Tesla has implemented an important change to its corporate bylaws, limiting the ability of shareholders to sue the company’s executives or board members for alleged breaches of fiduciary duties.
According to a regulatory filing, Tesla now requires investors to own at least 3% of the company’s outstanding shares—worth over $30 billion at the company’s current valuation—to initiate or maintain a lawsuit.
“Tesla has adopted an ownership threshold requiring any shareholder or group of shareholders to hold shares of common stock sufficient to meet an ownership threshold of at least 3% of Tesla’s issued and outstanding shares in order to institute or maintain a derivative proceeding,” the filing said, which is effective as of May 15.
The new rule essentially excludes all but the largest institutional investors—such as BlackRock, Vanguard, or State Street—from holding Tesla’s leadership accountable in court. While the law technically allows shareholder coalitions to meet the 3% requirement collectively, organizing such efforts could prove nearly impossible in practice.
While obviously not mentioned in the filing, this amendment was likely spurred on after a Delaware judge voided CEO Elon Musk’s $56 billion pay package. The plaintiff in that case, shareholder Richard Tornetta, owned just nine shares of Tesla stock, yet successfully argued that the board failed to act independently in approving Musk’s 2018 compensation plan.
The Delaware Chancery Court ruled that Musk exercised de facto control over the board and that key disclosures to shareholders were misleading. In response to the ruling, Musk posted on X, “Never incorporate your company in the state of Delaware.”
Now incorporated in Texas, Tesla has taken advantage of newly passed state legislation that allows corporations to impose significant barriers to shareholder litigation. The 3% threshold, introduced in Senate Bill 29 and signed into law earlier this month by Governor Greg Abbott, is part of a broader push to attract major companies to the state by weakening shareholder oversight provisions.
Meanwhile, Tesla has appealed the Delaware court’s decision to rescind Musk’s compensation. The state’s Supreme Court is expected to rule on the case later this year. In the meantime, Tesla’s board has formed a special committee to consider a new compensation package for Musk.
