May 2022 Business Litigation Update

As readers may have heard, Elon Musk signed an agreement on April 25 to take Twitter private for approximately $44B in cash.  The deal is expected to close in 2022, but analysts say that it might take up to 6 months to work through any regulatory issues and conduct the shareholder vote.  Interestingly, this deal is slated to be the second largest buy-out on record behind KKR’s purchase of TXU for 45B in 2007, according to the New York Times.

Musk is no stranger to litigation.  The Los Angeles Times reported that, this week alone, Musk was involved either directly or indirectly in multiple legal proceedings:

• FTC investigation into whether Musk complied with antitrust reporting requirements while he purchased his stake in Twitter;
• Shareholder litigation over Tesla’s purchase of SolarCity Corp.;
• Federal court proceedings in the Southern District of New York over Musk’s attempt to vacate his 2018 agreement with the SEC; and
• Racial discrimination lawsuit against Tesla filed by the California Department of Fair Employment and housing; and
• EEOC investigation regarding racial discrimination at Tesla factories.

One additional lawsuit involving Musk and Tesla arises out of the ten-year, $56B pay package Musk received from Tesla in 2018.  The suit, pending in the Delaware Court of Chancery, accuses Musk and the Tesla Board of Directors of breaching their fiduciary duties to Tesla’s shareholders because the compensation plan, among other things, did not require Musk to devote 100% of his time and energy to Tesla, despite the exorbitant price-tag.

Now, with Musk’s acquisition of Twitter, the plaintiffs in the Delaware lawsuit are contending that Musk’s focus on Tesla will be further diminished, according to a Reuters report.  Musk, in addition to Tesla, is already involved in SpaceX, the tunneling company The Boring Company, and Nueralink, a neurotechnology start-up.  The plaintiffs are seeking to have the Delaware Court cancel the 2018 compensation plan, including stock options already granted to Musk under the plan.

In defending the plan, Tesla argued in court papers that it was necessary to align Musk’s incentives with the company’s, Reuters reported.  But the plaintiffs point out that Musk already owned 22% of Tesla’s stock, meaning he was already motivated to make the company successful.

Tesla’s stock has dropped 20% since April 1, the last day before Musk announced his initial stake in Twitter.  On April 1 the stock closed at $1,084.59/share.  On April 29, it closed at $870.76/share.

The trial in Delaware is scheduled for October 2022; right about the time that Musk’s buy-out of Twitter is expected to close.  Will this have an impact on the outcome of the trial?  We will continue to monitor this case and provide updates when appropriate.