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Musk, Tesla Board Sued Over Tweeting in Violation of SEC Deal (2)

March 12, 2021, 5:39 PM; Updated: March 12, 2021, 8:36 PM

A Tesla Inc. investor sued CEO Elon Musk and its board in Delaware, claiming Musk has exposed the company to billions in potential liability and market losses by continuing to send “erratic” tweets, despite a settlement with regulators requiring pre-approval of his social media activity.

“Further unchecked tweeting by 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.

The 105-page derivative lawsuit, made public Friday in Delaware Chancery Court, accuses the electric vehicle maker’s board of failing to rein in Musk’s behavior online, even as he has repeatedly violated a 2018 settlement with the Securities and Exchange Commission.

The agreement, which included payments of $20 million each from Musk and Tesla, called for the company to adopt strict new oversight procedures related to Musk’s social media posts. Tweets from Musk about taking his company private spurred the case from the SEC, which claimed he misled investors.

After Musk faced contempt claims for violating the deal’s terms almost immediately in 2019, the new compliance rules were tightened, according to the partly redacted complaint.

But he has allegedly “continued to issue tweets without the required pre-approval,” while Tesla churns through in-house attorneys.

Read More: Elon Musk’s Mystery Twitter Sitter Has One Wild and Crazy Job

Among the examples cited by the shareholder suit is one May 2020 Twitter post in which Musk sent Tesla’s shares plunging by suggesting they were overpriced. That tweet alone “destroyed almost $14 billion of Tesla’s market capitalization in a single day,” according to the complaint.

“Musk’s wrongful conduct” and “the failure of Tesla’s board to ensure compliance” have “caused substantial damage” to the company, the suit says.

Musk might have a hard time winning over the Delaware Chancery Court, said Peter Rasmussen, a Bloomberg Law senior legal analyst.

“With all the chances that Musk has been given, it is quite possible that the Chancery Court will have little patience with his latest tweeting adventures,” Rasmussen said.

The suit was originally filed under seal March 8.

Cause of Action: Breach of fiduciary duty.

Relief: Damages, costs, fees, and interest.

Response: Tesla didn’t immediately respond to a request for comment Friday.

Attorneys: The plaintiff is represented by Cooch & Taylor PA and Bottini & Bottini Inc.

The case is Gharrity v. Musk, Del. Ch., No. 2021-0199, complaint unsealed 3/12/21.

(Updated with additional background and comment from Bloomberg Law analyst. )

To contact the reporter on this story: Mike Leonard in Washington at mleonard@bloomberglaw.com; Andrew Ramonas in Washington at mleonard@bloomberglaw.com

To contact the editors responsible for this story: Rob Tricchinelli at rtricchinelli@bloomberglaw.com; Peggy Aulino at maulino@bloomberglaw.com; Patrick L. Gregory at pgregory@bloomberglaw.com

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