Elon Musk accused of selling $7.5 billion of Tesla stock before releasing disappointing sales data that plunged the share price to two-year low
Fortune· Beata Zawrzel—NurPhoto/Getty Images
Christiaan Hetzner
Mon, Jun 3, 2024, 8:15 AM MDT3 min read
Elon Musk faces allegations that he illegally sold $7.5 billion worth of equity in Tesla in the fourth quarter of 2022, knowing that the business would disappoint after promising investors an "epic end of year."
In a lawsuit filed with a Delaware court late last week, shareholder Michael Perry accused both the CEO of deliberately unloading nearly 45 million shares in advance of poor vehicle sales data to prevent an estimated 55% hit in value, and almost the entire board of collectively violating their responsibility of directors toward shareholders.
“By disposing of $7,530,113,926 worth of Tesla stock in November and December 2022 while he was in possession of adverse, material non-public information, E. Musk exploited his position at Tesla, and he breached his fiduciary duties to Tesla,” the lawsuit claims, adding other directors were both “knowing and culpable” as well.
Unlike previous stock sales by Tesla insiders, however, these were not the result of a Rule 10b5-1 trading plan, which removes discretion over timing from an insider and hands them to a third-party broker.
Tesla shares slumped to a two-year low on Jan. 3, 2023, following the release of the car sales data.
He is asking for Musk’s illegal gains—which the plaintiff estimates at $3 billion—to be returned to the company via disgorgement, and is seeking damages from all eight directors at the time for their “reckless disregard.”
The insider trading claims are Musk's latest legal headache following the January ruling that voided his 2018 shareholder vote for a record compensation deal. Tesla is re-running the vote at the June 13 annual meeting.
'Ruthless measurers' at Tesla knew Q4 would disappoint
Core to Perry’s argument is establishing motive through the assertions that Musk knew, first, that he still needed to liquidate stock at as high a price as possible to cover a loan for purchasing Twitter; and second, that fourth-quarter sales trended well behind his bullish October 2022 expectations (Fortune even predicted as much at the time).
Just days after boasting about “excellent demand for Q4,” he slashed prices in China—the first of many cuts yet to come.
Musk may have been aware of softening sales because of what his former powertrain head Drew Baglino described last March as a corporate culture composed of “ruthless measurers,” all harnessing up-to-the-minute data to boost sales and optimize every aspect of Tesla’s business.
“I’m not sure there’s any company on Earth that has better real-time data than Tesla,” Musk said during the Q1 investor call last year. “Our finger on the pulse is real-time and does not have latency.”
Musk went so far as to say he personally examines the results of each price change to ensure production can continuously balance demand, rising when Tesla has too many orders and falling when it has too few.
“We see what happens immediately, and adjust course. We’re thinking about it literally every day,” he continued. “Seven days a week I look at that email and so does the rest of the team.”
Using his logic, the CEO would have known that Q4 would not meet market expectations and sold his shares anyway.
Perry’s lawsuit argued that it was reasonable to infer he did so to avoid losing money, having promised nothing short of an “epic end of year” only weeks earlier.
“Musk sold this stock before the non-public information in his possession could be publicly disclosed and affect the company’s stock price,” the suit claims.
This story was originally featured on Fortune.com
Exclusive-Tesla director Gebbia says he discussed selling house to Musk
Tesla CEO and Twitter owner Elon Musk attends the VivaTech conference in Paris·
Mon, Jun 3, 2024,
By Rachael Levy
(Reuters) - Joe Gebbia, the Tesla director who exited a board committee that made key decisions about the car maker's future, told Reuters that CEO Elon Musk had discussed purchasing a house from his start-up and that he was concerned their friendship could be seized on to attack the committee's independence.
Gebbia, whose start-up Samara makes tiny prefabricated houses, was one of two directors that Tesla's eight-member board deemed independent enough to serve on a "special committee" that deliberated on the company reincorporating from Delaware to Texas.
The board formed the special committee after Musk called in January for Tesla to move its corporate domicile out of Delaware, where a court shot down his $56 billion pay package.
The special committee was initially comprised of Gebbia, an Airbnb co-founder, and Kathleen Wilson-Thompson, a former Walgreens Boots Alliance human resources chief, according to a regulatory filing.
Gebbia stepped down from the committee in March after its mandate was expanded from deciding on the redomestication to also considering what to do about Musk's pay package, the filing states. His exit left behind a special committee of one, an unusual corporate governance setup that has been criticized by some of Tesla's shareholders.
Gebbia left the special committee "out of an abundance of caution", citing his personal relationship with Musk and a "potential business transaction" involving Samara that was "currently on hold", according to the filing.
Gebbia told Reuters that the transaction the filing was referring to was about Musk potentially buying a house made by Samara.
"I did not want Elon's status as a potential customer of Samara to be used against the committee, so I disclosed that I had put that potential business transaction on hold," Gebbia said in a statement.
The special committee's lawyers at Sidley Austin concluded that Gebbia's ties to Musk did not constitute a conflict of interest that jeopardized Gebbia's independence, according to the regulatory filing. Gebbia, however, chose to step down from the special committee regardless.
"I believed I was and am independent, but decided to step down because I did not want my relationship with Elon to be used to unfairly attack the committee," Gebbia said in a statement to Reuters.
Tesla chair Robyn Denholm said in her own statement to Reuters that the board followed Delaware law in setting up the special committee, and that it was committed to strong corporate governance. "Whether and where to reincorporate was clearly a board decision, not a CEO decision," Denholm said.
Musk and Wilson-Thompson could not be reached for comment.
The previously unreported details on the circumstances of Gebbia's exit from the special committee shed new light on Tesla's efforts to counter criticism that many of its directors are beholden to Musk.
Convincing investors that its board can deliberate without influence from its larger-than-life CEO will be key to Tesla securing shareholder approval for its move from Delaware to Texas and for reinstating Musk's pay package in a vote at the company's annual meeting on June 13.
Proxy solicitor Glass Lewis and a group that represents the interest of workers invested in union pension funds last month questioned the special committee's findings and called on other Tesla shareholders to reject both moves. Institutional Shareholder Services, another proxy adviser, also recommended against reinstating Musk's pay package, but sided in favor of the move from Delaware to Texas.
"Several legal experts expect Texas to prove more forgiving to directors and executives when it comes to reviewing corporate acts such as the approval of pay packages," Glass Lewis wrote in its recommendation. Tesla's special committee, on the other hand, found that the litigation rights of investors are "substantially equivalent" in Texas and Delaware.
Wilson-Thompson, who also sits on the boards of drug wholesaler McKesson and footwear maker Wolverine Worldwide, made decisions for Tesla's special committee in consultation with several advisers she tapped, the regulatory filing shows.
Special committees are deliberative bodies responsible for deciding some of a company's thorniest issues independent of management or controlling shareholders. Having a special committee of one director is rare and could make the company more vulnerable to legal challenges, four corporate governance experts said in interviews.
"Tesla has employed something akin to corporate governance-lite... a board substantially comprised of the CEO's friends and family," said Adam Epstein, whose firm Third Creek Advisors advises company boards.
DELAWARE RULING
The Delaware judge who in January ruled that Tesla's $56 billion payout to Musk should be rescinded, because it was unfair to shareholders, questioned in her ruling the independence of the board that approved it.
"At least as to this transaction, Musk controlled Tesla," the judge, Kathaleen McCormick, wrote in her ruling, referring to the board's decision to grant Musk's pay package. The package was worth as much as $56 billion, but is now valued at about $43 billion based on Tesla's current stock price.
Since the approval of Musk's payout in 2018, five directors have remained on Tesla's board: venture capitalist Ira Ehrenpreis, former Twenty-First Century Fox Chief Executive James Murdoch, Denholm, Musk, and his brother Kimbal.
McCormick criticized Ehrenpreis, Murdoch and Denholm as beholden to Musk, and said she expected Musk's brother to be loyal to him. In its regulatory filings, Tesla has stated that JB Straubel, a Musk protégé and former Tesla chief technology officer who has since joined the board, owns a company that provides scrap materials to Tesla.
That left only two out of eight directors – Gebbia and Wilson-Thompson – as independent enough to serve on the special committee, well below corporate America's average of 85% of directors in a board deemed independent of the chief executive, according to corporate consulting firm Spencer Stuart.
PRECEDENT
Delaware courts have found that one-member special committees are permissible, if the director can be shown to be independent.
In November 2023, for example, a Delaware judge upheld drug distributor AmerisourceBergen's decision to form a one-member special committee to decide on litigation facing the company, ruling that the director involved was independent. In April, in a case involving online dating company Match Group, Delaware's Supreme Court ruled that every member of a special committee should be independent, showing that having more than one independent director does not shield the committee from legal challenges.
The corporate governance experts Reuters interviewed, however, said that staffing special committees with one director was a risky choice, because courts in Delaware have ruled that the sole member has to be above reproach "like Caesar's wife".
"The court is likely to be particularly suspicious of whether the single director was truly independent and acted with care and might allow, for example, more discovery into that issue if there is a suggestion of lack of independence," said Ann Lipton, a corporate law professor at Tulane University.
(Reporting by Rachael Levy in Washington, D.C.; Editing by Greg Roumeliotis and Diane Craft)
Tesla CEO and Twitter owner Elon Musk attends the VivaTech conference in Paris·
Reuters
Mon, Jun 3, 2024,
By Rachael Levy
(Reuters) - Joe Gebbia, the Tesla director who exited a board committee that made key decisions about the car maker's future, told Reuters that CEO Elon Musk had discussed purchasing a house from his start-up and that he was concerned their friendship could be seized on to attack the committee's independence.
Gebbia, whose start-up Samara makes tiny prefabricated houses, was one of two directors that Tesla's eight-member board deemed independent enough to serve on a "special committee" that deliberated on the company reincorporating from Delaware to Texas.
The board formed the special committee after Musk called in January for Tesla to move its corporate domicile out of Delaware, where a court shot down his $56 billion pay package.
The special committee was initially comprised of Gebbia, an Airbnb co-founder, and Kathleen Wilson-Thompson, a former Walgreens Boots Alliance human resources chief, according to a regulatory filing.
Gebbia stepped down from the committee in March after its mandate was expanded from deciding on the redomestication to also considering what to do about Musk's pay package, the filing states. His exit left behind a special committee of one, an unusual corporate governance setup that has been criticized by some of Tesla's shareholders.
Gebbia left the special committee "out of an abundance of caution", citing his personal relationship with Musk and a "potential business transaction" involving Samara that was "currently on hold", according to the filing.
Gebbia told Reuters that the transaction the filing was referring to was about Musk potentially buying a house made by Samara.
"I did not want Elon's status as a potential customer of Samara to be used against the committee, so I disclosed that I had put that potential business transaction on hold," Gebbia said in a statement.
The special committee's lawyers at Sidley Austin concluded that Gebbia's ties to Musk did not constitute a conflict of interest that jeopardized Gebbia's independence, according to the regulatory filing. Gebbia, however, chose to step down from the special committee regardless.
"I believed I was and am independent, but decided to step down because I did not want my relationship with Elon to be used to unfairly attack the committee," Gebbia said in a statement to Reuters.
Tesla chair Robyn Denholm said in her own statement to Reuters that the board followed Delaware law in setting up the special committee, and that it was committed to strong corporate governance. "Whether and where to reincorporate was clearly a board decision, not a CEO decision," Denholm said.
Musk and Wilson-Thompson could not be reached for comment.
The previously unreported details on the circumstances of Gebbia's exit from the special committee shed new light on Tesla's efforts to counter criticism that many of its directors are beholden to Musk.
Convincing investors that its board can deliberate without influence from its larger-than-life CEO will be key to Tesla securing shareholder approval for its move from Delaware to Texas and for reinstating Musk's pay package in a vote at the company's annual meeting on June 13.
Proxy solicitor Glass Lewis and a group that represents the interest of workers invested in union pension funds last month questioned the special committee's findings and called on other Tesla shareholders to reject both moves. Institutional Shareholder Services, another proxy adviser, also recommended against reinstating Musk's pay package, but sided in favor of the move from Delaware to Texas.
"Several legal experts expect Texas to prove more forgiving to directors and executives when it comes to reviewing corporate acts such as the approval of pay packages," Glass Lewis wrote in its recommendation. Tesla's special committee, on the other hand, found that the litigation rights of investors are "substantially equivalent" in Texas and Delaware.
Wilson-Thompson, who also sits on the boards of drug wholesaler McKesson and footwear maker Wolverine Worldwide, made decisions for Tesla's special committee in consultation with several advisers she tapped, the regulatory filing shows.
Special committees are deliberative bodies responsible for deciding some of a company's thorniest issues independent of management or controlling shareholders. Having a special committee of one director is rare and could make the company more vulnerable to legal challenges, four corporate governance experts said in interviews.
"Tesla has employed something akin to corporate governance-lite... a board substantially comprised of the CEO's friends and family," said Adam Epstein, whose firm Third Creek Advisors advises company boards.
DELAWARE RULING
The Delaware judge who in January ruled that Tesla's $56 billion payout to Musk should be rescinded, because it was unfair to shareholders, questioned in her ruling the independence of the board that approved it.
"At least as to this transaction, Musk controlled Tesla," the judge, Kathaleen McCormick, wrote in her ruling, referring to the board's decision to grant Musk's pay package. The package was worth as much as $56 billion, but is now valued at about $43 billion based on Tesla's current stock price.
Since the approval of Musk's payout in 2018, five directors have remained on Tesla's board: venture capitalist Ira Ehrenpreis, former Twenty-First Century Fox Chief Executive James Murdoch, Denholm, Musk, and his brother Kimbal.
McCormick criticized Ehrenpreis, Murdoch and Denholm as beholden to Musk, and said she expected Musk's brother to be loyal to him. In its regulatory filings, Tesla has stated that JB Straubel, a Musk protégé and former Tesla chief technology officer who has since joined the board, owns a company that provides scrap materials to Tesla.
That left only two out of eight directors – Gebbia and Wilson-Thompson – as independent enough to serve on the special committee, well below corporate America's average of 85% of directors in a board deemed independent of the chief executive, according to corporate consulting firm Spencer Stuart.
PRECEDENT
Delaware courts have found that one-member special committees are permissible, if the director can be shown to be independent.
In November 2023, for example, a Delaware judge upheld drug distributor AmerisourceBergen's decision to form a one-member special committee to decide on litigation facing the company, ruling that the director involved was independent. In April, in a case involving online dating company Match Group, Delaware's Supreme Court ruled that every member of a special committee should be independent, showing that having more than one independent director does not shield the committee from legal challenges.
The corporate governance experts Reuters interviewed, however, said that staffing special committees with one director was a risky choice, because courts in Delaware have ruled that the sole member has to be above reproach "like Caesar's wife".
"The court is likely to be particularly suspicious of whether the single director was truly independent and acted with care and might allow, for example, more discovery into that issue if there is a suggestion of lack of independence," said Ann Lipton, a corporate law professor at Tulane University.
(Reporting by Rachael Levy in Washington, D.C.; Editing by Greg Roumeliotis and Diane Craft)
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