The Grabar Law Office has brought a shareholder derivative action for the benefit of Nominal Defendant Tesla. This derivative action is brought against certain current members of the Company’s Board of Directors (the “Board”) and certain current officers (collectively, the “Individual Defendants”) seeking to remedy the Individual Defendants’ violations of state law and breaches of fiduciary duty.
As alleged, on November 5, 2013, Tesla publicly filed a Form 8-K with the SEC stating that it intended to use CEO and Chairman of the Board defendant Elon Musk’s (“Musk”) Twitter account as a means of announcing material information to the public. Since that time, Musk has used his Twitter account as a means of issuing material information about the Company, including forward-looking guidance concerning key Tesla financial metrics and key non-financial metrics including production forecasts, production achievements, and new product releases. At no time did Tesla, however, have any disclosure controls or procedures in place whatsoever to assess whether the information Musk disseminated via his Twitter account was required to be disclosed in reports Tesla files pursuant to the Securities Exchange Act of 1934 (“Exchange Act”) within the time periods specified in the SEC’s rules and forms. Nor did the Company have sufficient processes in place to ensure the information Musk published via his Twitter account was accurate or complete.
On August 7, 2018, Musk posted via Twitter.com to his more than twenty-two million followers: “Am considering taking Tesla private at $420. Funding secured.” Later that same day, Musk issued another post on Twitter.com: “Investor support is confirmed. Only reason why this is not certain is that it’s contingent on a shareholder vote.” Also, on the same day following the announcement by Musk on Twitter.com, Tesla posted to its website an email from Musk to Tesla employees titled “Taking Tesla Private.” This email provided some additional information to employees including that shareholders would be given a choice, “they can stay investors in a private Tesla or they can be bought out at $420 per share.”
Following these statements, Tesla’s stock price surged, reaching an intraday high of $387.46 per share, before closing at $379.57 per share on August 7, 2018, a nearly 11% increase from the previous closing price. Over the next several days, additional information was publicly disseminated about the so-called ‘going- private deal.”
On August 8, 2018, The Wall Street Journal published an article entitled “SEC Probes Tesla CEO Musk’s Tweets,” reporting that U.S. regulators were inquiring whether “Elon Musk was truthful when he tweeted that he had secured funding” for the proposed buyout of Tesla and whether Musk had a “factual basis” for posting “that the going-private transaction was all but certain, with only a shareholder vote needed to pull it off.” On news of the SEC probe, Tesla’s stock price fell $9.23 per share, or 2.43%, to close at $370.34 on August 8, 2018.
On August 9, 2018, Bloomberg published an article entitled “The SEC Is Intensifying Its Probe of Tesla,” reporting that SEC regulators were “intensifying its scrutiny of Tesla Inc.’s public statements in the wake of Elon Musk’s provocative tweet Tuesday about taking the electric-car company private.” That same day, Reuters published an article entitled “Exclusive – Tesla’s board seeking more information on Musk’s financing plan – sources,” reporting that the Company’s board of directors had “not yet received a detailed financing plan from Musk and specific information about who will provide the funding.” As a result of these additional disclosures, indicating the lack of funding for taking the Company private, Tesla’s stock price fell an additional $17.89 per share, or 4.83%, to close at $352.45 per share on August 9, 2018.
On August 13, 2018, defendant Musk tweeted; “I’m excited to work with Silver Lake and Goldman Sachs as financial advisors, plus Wachtel, Lipton, Rosen & Katz and Munger, Tolles & Olson as legal advisors, on the proposal to take Tesla private.” That same day, The New York Times published an article entitled “Tesla Board Surprised by Elon Musk’s Tweet on Taking Carmaker Private,” reporting that some members of Tesla’s Board were “totally blindsided by Mr. Musk’s decision to air his plan on Twitter,” which had not been “cleared” by the board.
On August 14, 2018, Bloomberg published an article entitled “Goldman’s Missing mandate Adds to Clues Musk Tweeted Out of Turn,” reporting that neither Silver Lake or Goldman Sachs were yet working with Musk pursuant to a signed agreement or in an official capacity when Musk said on Twitter late Monday, August 13, 2018, both firms were working with him as financial advisors.
Following these public revelations, Tesla’s stock price fell $8.77 per share, or 2.46%, to close at $347.64 per share on August 14, 2018.
On August 16, 2018, after the close of the market, The New York Times published an in-depth interview with Musk entitled “Elon Musk Details ‘Excruciating’ Personal Toll of Tesla Turmoil,” which revealed the stress Musk had been under, his use of Ambien, and the manner in which the August 7, 2018, going-private tweets had been conceived. That same day, The Wall Street Journal reported that the “SEC is investigating whether Mr. Musk intentionally misled investors when he tweeted about the proposal in a bid to hurt short-sellers by driving up Tesla’s stock price.” The article went on to state that “regulators are pressing Tesla’s directors to reveal how much information Mr. Musk shared with them before he tweeted about it last week.” On this news, Tesla’s stock price dropped $29.95 per share or 8.92%, to close at $305.50 per share on August 17, 2018. Indeed, on August 24, 2018, after the close of the market, the Company revealed through a post on its corporate blog that the Company would remain public, adding that existing shareholders believed the Company to be “better off as a public company.”
As a result of Musk’s tweets concerning taking Tesla private and the public revelations that those statements were materially false and misleading causing a substantial drop in the price of the Company’s stock price, numerous securities class actions were filed against Tesla, Musk and others.
Subsequently, on September 27, 2018, the SEC brought an enforcement action against Musk and Tesla concerning his tweets about taking Tesla private. In fact, according to the SEC Actions, Musk did not have funding secured and had not even discussed key deal terms, including the price, with any potential funding source. Furthermore, it was not feasible to take the Company private in the way that Musk described and there were many additional contingencies that Musk failed to consider that made any such going-private plan highly uncertain.
The SEC Actions settled quickly on September 29, 2018, subject to court approval. According to the two settlements, Musk and Tesla much each pay $20 million or $40 million total.
The terms of the settlements of the SEC Actions are as follows: (i) Musk is to resign from his role as chairman of the Board of Tesla for a period of at least three years; (ii) the Company is to add two independent directors to its Board; (iii) the Board is to create a permanent committee, consisting of solely independent directors, to oversee: (a) implementation of the terms of the settlements; (b) controls and procedures governing the Company’s and its senior executives’ disclosures and/or public statements that relate to the Company; and (c) review and resolution of human resources issues or issues raising conflicts of interest that involve any member of executive management; (iv) employ or designate an experienced securities lawyer to review communications made through Twitter and other social media by the Company’s senior officers in a manner consistent with the Company’s disclosure policy and procedures, including those set forth in; (v) below, as well as advising the Company on securities issues, including compliance with all federal laws and regulations; and (vi) implement mandatory procedures and controls to oversee all of Musk’s communications regarding the Company in any format and to pre-approve all such communications that contain, information material to the Company and its shareholders.
As alleged, the Board is well aware of Musk’s history of making false and misleading statements resulting in alleged violations of the federal securities laws, specifically those related to Model 3 production volume and issues with the production process.
Despite being put on notice of Musk’s propensity for erratic public communications that have harmed the Company and its stockholders, the Board consciously disregarded his actions and failed to do anything. The Board put their loyalties to Musk ahead of their fiduciary duties to the Company and its shareholders. Moreover, a majority of the Board lacks independence from Musk due to extensive business and personal relationships.
As alleged, the Individual Defendants breached their fiduciary duties by: (i) failing to implement and enforce a system of effective internal controls and procedures; (ii) failing to exercise their oversight duties by not monitoring the Company’s compliance with Company procedures and federal and state regulations; and (iii) consciously disregarding and failing to ensure that E. Musk’s public statements were proper and accurate.
View a news article on the case here: Musk, Tesla Board Sued Over CEO’s ‘Erratic Behavior’ _ The Recorder
View the Complaint here: 2018.10.17 – Tesla – Complaint
