Elon Musk and Tesla Board Members Face Suit from Shareholders
By Cory Baker, University of Minnesota Crookston, Class of 2023
July 2, 2021
One of the most prominent and iconic Silicon Valley companies, Tesla, is under fire for its inability to control CEO Elon Musk. This company prides itself on limiting the world's reliance on fossil fuel consumption by producing innovative renewable energy solutions. Tesla’s business model has developed a successful venture into the electric vehicle, solar roofs, and solar panel industries. However, with an eccentric CEO who irrationally expresses his ideas over social media platforms, one shareholder has seen enough. Recently investor Chase Gharrity brought about a derivative lawsuit against its CEO Elon Musk and its board of directors for “accuses the electric vehicle maker’s board of failing to rein in Musk’s behavior online, even as he has repeatedly violated a 2018 settlement with the Securities and Exchange Commission.”.[6] The suit was filed under Delaware Chancery Court and unsealed on March 11th, 2021 “claiming Musk has exposed the company to billions in potential liability and market losses”.[6]
Mr. Gharrity is but a representative for Tesla and personally doesn’t gain anything from the suit but rather defends the interests of the company. Corporations are legal entities separate from their owners and owned by the shareholders who invest in them. Through the articles of incorporation, the shareholders are responsible for appointing a board of directors who then appoint the officers to run the day-to-day operations.[5] Under a derivative suit, the shareholders bring about a complaint “on behalf of a corporation when the corporation has a valid cause of action but has refused to use it”. [2] Without them the company and its board of directors would not be held liable for actions or inactions that damage the company in any way. This suit focuses on a fiduciary duty that the directors and officers had towards Tesla. These fiduciary duties can be broken up into the duties of care, loyalty, good faith, confidentiality, prudence, and disclosure.[1]
The actions taken by Mr. Gharrity stem from a previous suit against both Tesla and Musk filed by the SEC in 2018. At the time Elon Musk was both the chairman of the board and the CEO, which gave him tremendous influence over the Tesla corporation. With a strong Twitter presence, Elon Musk was charged with securities fraud due to a misleading tweet regarding Tesla’s share price and its ability to go private. “The SEC’s complaint alleged that, in truth, Musk knew that the potential transaction was uncertain and subject to numerous contingencies. Musk had not discussed specific deal terms, including price, with any potential financing partners, and his statements about the possible transaction lacked an adequate basis in fact.”[8] After making that tweet Tesla’s stock price rose by 6% over the day.
The SEC also charged Tesla with “failing to have the required disclosure controls and procedures relating to Musk’s tweets… nor did it have sufficient processes in place to that Musk’s tweets were accurate or complete”.[8] The suits ending in settlements for both Tesla and Elon Musk who neither denied nor admitted to the claims. The following actions were agreed upon by both parties.
1. “Musk will step down as Tesla’s Chairman and be replaced by an independent Chairman. Musk will be ineligible to be re-elected Chairman for three years.
2. Tesla will appoint a total of two new independent directors to its board.
3. Tesla will establish a new committee of independent directors and put in place additional controls and procedures to oversee Musk’s communications;
4. Musk and Tesla will each pay a separate $20 million penalty. The $40 million in penalties will be distributed to harmed investors under a court-approved process.” [8]
Within the derivative suit, Mr. Gharrity references a tweet like that of the 2018 situation that led to the SEC settlement. However, in this case, instead of an upward movement in price, Elon triggered a downward pressure on the stock by 10%. This occurred in May of 2020 when Elon Musk stated on Twitter that the stock was too high and that he was claiming to sell “almost all of his physical possessions and won’t own a house”.[4] Various investors believe that Mr. Musk was reacting to the Coronavirus pandemic and turned to Twitter as a coping mechanism.[4] This would seem like a violation of the settlement, however, the SEC has not confirmed it.
Even though he has allegedly “continued to issue tweets without the required pre-approval,” set about in the rules.[6] A contempt claim in 2019 triggered the SEC to tighten the rules of his past settlement. In this tweet, he suggested a production volume that was inaccurate and need not met the pre-approval from Tesla’s lawyers. Elon Musk is pushing the limits of the SEC with these actions and has made comments such as “I want to be clear, I do not respect the SEC. I do not respect them.”[7] This derivative suit illustrates his attitude toward these regulations and motivates the shareholders to do what they believe is best for the Tesla Corporation.
______________________________________________________________
Cory Baker is a Finance major at the University of Minnesota Crookston with an interest in corporate law and he plans to attend law school to receive a JD. His dream job would be to work as a securities attorney for the SEC or with a firm handling mergers and acquisitions, bankruptcy, and corporate governance. Cory currently lives in Montana with his dog and immediate family.
______________________________________________________________
[1] Cornell Law School. (2021a). Fiduciary Duty. Legal Information Institute. Retrieved from https://www.law.cornell.edu/wex/Fiduciary_Duty
[2] Cornell Law School. (2021b). Shareholder derivative suit. Legal Information Institute. Retrieved from https://www.law.cornell.edu/wex/shareholder_derivative_suit
[3] Gharrity vs. Musk et al. (2021). Court of Chancery of the State of Delaware. Retrieved from https://www.bloomberglaw.com/public/desktop/document/CONFCOMPLAINTChaseGharrityvElonMusketalDocketNo20210199DelChMar08?1620676593
[4] Hull, D. (2020). Tesla Falls as Musk Says Stock Too High in 2018-Style Tweets. Bloomberg Law. Retrieved from https://news.bloomberglaw.com/esg/tesla-falls-after-musk-says-stock-too-high-in-2018-style-tweets
[5] Justia. (2021). Shareholder derivative lawsuits. Retrieved from https://www.justia.com/business-operations/business-disputes/shareholder-derivative-lawsuits/
[6] Leonard, M. & Ramonas, A. (2021). Musk, Tesla Board Sued Over Tweeting in Violation of SEC Deal (2). Bloomberg Law. Retrieved from https://news.bloomberglaw.com/securities-law/musk-tesla-board-sued-over-tweeting-in-violation-of-sec-deal
[7] Neate, R. (2019). Elon Musk could face contempt charge over 'inaccurate' Tesla tweet. The Guardian. Retrieved from https://www.theguardian.com/technology/2019/feb/25/elon-musk-tesla-judge-contempt-sec
[8] U.S. Securities and Exchange Commission. (2018). Elon Musk Settles SEC Fraud Charges; Tesla Charged with and Resolves Securities Law Charge. Retrieved from https://www.sec.gov/news/press-release/2018-226













