Tesla, led by Elon Musk, recently announced a significant change to its corporate bylaws that limits shareholders’ ability to sue the company over alleged breaches of fiduciary duties by the board or executives. The update, effective as of May 15, introduces an ownership threshold requiring shareholders or groups to hold at least 3% of Tesla’s outstanding common stock to initiate or maintain a derivative lawsuit. Given Tesla’s market capitalization exceeding $1 trillion, this threshold represents a stake worth more than $30 billion, creating a substantial barrier for most investors to pursue legal action.
Tesla made this change following its move of incorporation from Delaware to Texas in June 2024, after receiving shareholder approval. The decision to relocate was influenced by a landmark Delaware court ruling in a shareholder derivative suit brought by Richard Tornetta, who owned only nine shares of Tesla stock. The Delaware Chancery Court found that Musk, rather than the company’s board, controlled Tesla and that the board’s compensation committee misled shareholders during the approval of Musk’s 2018 CEO compensation plan. The court ruled that the committee failed to negotiate terms independently, acting almost as an advisory group to Musk.
The court’s decision to rescind Musk’s pay package, valued at around $56 billion, was a major blow and led Musk to publicly advise against incorporating in Delaware. Now, by moving to Texas, Tesla is leveraging a state law that permits corporations to restrict derivative lawsuits by setting a high ownership threshold. Ann Lipton, a corporate law expert and Tulane Law School professor, explained that the Texas law allows companies to require shareholders to own at least 3% of the company before filing such suits. For a company of Tesla’s size, this creates a formidable obstacle for shareholders wishing to challenge board or executive actions in court.
Tesla has appealed the Tornetta ruling, with Delaware’s state supreme court set to determine whether Musk can retain the shares granted through the controversial 2018 pay plan. The outcome will have significant implications for Tesla’s governance and shareholder rights moving forward.
This change to Tesla’s bylaws highlights the strategic use of state laws to shape corporate governance and protect company leadership from litigation. It also reflects broader tensions in balancing executive power, shareholder rights, and legal accountability within major corporations.
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