ATTORNEY: MARC C. GORRIE
POMERANTZ MONITOR NOVEMBER/DECEMBER 2018
On September 27, 2018, the SEC sued Elon Musk, CEO and Chairman of Tesla Inc., charging him with securities fraud. It alleged that on August 2, 2018, after the close of the market, Musk had sent an email with the subject, “Offer to Take Tesla Private at $420,” to Tesla’s Board of Directors, Chief Financial Officer, and General Counsel. Musk stated he wanted to take Tesla private because being a publicly-traded company “[s]ubjects Tesla to constant defamatory attacks by the short-selling community, resulting in great harm to our valuable brand.” Apparently Musk had not lined up financing or done any other preparatory work before making this offer.
Before anyone at the company could respond, on August 7, 2018 Musk sent out a series of false tweets about the potential transaction to take Tesla private, confusingly saying that:
“My hope is *all* current investors remain with Tesla even if we’re private. Would create special purpose fund enabling anyone to stay with Tesla.”
“Shareholders could either to [sic] sell at 420 or hold shares & go private.”
“Investor support is confirmed. Only reason why this is not certain is that it’s contingent on a shareholder vote.”
Rule 10-b5 prohibits a company’s officers and directors from “knowingly or recklessly mak[ing] material misstatements about that company.” Musk’s tweets contain both clearly factual statements that are ambiguous or incomplete at best and concern information that Tesla shareholders would find very important.
The SEC’s complaint alleged that Musk had not even discussed the deal terms he tweeted, which offered a substantial premium to investors that was greater than Tesla’s share price at the time. After the tweet, Tesla’s stock price rose on increased trading volume, closing up 10.98% from the previous day.
A press release issued by the SEC on September 27, 2018 made it clear that Musk’s “celebrity status,” including his 22 million Twitter followers, did not affect his “most critical obligations” as a CEO not to mislead investors, even when making statements through non-traditional media. This status and Musk’s large audience drove the tenor of the SEC’s complaint and the relief sought: a permanent injunction against future false and misleading statements, disgorgement of any profits resulting from the tweets, civil penalties, and a bar prohibiting Musk from serving as an officer or director of a public company.
The SEC had previously issued a report that companies can use social media to announce key information in compliance with Regulation Fair Disclosure, so long as investors have been alerted about which media avenues will be used and such statements otherwise comply with regulations. This clarification arose out of the 2013 inquiry into a post by Netflix CEO Reed Hastings’ personal Facebook page, stating that Netflix’s monthly online viewing had exceeded one billion hours for the first time. Due to the uncertainty about the rule, an enforcement action was not initiated regarding Hastings or Netflix.
Regarding the disclosure of material, company-specific information via Twitter, the SEC averred that Tesla had stated in 2013 that the company may use social media to release information to investors, but never made any greater specification. Here, Musk announced a record-breaking private buyout offer at a price he alone determined without any board approval or arms-length negotiation.
Musk initially rejected settlement negotiations outright, but lawyers for the company purportedly convinced him, and the SEC, to come back to the table. Before Musk or Tesla responded to the SEC’s complaint, settlement was quickly reached on September 29, 2018 and a joint motion for the court to approve the settlement was filed. The deal allows Musk to remain CEO and a board member but imposed a two-year ban as Chairman and a $20 million fine, as well as a $20 million fine on Tesla. The settlement further requires Tesla to add two independent directors as well as a permanent committee of independent directors tasked with monitoring disclosures and potential conflicts of interest. Such monitoring includes a required preapproval of any communications regarding Tesla in any format that contains, “or reasonably could contain, information material to the Company or its shareholders.”
On October 4, District Judge Alison J. Nathan ordered the parties to file a joint letter explaining why the proposed settlement was fair and reasonable, which was filed October 11. As to the reasons behind the tweets, Musk has cryptically commented, “[i]f the odds are probably in your favor, you should make as many decisions as possible within the bounds of what is executable. This is like being the house in Vegas. Probability is the most powerful force in the universe, which is why the house always wins. Be the house.”
Before the Court ruled on the proposed settlement, Musk released another confusing tweet:
“Just want to [sic] that the Shortseller Enrichment
Commission is doing incredible work. And the name change is so on point!”
The court nevertheless overlooked this outburst, approved the settlement and entered final judgment on October 16. After taking a short Twitter break, Musk then tweeted that the whole debacle was “[w]orth it.”
The settlement comes without an admission or denial of wrongdoing by Musk, but stands as a clear reminder of the obligations that the officers and directors of public companies have to shareholders. Tesla is a company whose value is in no small part its future potential – a value driven by a belief that Musk is central to the company’s ongoing success. It appears as though this was tacitly recognized through the settlement negotiations, as the second round resulted in the SEC backing away from their initial position that Musk be barred from being a corporate officer or director permanently. Such a punishment could have easily proved ruinous for Tesla.
In a time where even presidential communiqués can issue via Twitter, officer and director statements concerning material information related to publicly traded companies must adhere to the well-established rules of disclosure, even when they are limited to 140 characters or less.