Tesla CEO Faces New Legal Challenge Over Twitter Activity

Elon Musk, the Chief Executive Officer of Tesla, is currently embroiled in another legal dispute stemming from his activity on the social media platform Twitter.

Investor Lawsuit Alleges Breach of SEC Settlement

A Tesla investor has initiated a lawsuit against both the company’s board of directors and Musk himself. The claim centers on the assertion that Musk continues to publish “unpredictable tweets” that contravene a prior settlement agreement reached with the U.S. Securities and Exchange Commission (SEC).

This settlement necessitates oversight of his communications on social media. According to reports, the lawsuit contends that Musk’s actions expose Tesla to potential regulatory fines and penalties. Furthermore, it suggests a possible negative impact on the company’s stock valuation. The board is accused of failing to adequately manage Musk’s conduct, thereby placing the company at considerable risk.

Details of the Filed Complaint

The lawsuit, brought forth by investor Chase Gharrity, was initially submitted to the Delaware Chancery Court on March 8th and subsequently unsealed on Friday. Tesla has not yet issued a response to requests for comment regarding the matter.

The 2019 Agreement with the SEC

In April 2019, Tesla, Musk, and the SEC reached a consensus. This agreement granted Musk the ability to utilize Twitter, subject to specific constraints, without facing accusations of contempt of court related to a previous order.

The terms stipulated that Musk could tweet freely, except concerning particular events or financial benchmarks. In such instances, pre-approval from a securities attorney was required, as outlined in the agreement filed with the Manhattan federal court.

Origins of the Dispute: The 2018 Tweet

The 2019 agreement arose from a protracted conflict between Musk and the SEC. This conflict originated from Musk’s controversial tweet on August 7, 2018, in which he declared that funding was “secured” for taking the company private at a price of $420 per share.

The SEC subsequently filed a complaint alleging that Musk had engaged in securities fraud. A settlement was ultimately reached without either party admitting wrongdoing. Tesla agreed to pay a $20 million penalty.

Settlement Terms and Subsequent Concerns

As part of the settlement, Musk agreed to relinquish his position as Tesla chairman for a minimum of three years. The company was also mandated to appoint two independent directors to the board. Additionally, Tesla was required to establish a system for monitoring Musk’s public statements about the company, including those made on Twitter.

The dispute was rekindled following a tweet sent by Musk on February 19, 2019. He initially stated that Tesla would produce “around” 500,000 vehicles that year, later clarifying that this referred to an annualized production rate of 500,000 vehicles by the end of the year.

Allegations of Fiduciary Duty Breach

The current lawsuit asserts that Musk’s tweeting practices violate the April 2019 judgment and constitute a breach of his, and the board’s, fiduciary responsibilities. The 105-page suit references several tweets originating from Musk’s account.

One example cited is a tweet from May 1, 2020 – more than a year after the SEC judgment – in which Musk stated, “Tesla stock is too high IMO.”

Impact of the "Too High" Tweet

This particular tweet triggered a significant decline in Tesla’s share price, falling almost 12% within the subsequent half-hour. Musk sent this tweet amidst a flurry of rapid-fire posts covering diverse topics, including calls to “give people back their freedom,” excerpts from the U.S. National Anthem, quotes from poet Dylan Thomas, and a claim that he would sell all of his possessions.

He later informed the Wall Street Journal in an email that he was not joking and that his tweets had not undergone prior vetting.

Concerns Regarding Board Oversight

The lawsuit further alleges that the Tesla board has failed to secure a general counsel capable of providing unbiased advice, free from Musk’s influence. The departure of three general counsels from the company in 2019 is presented as evidence that none were able to offer independent counsel that diverged from Musk’s “desired outcome.”

The lawsuit claims that Musk’s “erratic” behavior has inflicted “substantial damage” on the company, resulting in billions of dollars in lost market capitalization.

The case is identified as Gharrity v. Musk, Del. Ch., No. 2021-0199.

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