Tesla has revised its corporate bylaws to restrict the ability of shareholders to sue company executives or board members for alleged breaches of fiduciary duties, according to a regulatory filing.
Effective May 15, the electric vehicle maker requires investors to own at least 3% of Tesla’s outstanding shares—valued at over $30 billion based on current market prices—to initiate or maintain derivative lawsuits. The filing states, “Tesla has adopted an ownership threshold requiring any shareholder or group of shareholders to hold shares of common stock sufficient to meet an ownership threshold of at least 3% of Tesla’s issued and outstanding shares in order to institute or maintain a derivative proceeding.”
This new rule effectively excludes most individual investors and smaller institutional shareholders from holding Tesla’s leadership legally accountable. While the law allows shareholder groups to combine holdings to meet the threshold, practical challenges may deter such coalitions.
The move follows a Delaware Chancery Court ruling that voided Tesla CEO Elon Musk’s $56 billion compensation package. The case was brought by Richard Tornetta, a shareholder who owned just nine Tesla shares and successfully argued that the board lacked independence in approving Musk’s 2018 pay plan. The court found that Musk exerted significant control over the board and that disclosures to shareholders were misleading.
Tesla, now incorporated in Texas, has utilized a recently passed state law enabling companies to impose stricter limits on shareholder litigation. Senate Bill 29, signed by Governor Greg Abbott earlier this month, includes the 3% ownership threshold as part of efforts to attract large corporations by reducing shareholder oversight.
Tesla has appealed the Delaware ruling on Musk’s pay, with the state Supreme Court expected to issue a decision later this year. Meanwhile, Tesla’s board has formed a special committee to explore a new compensation plan for Musk.