Could Musk's tweet about taking Tesla private lead to legal trouble?
Nine words tweeted by Tesla CEO Elon Musk Tuesday afternoon raised questions for the outspoken auto executive.
At 12:48 p.m. Musk tweeted: "Am considering taking Tesla private at $420. Funding secured."
The tweet caused a stir in the stock market. Tesla shares spiked 11 percent to close at $379.57 after trading was halted for part of the afternoon while investors awaited clarification. The stock's record high was $389.61 on Sept. 18, 2017.
But the tweet could be in violation of state and federal laws, said a former federal prosecutor.
"You’re not allowed to issue misleading information that investors could act on, and it looks like investors acted on it," said Peter Henning, a professor at Wayne State University Law School specializing in securities law.
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Legally, shareholders could sue Musk for a breach of fiduciary responsibility, said Henning. If the tweet gives an impression that Musk is trying to "stampede the board," that’s a violation of state fiduciary duty of directors, Henning said.
"You’re not allowed to strong-arm the directors, even if you are a 20 percent stakeholder" as Musk is, Henning said.
If the Securities and Exchange Commission believes Musk's tweet misled shareholders, the SEC could deem it a violation of anti-fraud prohibition in the federal securities law, said Henning.
“I suspect the corporate lawyers are scrambling right now and hoping the SEC doesn’t go after him and the company, because it could be viewed as a statement from Tesla,” said Henning. “If it misleads investors, the SEC can bring a case even if no one’s been harmed.”
The SEC in 2013 did say that companies can use social media such as Facebook and Twitter to announce key information so long as investors have been alerted about which social media will be used to disseminate the information.
Musk offered some clarification to his tweet later, saying the "only reason why this is not certain is that it’s contingent on a shareholder vote."
Musk, whose tweets initially caused confusion as some investors questioned whether he had been hacked, later confirmed his thinking through Tesla's official website.
"I think this is the best path forward," he said in an email to employees, further clarifying that "a final decision has not yet been made, but the reason for doing this is all about creating the environment for Tesla to operate best."
The explanation could have been late, said Henning. Corporate governance requires a company officer to first notify the board of directors of any deals, then negotiate a deal with the board.
"The tweet is potentially misleading. It didn’t give the kind of details that shareholders would want. The key detail being that it’s not a done deal. It sounded like, 'We’ve got the financing and we’re done.' That’s not how it works."
He added, "If an analyst said, 'Musk should take the company private,' people would shrug their shoulders. It’s much different when the CEO says it. The law is protective of shareholders. You have to get them the best deal, and whether $420 is a fair price or not? We don’t know."
Contact Jamie L. LaReau at 313-222-2149 or jlareau@freepress.com. Nathan Bomey of USA Today contributed to this report.
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