In September, the SEC alleged that Elon Musk falsely claimed in a series of tweets on August 7, 2018 that he had lined up funding and support to take Tesla private at $420 per share, with backing from Saudi Arabia’s public investment fund. The announcement boosted Tesla’s stock price about 6 percent to close at $379.57 a share that day, although the price has since fallen 28.4 percent, to $271.78, as of Wednesday evening.
The SEC settled the claim against Tesla and Musk for matching $20 million fines, and required Musk to step down as chairman for three years, required the company to appoint two new independent directors and establish new corporate controls — including for oversight of Musk’s communications — and directed the company to hire a securities lawyer to review social media communications by Musk and senior officers.
At about the same time, securities fraud class actions were filed on behalf of those who purchased or acquired the securities of Tesla, Inc. between August 7, 2018 and August 14, 2018. According to the lawsuit, throughout the Class Period Defendants made false and/or misleading statements and/or failed to disclose that: (1) Tesla had not secured funding for the Company’s proposed “going-private transaction”; (2) the proposed “going-private transaction” required the approval of Tesla’s shareholders’ and not just Tesla’s Board of Directors; (3) Tesla’s Board of Directors were unaware whether Tesla secured funding for the proposed transaction; (4) the status and likelihood of the proposed “going-private transaction” was misrepresented to the market because the financing for the proposed transaction had not been secured and because it required the approval of both Tesla’s Board of Directors and its shareholders; and (5) as a result of the foregoing, Defendants’ statements about Tesla’s business, operations, and prospects, were materially false and/or misleading and/or lacked a reasonable basis. Those class actions are still pending.
Now, shareholders have filed a derivative action against Tesla founder Musk and board members pointing to unchecked, “erratic” behavior by Musk and board failures to head off recent, costly consequences. The suit against Musk and eight board members alleges breach of fiduciary duty, unjust enrichment and gross mismanagement.
The derivative action seeks damages for the compensation and benefits paid to those named, costs incurred as a result of the SEC action and settlement, loss of Tesla customer confidence and future compliance expenses.
Musk, the suit said, is “no stranger” to false and outrageous public comments. In a purported April Fool’s tweet joking that Tesla had gone bankrupt, he posted a picture of himself with a caption declaring that he was found “passed out against a Tesla Model 3, surrounded by ‘Teslaquilla’ bottles, the tracks of dried tears still visible on his cheeks.”
Other signs of trouble cited in the suit included published accounts of board concern about Musk’s workload and use of the sleep medication Ambien, a recent 2 ½-hour appearance on a Joe Rogan podcast during which Musk smoked marijuana, and made wry and critical tweets by the CEO following the SEC settlement.
According to the SEC, Musk said he calculated the $420-per-share price for the fictitious go-private deal based on an assumed “standard premium” of 20 percent in go-private transactions, plus $1. Musk picked the resulting $420 number, the SEC said, because “he had recently learned about the number’s significance in marijuana culture and thought his girlfriend ‘would find it funny, which admittedly is not a great reason to pick a price.'”
This blog is intended to provide information to the general public and to practitioners about developments that may impact Oregon class actions.