A group of Tesla investors recently filed a lawsuit against CEO Elon Musk, along with the company and its board members. The lawsuit alleges that Tesla was harmed by Musk’s diversion of resources to his xAI venture, which includes hiring AI employees from Tesla, diverting microchips from Tesla to X (formerly Twitter) and xAI, and using Tesla’s data to develop xAI’s own software and hardware without compensation to Tesla.
The lawsuit was filed in the Delaware Court of Chancery by three Tesla shareholders: the Cleveland Bakers and Teamsters Pension Fund, Daniel Hazen, and Michael Giampietro. They are seeking financial damages for Tesla and want Musk’s equity stake in xAI to be disgorged to Tesla.
The lawsuit draws a parallel to the actions of CEOs in other industries and argues that the actions of Musk and Tesla’s board members are a breach of fiduciary duty. It questions whether the CEO of Coca-Cola could start a competing soft-drink company and divert resources from Coca-Cola to the startup, or if the CEO of Goldman Sachs could start a competing financial advisory company and hire away key bankers from Goldman Sachs without facing consequences.
Tesla has positioned itself as an AI company, and Musk has repeatedly emphasized the importance of artificial intelligence for Tesla’s future. However, by founding xAI, Musk essentially started a competing company and diverted talent and resources from Tesla to the startup with the apparent approval of Tesla’s board.
According to the lawsuit, Musk founded xAI in March 2023 and proceeded to hire numerous key AI-focused employees from Tesla to xAI. The lawsuit also claims that Musk diverted Nvidia GPUs from Tesla to xAI and X, which was confirmed by Nvidia emails revealed in a CNBC report.
The investors suing Musk and Tesla do not accept Musk’s justification for the GPU diversion. Musk claimed that Tesla had no place to use the Nvidia chips and they would have sat in a warehouse unused. However, the lawsuit questions Musk’s claim and accuses him of exploiting information owned by Tesla to pitch xAI to potential investors.
The complaint argues that Musk intended to have xAI harvest data from Tesla without properly compensating Tesla, even though xAI already received equity from X for its data contributions. The lawsuit suggests that xAI should have been created as a subsidiary of Tesla, which would have avoided the need for compensation issues.
The Delaware Court of Chancery, where the lawsuit was filed, is the same court that nullified Musk’s pay package in 2018 following another investor lawsuit. The court ruling reduced Musk’s stake in Tesla, which allegedly prompted him to accelerate his efforts to grow xAI, including raising billions of dollars and poaching employees from Tesla.
The lawsuit accuses Tesla’s board of allowing 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 take action is seen as a breach of their fiduciary duty to protect the interests of Tesla and its shareholders.
The close ties between Tesla’s board members and Musk are a significant factor in the case. The court’s previous ruling on the nullification of Musk’s pay package found that most of Tesla’s board members were beholden to Musk or had compromising conflicts. The lawsuit highlights these findings as evidence of the board’s failure to act in the best interests of Tesla and its shareholders.
In response to the lawsuit, Tesla has not yet provided a statement. The outcome of this case will have significant implications for Tesla, its AI development efforts, and the accountability of CEOs and board members in similar situations.
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