The larger the company, the more likely they are to attract sophisticated institutional investors
who have certain expectations on corporate governance matters like pledging.
They say that pledging creates a misalignment of incentives between shareholders. The idea here is
that pledgers, by diversifying their wealth through debt-financed investments, are essentially
reducing their immediate economic interest in a company's success. The bigger risk, though,
is that pledgers face margin calls against loans they've taken out. If the price of a
pledged stock falls, a lender may demand the borrower put up more collateral to secure a loan.
If a pledger isn't liquid enough to do that, then they may have to sell a significant amount
of the company stock being pledged, which can put further downward pressure on the share price
and generate more anxiety amongst outside shareholders. Margin calls against pledged
Many companies don't make arguments against pledging, but defenders of the practice,
including Tesla, argue pledging creates a fiduciary relationship between pledgers and
shareholders. In 2018, The Electric Carmaker argued that pledging gives
executive officers flexibility in financial planning without having to rely on large
cash compensation or the sale of company shares, thus keeping their interests well-aligned with
those of our stockholders while also mitigating risk exposure to the company.
When we talk about share pledging, we have to keep in mind that it is a limited slice of the
overall pie of assets that are being pledged for debt in the market. And when it comes to
the world of billionaire borrowing, there's still a lot we don't know. Individuals who
collateralize private stakes or diversify baskets of securities for which they're
not serving as a director or executive officer, we don't have information on those pledges and
the debt that's being taken out against those pledges. So while pledge shares offer a window
onto the world of billionaire borrowing, it's still a pretty murky world and there's a lot
we don't know.
