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Business Litigation Alert: "The Tesla Lesson When an Electric CEO Threatens the Company's Future"

On August 7, 2018, Tesla CEO Elon Musk shocked Wall Street and surprised his board of directors.  He announced via Twitter that he was “considering” taking the company private at $420 per share and, importantly, that he had “Funding secured.”  Even though Musk reversed this “decision” on August 24, his one tweet has led to a great deal of confusion within (and about) Tesla, as well as sparked the interest of the SEC.  Never a good sign. 

Because of Musk’s tweet and the subsequent fall-out, the Tesla board of directors must face a serious issue that many boards face at one time or another: what can or should the board do when the company’s visionary, energetic founder turns into an impulsive, uncontrollable CEO?  As Musk engages in questionable behavior ranging from inflammatory tweets to poor communication with his own board to (possibly) securities fraud, Tesla is left to consider its options.

And it appears that there are really only three options, all of which come with considerable risk.

  1. If the board chooses to do nothing, it leaves the company at continued risk of additional controversy, distraction, and possible financial harm.  Musk’s behavior appears to be unpredictable and his decisions are often not communicated to the board ahead of time.  As a result, the board could find itself in a similar situation in the future where the company is facing regulatory scrutiny resulting from an inappropriate public announcement. 
  2. The board is rumored to be considering a co-CEO or bringing on a COO, which also presents a risk.  Musk certainly has a strong personality, and this kind of move could be perceived (by him) as a threat.  Again, given his unpredictability, it is difficult to know what, if anything, he would do if the board choses to go this route.  Would he welcome the additional oversight or reject it and plunge the company into internal infighting?
  3. Fire Musk.  This seems the most risky, particularly from an operational standpoint.  Unless Musk agreed to be removed, he would probably contest an effort to completely oust him from the company, thereby plunging Tesla into distracting and expensive litigation.

The energy, vision, and single-mindedness of a company’s founder is often key to the business’ success.  However, those same characteristics can sometimes turn into potential (or actual) liabilities as the company grows and matures.  Tesla is at that cross-road.  It’s certainly a difficult decision: do nothing, attempt to reign in Musk’s behavior, or move him aside. 

All businesses face this challenge at one time or another, and it will be interesting to watch it play out here as the Tesla board considers its options and ultimately makes its move.

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