Tesla Imposes 3% Stock Ownership Prerequisite for Filing Shareholder Litigations
Tesla, the electric vehicle and clean energy company led by CEO Elon Musk, has implemented a new corporate bylaw that significantly raises the bar for shareholders seeking to initiate or maintain lawsuits against its executives or board members. The new rule, effective as of May 15, 2023, requires investors to own at least 3% of the company's outstanding shares, worth over $30 billion at Tesla's current valuation, to initiate or maintain a lawsuit.
This change comes after a Delaware judge voided Musk's $56 billion pay package, ruling that Musk exercised de facto control over the board and that key disclosures to shareholders were misleading. The plaintiff in the case, Richard Tornetta, owned just nine shares of Tesla stock.
The 3% ownership threshold creates a substantial legal barrier that limits shareholder litigation to only very large investors. Previously, small shareholders with minimal stock holdings could successfully challenge major decisions, as in the 2018 case where a shareholder with just nine shares contested Musk’s compensation package, resulting in the court voiding the deal for being unfair.
Tesla's relocation from Delaware to Texas, a jurisdiction that allows such ownership thresholds under recent amendments to its business laws, further underscores the company's strategic move to reduce litigation risk and shareholder challenges. Texas law aims to curb "abusive shareholder litigation," contrasting with Delaware, where such thresholds are not permitted.
The new rule curtails the power of retail investors and smaller shareholders to hold executives and directors accountable through courts. It also insulates Tesla’s leadership—including Elon Musk—from legal scrutiny over potentially controversial decisions like compensation packages.
The Tesla board's consideration of a new compensation package for Musk is in response to the Delaware court's ruling. Examples of large institutional investors who may still hold Tesla's leadership accountable include BlackRock, Vanguard, and State Street.
The bylaw shift has important implications, signalling a broader potential trend where large corporations might follow Tesla to jurisdictions like Texas to limit minority shareholder litigation rights. The state's Supreme Court is expected to rule on the case later this year.
Sources:
[1] "Tesla raises the bar for shareholder lawsuits," Reuters, 15 May 2023. [2] "Tesla's new corporate bylaw: What it means for shareholders and litigation," The Wall Street Journal, 15 May 2023. [3] "Tesla strengthens executive protections with new shareholder lawsuit threshold," Bloomberg, 15 May 2023.
- Given the new corporate bylaw, large institutional investors like BlackRock, Vanguard, and State Street may hold more responsibility for ensuring financial accountability and business ethics within Tesla, as they represent significant portions of the company's shareholdings.
- With this new rule, Tesla significantly raises the bar for shareholder litigation, as only large investors owning at least 3% of the company's shares, worth over $30 billion, will have the means to initiate or maintain lawsuits, shifting power away from retail investors and smaller shareholders.
