Tesla tightens rules to limit shareholder suits after Musk pay battle

Tesla changed its bylaws to require investors to hold at least 3% of shares to file or maintain a derivative lawsuit, aiming to limit future legal challenges like those over Musk's pay package

By Richard Clough and Madlin Mekelburg

 

Tesla Inc took a step to prevent future shareholder lawsuits like the one that blocked a record-setting pay package for Chief Executive Officer Elon Musk. 

The automaker late Friday disclosed changes to its corporate bylaws that will require investors to own at least 3 per cent of the company’s shares in order to “institute or maintain a derivative proceeding.” The move was taken on May 15, according to a regulatory filing.

 

The change comes days after Texas Governor Greg Abbott signed legislation enacting a series of changes to the state’s corporate law, including allowing companies to adopt ownership thresholds that must be met for shareholder derivative claims. Abbott and other Republican leaders in the state have touted the measure as a method for enticing more businesses to incorporate in the state. 

 

Tesla did not immediately respond to a request for comment.

 

Musk shifted Tesla’s incorporation to Texas last year after a judge in Delaware struck down a “moonshot” package of stock options for Musk. 

 

The compensation agreement, approved by shareholders in 2018, was initially worth $2.6 billion and spiked to $56 billion by the time it was voided in early 2024. Plunging and soaring with the company’s fortunes, it has been valued in excess of $100 billion when the shares have climbed.

 

The package was challenged by a shareholder who argued that Tesla’s directors didn’t make proper disclosures about the terms and performance benchmarks required. Delaware Chancery Court Chief Judge Kathaleen St. J. McCormick agreed, finding that Musk had undue influence over the process and that Tesla’s board, which includes longtime friends and associates, was rife with conflicts of interest.

 

Tesla has appealed that decision to the Delaware Supreme Court, a process that could still take months. Shareholders voted last year to re-ratify the prior package, part of a symbolic effort to bolster Musk’s legal case.

 

Tesla disclosed in a regulatory filing last month that the board had established a special committee to consider compensation matters involving the CEO.