Tesla

In dealing with a $US40 million US government fraud lawsuit, a share price plunge and the loss of his position as chairman of his electric car company, Musk may be rethinking the series of tweets that led to his undoing. The lawsuit alleges that Musk duped investors with misleading statements about a proposed buyout of the company, according to the ABC.

On 7 August, Musk tweeted declaring he had secured financing to lead a buyout of Tesla. However, the Securities and Exchange Commission (SEC) alleged their investigation revealed Musk was not close to locking up the estimated $US25 billion to $US50 billion needed to pull off the buyout and launched the case against him. In its complaint, the SEC alleged, “Musk’s false and misleading statements and omissions caused significant confusion and disruption in the market for Tesla’s stock and resulting harm to investors.”

Costly settlement

Musk and Tesla have reached a settlement without admitting to or denying the SEC’s allegations. Under the settlement, Musk and Tesla have agreed to pay a total of $US40 million to settle the US government lawsuit brought by the SEC.

Media reports identify the key points of the settlement as:

  • Tesla agrees to pay fine and for Musk to step down as chairman
  • The deal allows Musk to remain as CEO
  • The SEC alleges Musk had not secured funding at the time of his tweet

Musk, who is also a large Tesla shareholder, must relinquish his role as chairman for at least three years.

The settlement provides for the appointment of a new chairman and directors to balance Musk's influence at the company, as well as moves to oversee his output on social media.

The Tesla company, which ended June 2018 with $US2.2 billion in cash, avoids through the settlement a protracted lawsuit may have undermined the company's operations and ability to raise capital.

Tesla's stock fell by 14 per cent on Friday last week (5 October) after the SEC filed its lawsuit, erasing more than $US7 billion in shareholder wealth.

Musk is Tesla’s largest shareholder, holding about 22 per cent of outstanding shares at the end of 2017.

Who is the next chairman?

The carmaker could appoint an existing independent director as chairman.

Contenders include three current Tesla directors whose independence wouldn't be subject to criticism, according to the Sydney Morning Herald. They include Robyn Denholm, the Chief Financial Officer of Australia’s Telstra Corporation Ltd, publisher Linda Johnson Rice, who leads the Johnson Publishing Company and James Murdoch, the CEO of Twenty-First Century. Denholm, who has been director since 2014, has reportedly ruled herself out of the race.

Under the settlement, which still has to be approved by a federal court, Tesla agreed to replace Musk with an independent chairman within 45 days of the settlement and also name two independent directors within 90 days.

Musk will stay on as Tesla CEO.

Since the fraud settlement, Musk has continued a pattern of unpredictable Twitter activity, including accusing the SEC of becoming the ‘Shortseller Enrichment Commission’.

Any board dealing with such behaviour would normally be holding meetings about whether they would fire the CEO, according to Steve Mader, retired vice chairman of the executive search firm Korn Ferry, who formerly led the firm’s board services practice. He told the Washington Post, “The CEO’s external behavior is an accountability of the board. You either accept it, like it, support it or get rid of it. That’s your job, first and foremost."