Elon Musk, Tesla board sued in lawsuit alleging 'erratic' tweets violate fiduciary duty

Aria Alamalhodaei
·4 min read

Tesla CEO Elon Musk's tweets are the subject of another lawsuit.

A Tesla investor is suing the company board and Musk for continuing to send "erratic tweets" that violate a settlement with the U.S. Securities and Exchange Commission that requires oversight of his social media activities. The lawsuit, which was first reported by Bloomberg, claims Musk is exposing the company to potential fines and penalties from regulators and could drive down its share price. The lawsuit names the board for failing to control Musk's behavior, which puts the company at risk.

The lawsuit by investor Chase Gharrity, which was filed in Delaware Chancery Court, was unsealed Friday. It was originally filed March 8. Tesla did not respond to a request for comment.

Tesla, Musk and the SEC reached an agreement in April 2019 that gave the CEO freedom to use Twitter -- within certain limitations -- without fear of being held in contempt for violating an earlier court order. The agreement allows Musk to tweet as he wishes except when it's about certain events or financial milestones. In those cases, Musk must seek pre-approval from a securities lawyer, according to the agreement filed with Manhattan federal court.

The April 2019 agreement was the product of a years-long fight between Musk and the SEC that began after his infamous August 7, 2018 tweet in which he stated the company had “funding secured” for a private takeover at $420 per share. The SEC filed a complaint alleging that Musk had committed securities fraud.

Musk and Tesla settled with the SEC without admitting wrongdoing. Tesla agreed to pay a $20 million fine; Musk had to agree to step down as Tesla chairman for a period of at least three years; the company had to appoint two independent directors to the board; and Tesla was also told to put in place a way to monitor Musk’s statements to the public about the company, including via Twitter.

The fight was reignited after Musk sent a tweet on February 19, 2019 that Tesla would produce “around” 500,000 cars that year, correcting himself hours later to clarify that he meant the company would be producing at an annualized rate of 500,000 vehicles by year's end.

This latest lawsuit alleges that Musk’s tweeting violates the April 2019 judgment and betrays his, and the board’s, fiduciary duty. The 105-page suit cites several tweets sent from Musk’s account, including a tweet on May 1, 2020 — over a year after the SEC judgment — which stated: “Tesla stock is too high IMO.”

This content is not available due to your privacy preferences.
Update your settings here to see it.

The tweet sent shares into a free fallnearly 12% in the half-hour following his stock price tweets. The tweet was one of many sent out in rapid fire that day, covering a variety of topics and demands “give people back their freedom” and lines from the U.S. National Anthem to quotes from poet Dylan Thomas and a claim that he will sell all of his possessions. Musk later told the Wall Street Journal in an email that he was not joking and that his tweets were not vetted in advance.

The lawsuit revealed Friday alleges that the Tesla board has also failed to secure a general counsel “who can provide advice untainted by Musk,” the lawsuit. Three general counsels departed from the company in 2019, which the lawsuit points to as evidence that none were able to exercise independent advice that differed from Musk’s “desired outcome.”

Musk’s “erratic” actions have caused the company “substantial damage,” including billions of dollars in lost market capitalization, the lawsuit says.

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

Early Stage is the premier ‘how-to’ event for startup entrepreneurs and investors. You’ll hear first-hand how some of the most successful founders and VCs build their businesses, raise money and manage their portfolios. We’ll cover every aspect of company-building: Fundraising, recruiting, sales, product market fit, PR, marketing and brand building. Each session also has audience participation built-in – there’s ample time included for audience questions and discussion. Use code “TCARTICLE at checkout to get 20 percent off tickets right here.