The biggest task of Tesla’s general counsel: reining in CEO Elon Musk social media posts.
A recently unsealed lawsuit alleges that Tesla’s board of directors failed to appoint a general counsel who could defend him or herself to the company’s controversial CEO.
The statement shows Tesla’s limited options and that general counsel have when working with difficult bosses.
Tesla Investor Files Derivative Lawsuit
law.com reports that Tesla investor Chase Gharrity alleged in a derivative suit filed in the Delaware Court of Chancery that the electric vehicle maker’s board has been unable to control Elon Musk and his “increasingly erratic behavior and misconduct.”
Gharrity sued Musk and its board, claiming Elon Musk has exposed the company to billions. The exposure includes both potential liability and market losses. He says that Musk continued to send “erratic” tweets, despite a settlement with regulators requiring pre-approval of his social media comments. The complaint specifically claims that Tesla’s board did not keep Musk from tweeting about the company’s finances in violation of a 2018 settlement with the Securities and Exchange Commission.
In one Tweet in question, Elon Musk posted, “Tesla stock is too high IMO.”
“Similar to its repeated failure to implement and apply internal controls regarding oversight of Mr. Musk, the Board has also consistently failed to ensure that Tesla has an independent General Counsel who can provide advice untainted by Musk,” the 105-page derivative lawsuit states.
“Further unchecked tweeting by Elon Musk” could “have severe ramifications on the company’s ability to secure financing,” and it “drives out the very voices in the company meant to stand up to him and protect” investors, the complaint says.
Musk has repeatedly violated a 2018 settlement with the SEC. The settlement imposed payments of $20 million each from Musk and Tesla. The agreement ordered Tesla to adopt strict new oversight procedures concerning Musk’s social media posts. Tweets from Elon Musk about taking his company private caused the filing of the case from the SEC. The SEC said Musk misled investors.
Several General Counsel Have Left Tesla, Showing Inability to Control Elon Musk
Three general counsel have left the Palo Alto, California-based Tesla within a year. Investor Gharrity says that this “reflects the fact that none of them were able to exercise any independent advice on matters that differed from Elon Musk’s desired outcome.”
The lawsuit goes on to state:
The Board was acutely aware of the need for Tesla to have a General Counsel who could provide advice as to what was in Tesla’s best interests,” the suit adds. “It was also well aware that Elon Musk was interfering with the General Counsel and dictating Tesla’s positions on issues, including with respect to compliance with the SEC’s Judgment.
Alan Prescott is currently serving as Tesla’s acting general counsel. His predecessors were Jonathan Chang, Todd Maron and Dane Butswinkas.
“These are all very, very good and experienced lawyers,” ex-Marriott International GC Ed Ryan told law.com.
The lawsuit was unsealed on March 12th. The complaint names Elon Musk and Tesla’s individual board members as defendants. However, none of the company’s current or former chief lawyers are listed as defendants, which Ryan found notable.
“The [three former] GCs probably did the right thing here in resigning. One reason you resign is you don’t want to be a defendant in a lawsuit,” he said.
When a CEO that Ignores a GC’s Advice
A general counsel sometimes must work with a CEO like Elon Musk who repeatedly ignores their legal advice. When that occurs, the attorney can either leave the company or remain and work with the board. Perhaps the attorney can convince the CEO to change his or her tactics.
The second route is difficult and possibly could expose the general counsel to potential legal liability. Further, the general counsel also could risk his or her “reputation and emotional well-being,” said former Airbnb Inc. general counsel Rob Chesnut after reviewing the case against Elon Musk.
“When you’ve got a strong-minded, strong-willed leader, it is going to be challenging,” he said. “You almost have to quit. If they’re not listening to your advice over and over again, then I don’t think you have a lot of choices.”
In addition, Ryan said, “I don’t think the GC has much of a choice. They can’t control the CEO. It’s not like they can turn off his Twitter account. When they reach the point where they have no control and you have a company officer who’s doing things that the SEC has said he can’t do, I think they have no choice but to move along and exit that situation.”
Elon Musk Fate Ultimately Up To the Board
The two former general counsel interviewed by law.com both said that, ultimately, it’s the board’s responsibility, rather than that of the general counsel, to make certain that a CEO is acting in the company’s best interests.
Chesnut also remarked that this was the first time he had seen a plaintiff argue this particular issue. The argument is that a board failed to secure a GC who could keep a CEO in line.
“One aspect of it may be ensuring that there’s a strong, independent general counsel,” he said. “But if the CEO isn’t listening to the general counsel, I don’t know if it’s the general counsel’s fault.”