Elon Musk’s Tesla Sets 3% Standard to Prevent Derivative Lawsuits

On May 16th, Tesla sent a filing to the U.S Securities and Exchange Commission updating Tesla corporate bylaws, stating that no shareholder who has ownership under 3% is allowed to sue the company, any directors, or executives for breach of fiduciary duties, reports Reuters. 

Impact on Tesla Shareholder Rights

The amendment increases limitations on shareholder rights and the ability to uphold a derivative lawsuit. As of last week, 3% in Tesla shares is worth more than $30 billion, equating to 97 million shares in the company. 

In 2018 Richard Tornetta, an owner of 9 shares, sued Elon Musk among a handful other executives on behalf of Tesla. Tornetta claimed the $56 billion pay package Musk was to receive was unfair and that the board had failed their duties by approving the receival of this pay package.

January 2024, Delaware Chancery Court Chancellor Kathaleen McCormick, ruled that the 56 billion dollar compensation plan be rescinded. Becoming the largest modification in U.S corporate history.

Texas Regulations Benefits Elon Musk

Following this ruling, Musk moved the company’s site of incorporation from Delaware to Texas in June 2024, where a bill was passed giving companies the ability to set 3% ownership thresholds, to protect against derivative claims. Stating to “Never incorporate your company in the state of Delaware”. Additionally, Tesla shareholders voted again to reinstate the pay package, which was rejected by the judge, on the grounds that it reversed her ruling.

Elon Musk has since then appealed the ruling, still aiming to receive his $56 billion, through a new court case with the Delaware State Supreme Court. Claiming that the lower court judge made legal mistakes in the ruling. Musk has said that he wants a greater stake in Tesla, with better compensation to keep his attention on the company, or he will begin to develop products outside of Tesla. 

It has recently been reported by the Financial Times, that a smaller committee composed of Robyn Denholm, Tesla board chair, and Kathleen Wilson-Thompson, an independent board member, is now in the process of forming a new stock options package for Musk’s compensation. The updated deal would possibly be tied to benchmarks surrounding financial and operational goals and performance.

Photo courtesy of Reuters