Tesla shareholders sue Musk: What's the cause?

Tesla shareholders are suing CEO Elon Musk and members of the automaker's board of directors over Musk's decision to create xAI, a competing artificial intelligence company, and divert Tesla's talent and resources to the new venture.

Challenge to Musk

The lawsuit is one of the most direct challenges to Musk's decision to create xAI and was filed after he threatened to develop artificial intelligence outside of Tesla if he didn't get more votes for control of the company. The lawsuit was filed just hours before Tesla's annual shareholder meeting, where shareholders will vote on a $56 billion dollars compensation plan that was overturned by a judge earlier this year.

Tesla's true value

Musk has long argued that Tesla's true value lies not only in the fact that it makes electric cars, but also in the fact that it is an artificial intelligence company - an argument that is one of the reasons its stock is worth as much as a technology company's stock and more expensive than that of the four largest automakers combined.

The new lawsuit was filed Thursday in Delaware Chancery Court on behalf of Tesla by the Cleveland Bakers and Workers Pension Fund, which is represented by Daniel Hazen and Michael Giampietro. The lawsuit alleges that Musk and Tesla board members breached their fiduciary duties to shareholders and unjustly enriched Musk by allowing the CEO to start a competing company.

Violation of business ethics

The plaintiffs also allege that Musk violated Tesla's Code of Business Ethics by founding and leading xAI and that the board allowed Musk to continue to violate the rules. The plaintiffs are asking the court to force Musk to give up his xAI shares and transfer them to Tesla.

"The notion that the CEO of a large, publicly traded Delaware corporation can create a competing company with the express approval of the board of directors and then direct the company's talents and resources to a startup is absurd," the complaint says. It compares Musk's behavior to a hypothetical situation where the CEO of Coca-Cola creates a competing soft drink company and directs ingredients to it.

Competition

Musk founded xAI in 2023 and recently raised 6 billion dollars in funding for his venture, which hopes to compete with rivals such as OpenAI, Microsoft and Alphabet.

Shortly thereafter, Tesla began transferring talent and resources from Tesla to xAI, the plaintiffs allege. The lawsuit says that at least 11 employees transferred directly from Tesla to xAI and that Tesla gave xAI access to its artificial intelligence-related data.

Link to CNBC report

The plaintiffs also cite a CNBC report that Musk diverted shipments of artificial intelligence processors that Nvidia had reserved for Tesla to his own company X (formerly Twitter). A few weeks ago, Musk wrote on X's website that Tesla will "invest 10 billion dollars in machine learning and artificial intelligence" this year and that Tesla needs Nvidia's expensive chips to become "a leader in artificial intelligence and robotics."

Musk's confession

Musk admitted to moving the chips to X, saying Tesla's new data center in Texas was still under construction and he had nowhere to store them.

"The board has allowed Musk, Tesla's CEO and largest shareholder, to create and run another artificial intelligence company, plunder Tesla's resources and divert them to xAI, and receive billions of dollars in artificial intelligence-related revenue from companies outside of Tesla," the plaintiffs allege. "In light of its long history of deferential treatment of Musk, Tesla's board of directors utterly failed utterly to even attempt to fulfill its fiduciary duty to protect the interests of Tesla and its shareholders in the face of Musk's brazen disloyalty."

Earlier this week, other Tesla shareholders filed a separate lawsuit against Musk, alleging that he used inside information to make billions of dollars from selling shares of the automaker in 2021 and 2022.