Elon Musk's Recent Move to Empower Investors Has Made Suing Tesla Almost Impossible | Carscoops

      Upon relocating its incorporation to Texas, Tesla made adjustments to avoid potential lawsuits from smaller investors.

      5 hours ago

      By Brad Anderson

      Shareholders must now own a minimum of 3% stake in Tesla to initiate lawsuits for fiduciary violations.

      Currently, a 3% stake in Tesla is valued at over $34 billion based on market rates.

      A Delaware judge has twice blocked Elon Musk's unprecedented pay package.

      Interestingly, it wasn’t a significant Tesla shareholder who challenged Elon Musk’s record-setting $56 billion compensation in court, but rather an individual with just nine Tesla shares. Naturally, Tesla aims to prevent a recurrence of that situation. Therefore, earlier this month, the company discreetly amended its corporate bylaws to make it more difficult for shareholders to sue the board or executives for suspected fiduciary breaches.

      Tesla’s recent filings indicate that an investor must now possess at least 3% of Tesla’s outstanding shares to pursue legal action. With the current market value of the automaker, this translates to needing around 97 million shares worth over $34 billion to even consider taking legal steps. Good luck with that.

      The Texas Twist

      What prompted the change? Tesla was able to implement this adjustment following its recent move to Texas, a state with corporate-friendly laws compared to Delaware, where Tesla was originally incorporated. Richard Tornetta, the shareholder who initially sued over Musk's compensation, filed his lawsuit when Tesla was still incorporated in Delaware. However, last year, after obtaining shareholder approval, Tesla transitioned to Texas, facilitating the adoption of these new bylaws that limit lawsuits.

      In an interview with CNBC, corporate and securities law trial attorney Ann Lipton noted that Tesla is capitalizing on more permissive Texas laws that allow firms to restrict shareholder lawsuits for alleged fiduciary duty violations. While most Tesla shareholders may be unaware, this change significantly curtails their ability to bring the company to court for misdeeds.

      Musk’s Pay Saga

      Elon Musk is still striving to have his compensation package reinstated. In 2018, the world’s wealthiest individual opted not to draw a salary from Tesla and negotiated a deal to purchase 303 million shares at $23 each, contingent upon the company achieving specific performance and valuation benchmarks. Although all targets were met, Delaware Chancellor Kathaleen McCormick nullified the pay plan in January 2024, stating that the Tesla board members who approved it were essentially tied to Musk’s influence.

      Tesla shareholders subsequently voted on the pay package again, and it received approval a second time. Yet, the judge blocked the arrangement once more. This pay plan seems inescapable, as does Musk's commitment to see it reinstated.