As soon as Tesla shifted its incorporation to Texas, they made the change to avoid getting hit by lawsuits from smaller investors
- Shareholders now need at least a 3% stake in Tesla to sue for fiduciary breaches.
- A 3% stake in Tesla is valued at more than $34 billion at current market rates.
- Elon Musk’s record pay package has been blocked twice by a Delaware judge.
It wasn’t a major Tesla shareholder who took down Elon Musk’s record-breaking $56 billion pay package in court, but rather a guy with just nine Tesla shares. But, of course, Tesla isn’t keen on letting that happen again. So, earlier this month, the company quietly tweaked its corporate bylaws, making it harder for shareholders to sue the board or executives over suspected breaches of fiduciary duty.
Read: Musk Appeals For $56 Billion Tesla Payday, As Firing Thousands Just Doesn’t Pay Enough
Tesla’s latest filing reveals that to sue the EV company, an investor now has to hold at least 3% of Tesla’s outstanding shares. Given the automaker’s current market value, that means you’d need around 97 million shares worth more than $34 billion to even think about taking legal action. Good luck with that.
The Texas Twist
Why the change? Well, Tesla has been able to implement this thanks to its recent move to Texas, a state with laws that are a bit friendlier to corporations than Delaware, where Tesla was originally incorporated. Richard Tornetta, the shareholder who first sued over Musk’s compensation, filed the case when Tesla was still a Delaware company. But last year, Tesla made the leap to Texas after receiving shareholder approval, making it easier to adopt these new, lawsuit-limiting bylaws.
Speaking with CNBC, corporate and securities law trial attorney Ann Lipton said Tesla is making the most of more favorable laws in Texas that allow companies to limit shareholder lawsuits for alleged breaches of fiduciary duties. While the change will likely go unnoticed by the majority of Tesla shareholders, it does severely limit their ability to take Tesla to court for wrongdoings.
Musk’s Pay Saga
Elon Musk continues efforts to have his compensation package reinstated. In 2018, the world’s richest man decided against taking a salary at Tesla and struck a deal to buy 303 million Tesla shares at $23 apiece if the company met certain performance and valuation targets. It reached all of these targets, but in January 2024, Delaware Chancellor Kathaleen McCormick annulled the pay plan. According to her, the Tesla board members who approved it were essentially beholden to Musk.
Tesla shareholders were then asked to vote on the pay package again, and they approved it a second time. But the judge wasn’t having it and blocked the deal yet again. It’s a pay plan that just won’t die, and it seems like neither will Musk’s determination to get it reinstated.
