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Tesla investors sue Elon Musk for diverting carmaker’s resources to xAI

elon musk tesla, elon musk xai, Policy / /

Tesla sued by shareholders —

Lawsuit: Musk’s xAI poached Tesla employees, Nvidia GPUs, and data.

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A large Tesla logo

Getty Images | SOPA Images

A group of Tesla investors yesterday sued Elon Musk, the company, and its board members, alleging that Tesla was harmed by Musk’s diversion of resources to his xAI venture. The diversion of resources includes hiring AI employees away from Tesla, diverting microchips from Tesla to X (formerly Twitter) and xAI, and “xAI’s use of Tesla’s data to develop xAI’s own software/hardware, all without compensation to Tesla,” the lawsuit said.

The lawsuit in Delaware Court of Chancery was filed by three Tesla shareholders: the Cleveland Bakers and Teamsters Pension Fund, Daniel Hazen, and Michael Giampietro. It seeks financial damages for Tesla and the disgorging of Musk’s equity stake in xAI to Tesla.

“Could the CEO of Coca-Cola loyally start a competing soft-drink company on the side, then divert scarce ingredients from Coca-Cola to the startup? Could the CEO of Goldman Sachs loyally start a competing financial advisory company on the side, then hire away key bankers from Goldman Sachs to the startup? Could the board of either company loyally permit such conduct without doing anything about it? Of course not,” the lawsuit says.

Tesla and Musk have touted artificial intelligence “as the key to Tesla’s future” and described Tesla as an AI company, the lawsuit said. By founding xAI, Musk started a competing company “and then divert[ed] talent and resources from his corporation to the startup,” with the apparent approval of Tesla’s board, the lawsuit said.

After founding xAI in March 2023, “Musk hired away numerous key AI-focused employees from Tesla to xAI” and later diverted Nvidia GPUs from Tesla to X and xAI, the lawsuit said. The GPU diversion was recently confirmed by Nvidia emails that were revealed in a report by CNBC.

GPU diversion

Before founding xAI, “Musk stated that Tesla needed more Nvidia H100 GPUs than Nvidia had available for sale, a common problem in the AI industry… After Musk established xAI, however, he began personally directing Nvidia to redirect GPUs from Tesla to xAI and X,” the lawsuit said.

The investors suing Musk and Tesla don’t buy Musk’s justification. “For his part, Musk dubiously claimed in a post on X following the publication of the CNBC report that, contrary to his prior public representations about Tesla’s appetite for Nvidia hardware, ‘Tesla had no place to send the Nvidia chips to turn them on, so they would have just sat in a warehouse,'” the lawsuit said.

The complaint says that a pitch deck to potential investors in xAI said the new firm “intended to harvest data from X and Tesla to help xAI catch up to AI companies OpenAI and Anthropic. X would provide data from social media users, and Tesla would provide video data from its cars.”

“It is apparent that Musk has pitched prospective investors in xAI partly by exploiting information owned by Tesla,” the lawsuit also said. “On information and belief, Musk has already or intends to have xAI harvest data from Tesla without appropriately compensating Tesla even though X has already been provided xAI equity for its data contributions. None of this would be necessary if Musk properly created xAI as a subsidiary of Tesla.”

We contacted Tesla today and will update this article if the company provides a response to the lawsuit. The filing of the complaint was previously reported by TechCrunch.

Same court nullified Musk’s pay

The Delaware Court of Chancery is the same one that nullified Elon Musk’s 2018 pay package following a different investor lawsuit. Tesla shareholders yesterday re-approved the $44.9 billion pay plan, with 72 percent voting yes on the proposal, but the re-vote doesn’t end the legal battle over Musk’s pay. Tesla shareholders also approved a corporate move from Delaware to Texas, which was proposed by Musk and Tesla after the pay-plan court ruling.

That drama factors into the lawsuit filed yesterday. After the pay ruling that effectively reduced Musk’s stake in Tesla, “Musk accelerated his efforts to grow xAI” by “raising billions of dollars and poaching at least eleven employees from Tesla,” the new lawsuit said. The lawsuit also points to Musk’s threat “that he would only build an AI and robotics business within Tesla if Tesla gave him at least 25% voting power.”

The lawsuit accuses Tesla’s board of “permit[ting] Musk to create and grow xAI, hindering Tesla’s AI development efforts and diverting billions of dollars in value from Tesla to xAI.” The board’s failure to act is alleged to be “an obvious breach of its members’ unyielding fiduciary duty to protect the interests of Tesla and its stockholders.”

The Tesla board members’ close ties to Musk could play a key role in the case. In the pay-plan ruling, Delaware Court of Chancery Judge Kathaleen McCormick found that most of Tesla’s board members were beholden to Musk or had compromising conflicts. The lawsuit filed yesterday points to the court’s previous findings on those board members, including Kimbal Musk, Elon Musk’s brother; and James Murdoch, a longtime friend of Musk.

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Tesla shareholder group opposes Musk’s $46B pay, slams board “dysfunction”

elon musk tesla, Policy / /
A photoshopped image of Elon Musk emerging from an enormous pile of money.

Aurich Lawson / Duncan Hull / Getty

A Tesla shareholder group yesterday urged other shareholders to vote against Elon Musk’s $46 billion pay package, saying the Tesla board is dysfunctional and “overly beholden to CEO Musk.” The group’s letter also urged shareholders to vote against the reelection of board members Kimbal Musk and James Murdoch.

“Tesla is suffering from a material governance failure which requires our urgent attention and action,” and its board “is stacked with directors that have close personal ties to CEO Elon Musk,” the letter said. “There are multiple indications that these ties, coupled with excessive director compensation, prevent the level of critical and independent thinking required for effective governance.”

Tesla shareholders approved Elon Musk’s pay package in 2018, but it was nullified by a court ruling in January 2024. After a lawsuit filed by a shareholder, Delaware Court of Chancery Judge Kathaleen McCormick ruled that the pay plan was unfair to Tesla shareholders and must be rescinded.

McCormick wrote that most of Tesla’s board members were beholden to Musk or had compromising conflicts and that Tesla’s board provided false and misleading information to shareholders before the 2018 vote. Musk and the rest of the Tesla board subsequently asked shareholders to approve a transfer of Tesla’s state of incorporation from Delaware to Texas and to reinstate Musk’s pay package. Votes can be submitted before Tesla’s annual meeting on June 13.

The pay package was previously estimated to be worth $56 billion, but the stock options in the plan were more recently valued at $46 billion.

“Tesla has clearly lagged”

From March 2020 to November 2021, Tesla’s share price rose from $28.51 to $409.71. But it “has since fallen to $172.63, a decline of $237.08 or 62 percent from its peak,” the letter opposing the pay package said.

“Over the past three years, and especially over the past year, Tesla has clearly lagged behind its competitors and the broader market. We believe that the distractions caused by Musk’s many projects, particularly his decision to buy Twitter, have played a material role in Tesla’s underperformance,” the letter said.

Tesla’s reputation has been harmed by Musk’s “public fights with regulators, acquisition of Twitter, controversial statements on X, and his legal and personal troubles,” the letter said. The letter was sent by New York City Comptroller Brad Lander and investors including Amalgamated Bank, AkademikerPension, Nordea Asset Management, SOC Investment Group, and United Church Funds.

Musk has taken advantage of lax oversight in order “to use Tesla as a coffer for himself and his other business endeavors,” the letter said. It continued:

In 2022, Musk admitted to using Tesla engineers to work on issues at Twitter (now known as X), and defended the decision by saying that no Tesla Board member had stopped him from using Tesla staff for his other businesses. More recently, Musk has begun poaching top engineers from Tesla’s AI and autonomy team for his new company, xAI, including Ethan Knight, who was computer vision chief at Tesla.

This is on the heels of Musk’s post on X that he is “uncomfortable growing Tesla to be a leader in AI & robotics without having ~25% voting control,” a move widely seen as a threat to push Tesla’s Board to grant him another mega pay package.

The Tesla board “continues to allow Musk to be overcommitted” as he devotes “significant amounts of time to his roles at X, SpaceX, Neuralink, the Boring Company and other companies,” the letter said.

Tesla shareholder group opposes Musk’s $46B pay, slams board “dysfunction” Read More »

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Elon Musk proposes Tesla move to Texas after Delaware judge voids $56 billion pay

elon musk tesla, Policy / /

Don’t mess with Tesla —

Musk is sick of Delaware judges, says shareholders will vote on move to Texas.

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Elon Musk speaks at an event while wearing a cowboy hat, sunglasses, and T-shirt.

Enlarge / Tesla CEO Elon Musk speaks at Tesla’s “Cyber Rodeo” on April 7, 2022, in Austin, Texas.

Getty Images | AFP/Suzanne Cordeiro

Tesla CEO Elon Musk has had enough of Delaware after a state court ruling voided his $55.8 billion pay package. Musk said last night that Tesla will hold a shareholder vote on transferring the electric carmaker’s state of incorporation to Texas.

Musk had posted a poll on X (formerly Twitter) asking whether Tesla should “change its state of incorporation to Texas, home of its physical headquarters.” After over 87 percent of people voted yes, Musk wrote, “The public vote is unequivocally in favor of Texas! Tesla will move immediately to hold a shareholder vote to transfer state of incorporation to Texas.”

Tesla was incorporated in 2003 before Musk joined the company. Its founders chose Delaware, a common destination because of the state’s low corporate taxes and business-friendly legal framework. The Delaware government says that over 68 percent of Fortune 500 companies are registered in the state, and 79 percent of US-based initial public offerings in 2022 were registered in Delaware.

One reason for choosing Delaware is the state’s Court of Chancery, where cases are decided not by juries but by judges who specialize in corporate law. On Tuesday, Court of Chancery Judge Kathaleen McCormick ruled that Musk’s $55.8 billion pay package was unfair to shareholders and must be rescinded.

McCormick’s ruling in favor of the plaintiff in a shareholder lawsuit said that most of Tesla’s board members “were beholden to Musk or had compromising conflicts.” McCormick also concluded that the Tesla board gave shareholders inaccurate and misleading information in order to secure approval of Musk’s “unfathomable” pay plan.

Musk a fan of Texas and Nevada

Musk yesterday shared a post claiming that McCormick’s ruling “is another clear example of the Biden administration and its allies weaponizing the American legal system against their political opponents.”

McCormick previously oversaw the Twitter lawsuit that forced Musk to complete a $44 billion purchase despite his attempt to break a merger agreement. After Musk became Twitter’s owner, he merged the company into X Corp., which is registered in Nevada.

“Never incorporate your company in the state of Delaware,” Musk wrote in a post after the Delaware court ruling. “I recommend incorporating in Nevada or Texas if you prefer shareholders to decide matters,” he also wrote.

Last year, Texas enacted a law to create business courts that will hear corporate cases. The courts are slated to begin operating on September 1, 2024. Musk is clearly hoping the new Texas courts will be more deferential to Tesla on executive pay if the company is sued again after his next pay plan is agreed on.

Tesla shareholders who will be asked to vote on a corporate move to Texas “need to take a hard look at how transitioning out of Delaware might impact their rights and the company’s governance,” Reuters quoted business adviser Keith Donovan as saying.

Reuters quoted AJ Bell investment analyst Dan Coatsworth as saying that “Elon Musk’s plan to change Tesla’s state of incorporation from Delaware to Texas is typical behavior for the entrepreneur who always looks for an alternative if he can’t get what he wants.”

Elon Musk proposes Tesla move to Texas after Delaware judge voids $56 billion pay Read More »