Tesla's board failed to appoint general counsel who could keep Elon Musk in line, unsealed suit alleges
Elon Musk at the Tesla factory in Fremont, California, in 2011. Photo by Maurizio Pesce via Wikimedia Commons.
Tesla’s board of directors failed to secure a general counsel who could curtail “erratic” tweeting Tesla CEO Elon Musk, according to a shareholders’ derivative lawsuit unsealed Friday.
The lawsuit, originally filed March 8, says Musk repeatedly tweeted Tesla-related information that violated settlements with the U.S. Securities and Exchange Commission requiring advance corporate approval of the posts. According to the suit, the board breached its duties “by failing to appoint an independent general counsel and prevent Musk from interfering with the general counsel’s duties.”
The SEC had pursued Musk and Tesla following an August 2018 tweet by Musk that said, “Am considering taking Tesla private at $420. Funding secured.” A settlement was approved in a final judgment in October 2018.
Tesla had three general counsels in 2019, the suit points out. They left “because the lawyers were either too close to Musk or felt they could not do their job due to interference from Musk,” the suit says. None of the general counsels was named as a defendant in the suit.
The first general counsel to resign in early 2019 was Todd Maron, a confidante of Musk’s who was his former divorce lawyer, the suit says.
The next general counsel was former Williams & Connolly chairman Dane Butswinkas, who arrived as Tesla was attempting to leave behind a a period of intense regulatory scrutiny. Butswinkas resigned one day after Musk tweeted in February 2019, “Tesla made 0 cars in 2011, but will make around 500k in 2019.”
Four hours later, Musk issued a revised tweet that read, “Meant to say annualized production rate at end of 2019 probably around 500k, ie 10k cars/week. Deliveries for year still estimated to be about 400k.”
The SEC sued for alleged contempt of its judgment and reached a revised settlement that was approved in April 2019.
“While Butswinkas was viewed as competent and independent, he quickly learned that Musk ran the show,” the suit says.
The next general counsel was Jonathan Chang, who had first begun working with Tesla in 2006 at Latham & Watkins. He also resigned, according to a December 2019 report.
The board “was well aware of the need for Tesla to have a general counsel who could provide advice as to what was in Tesla’s best interests,” the suit says. “It was also well aware that Musk was interfering with the general counsel and dictating Tesla’s positions on issues, including with respect to compliance with the SEC’s judgment.”
Tesla had to pay a $20 million fine in the SEC litigation and has had to defend against SEC actions, securities class actions and investigations because of inaction by the board, the suit says. Its stock has also dropped in price following misleading tweets by Musk, the suit alleges.
The plaintiff in the suit is Chase Gharrity. The case, filed in Delaware’s chancery court, is Gharrity v. Musk.