Despite provisionally agreeing to settle an ongoing dispute with the Securities and Exchange Commission (SEC) centering on a tweet speculating that Tesla may be taken private, Elon Musk has continued to jeopardize settlement discussions by taunting the SEC on Twitter. Given that the terms of any settlement are subject to judicial review, Musk’s Twitter usage has risked exposing Tesla and Musk, personally, to additional monetary liability and further mandates to change Tesla’s corporate structure to limit Musk’s control over the company.
The issue first arose on Aug. 7, 2018, when Musk tweeted the following: “Am considering taking Tesla private at $420 per share. Funding secured.” Following this tweet, the Tesla’s stock price drastically increased in anticipation of an imminent $420 per share offer. This offer, however, never materialized, as Musk had not secured the approximately $70 billion in funding needed to actually take Tesla private at that price. As a result, the SEC opened an investigation, and, because Tesla has disclosed Musk’s Twitter account in SEC filings as an official means of disseminating material information about the company, the SEC filed suit in the Southern District of New York on Sept. 27, 2018. This suit alleged that Musk’s claim of “funding secured” materially misrepresented the situation in violation of SEC rules and sought remunerations from Tesla and Musk, personally.
During the initial negotiation period, it seemed a deal would be struck whereby Musk would agree to pay a $10 million fine and be removed as Tesla’s chairman for a period of two years. When this deal did not materialize and Tesla’s stock fell by approximately 14 percent, the parties agreed to a settlement on the following terms:
- Musk would be banned from serving as chairman of any public company for a period of three years.
- Tesla would add two independent directors to its board of directors.
- Tesla would elect an independent director as chairman to replace Musk.
- Tesla would implement policies to oversee Musk’s communications, including his social media usage.
- Tesla would pay a fine of $20 million.
- Musk would pay a fine of $20 million.
Nevertheless, shortly after the parties submitted the settlement terms for judicial review, Musk once again commented on Twitter describing the SEC as the “Shortseller Enrichment Commission” and causing another drop in Tesla’s stock price. The SEC has yet to officially respond to this latest insult, and, while unlikely, Musk’s remarks could cause the SEC to drop its support for the settlement terms and reopen its investigation of the case.
What public companies can learn from Elon Musk’s Twitter rants
Though seemingly unique in his role as simultaneously CEO and chief Twitter marketer for Tesla, public companies can learn a major lesson from Musk’s Twitter rantings and the resulting legal snafu: if your company’s executive directly distributes material information to the public, regardless of the means of dissemination, your company needs robust policies and procedures in place to assure internal review of all such information. Without such policies, a lapse in judgment on the internet can have drastic and long lasting consequences on your company.
If you have any questions on this blog post, feel free to reach out to any of our attorneys listed below.