Another Lawsuit Confronts Elon Musk As He Continues To Use Twitter To Disseminate Investor Information
Elon Musk, with a net worth close to $240 billion, is not one to shy away from his dislike of the Securities and Exchange Commission (“SEC”). (Forbes, last visited Feb. 4th, 2022). As the CEO of Tesla, Inc. (“Tesla”), Musk has repeatedly tweeted comments that have affected both Tesla’s stock price and his reputation with investors. A tweet from November 6, 2021 regarding Tesla has caught the eye of investors, some of whom filed a Delaware lawsuit on December 16, 2021, alleging mismanagement of the company based on the tweet. (Mike Leonard, Bloomberg Law). The tweet polled Musk’s approximately 70 million followers asking if he should sell a tenth of his stake in the company, and 57.9% of those who viewed his poll voted for the sale. (Subrat Patnaik, Vidya Ranganathan, and Chris Prentice, Reuters Business). As a result of that single tweet, Tesla lost about $60 billion of its market value and its shares fell 4.8% by the end of the day. Id. In addition to raising concerns regarding Musk’s compliance with his 2018 SEC settlement agreement, the event also calls to mind the boundaries of market manipulation under federal securities laws, which will be discussed below. Id.
In the December 2021 lawsuit, a Tesla stockholder stated that because of Musk’s potential violation of the 2018 SEC settlement agreement through his tweets, he believed that Tesla’s Board of Directors was breaching their fiduciary duties to stockholders and accordingly, on this basis, exercised his right to inspect certain records of the company. (Compl., David M. Wagner v. Tesla, Inc., (Del. Ch. 2021) (No. 2021-1090)). The lawsuit was filed after Tesla allegedly failed to comply with this records inspection request, and the stockholder wants the Court to require Tesla to produce multiple documents, including board materials relating to Musk’s November 6 tweet and policies and procedures in place to review his tweets. Id. The shareholder’s ultimate goal is to inspect the company’s documents to determine if there is sufficient evidence to file a lawsuit against one or more board members for breach of fiduciary duties, namely the duty of care and duty of loyalty. (Compl., David M. Wagner, v. Tesla, Inc.) If the Court determines that there is a “credible basis” for document inspection, Tesla will be required to turn over the requested documents to shareholders for review. (8 Del. C. § 220).
The plaintiff stockholder described other concerning tweets made by Musk since he began using Twitter to convey additional information about Tesla to investors. (Compl., David M. Wagner, v. Tesla, Inc.) Notably, Musk tweeted in August 2018 that he had secured funding to transform Tesla into a private corporation, but there was insufficient funding in place, and privatization did not occur. Id. The lawsuit also mentioned Musk’s December 2021 Twitter “feud” with Senator Elizabeth Warren (D-Mass.) and how that multi-day discussion resulted in Tesla’s stock dropping nearly 10%. Id. Furthermore, the lawsuit describes a September 2018 settlement agreement between Musk and the SEC, which required Tesla to implement procedures to pre-approve any written communications by Musk that contained information relevant to Tesla or its stockholders. Id. The agreement was amended in 2019, but the lawsuit questions who, if anyone, is reviewing Musk’s tweets, especially considering that Tesla did not appear to have a General Counsel at the time of Musk’s November 2021 tweet. Id. Based on these and other similar concerns, the plaintiff stockholder argues that there is a credible basis to believe that Tesla is being mismanaged and, thus, seeks to have his document demand ordered by the Court. Id. Musk’s tweets concerning the proposed privatization of Tesla and whether he should sell a significant portion of his shares in Tesla raise potential market manipulation concerns on their own. However, there is no indication that Musk intends to raise or lower the purchase price of Tesla stock through his tweets or to induce others to buy or sell their shares in the company, which is a specific activity prohibited by 15 U.S.C. § 78i. (15 U.S.C. § 78i(a)(2)). Although the lawsuit filed in December 2021 does not make any market manipulation claims, Elon’s Twitter missteps certainly shine a bright light on the potential insufficiency of board oversight of Tesla’s management.
On top of tweeting about Tesla’s financial health, Musk has also expressed his disdain for the SEC, most directly in a December 2018 60 Minutes interview with Lesley Stahl. He stated specifically that he has “no respect for the SEC,” and said he is only complying with the settlement agreement out of respect for the justice system. Aligning with that view, a lawyer at Tesla recently asked one of the company’s outside law firms, Cooley LLP, to fire one of its attorneys or the firm would run the risk of losing Tesla as a client. (Jacob Pramuk, CNBC). The attorney in question previously worked for the SEC and had interviewed Musk regarding a 2018 tweet. Id. Furthermore, both Tesla and Space Exploration Technologies (“SpaceX”), also owned by Musk, appear to be looking to other firms for work instead of Cooley. Id.
Although Musk is no longer the chairperson of Tesla, he still wields significant influence as the company’s CEO. Because investors bear the risks of their own investments, it would behoove investors in Tesla to approach Musk’s tweets with a high level of scrutiny. Additionally, shareholders should never hesitate to exercise their rights, which include requesting to inspect financial records and board minutes if there is suspicion of mismanagement of any private or public company that is invested in.