Tesla shareholders face staggering new hurdle after company enacts controversial policy: 'A formidable barrier'

Tesla raised the bar for shareholders to sue the company board or executives for breach of fiduciary duties.

What's happening?

The change took effect May 15 and requires an investor or group of investors to hold 3% of the electric vehicle maker's stock "to institute or maintain a derivative proceeding," CNBC reported. Tesla's market cap is $1.123 trillion, so a plaintiff would have to own shares worth $33.7 billion.

"Obviously, for a company of Tesla's size, that would be a formidable barrier to anyone bringing a lawsuit for breach of fiduciary duty," Tulane Law School's Ann Lipton told CNBC in an email.

The change was enabled by a Texas law that "allows corporations to limit shareholder lawsuits against insiders for breach of fiduciary duty," the outlet added. With shareholder approval, Tesla moved its incorporation site from Delaware to the Lone Star State in June 2024.

An investor who owned nine shares of Tesla stock sued the company in 2018, and CEO Elon Musk's $56 billion compensation package was revoked in January 2024.

Why is this important?

Musk is by far the richest person on the planet, and his wealth makes him nearly untouchable. He pioneered the EV movement by founding Tesla in 2003, and the company has been known for innovative technology and industry-leading breakthroughs.

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Recently, however, the South African has drawn criticism for straying into American and European politics, including spending lavishly on the U.S. presidential election campaign of Donald Trump, leading government spending cuts as the head of the U.S. Department of Government Efficiency, and supporting the far-right Alternative for Germany party.

Activists have protested these actions, and Tesla charging stations, vehicles, and dealerships have been vandalized. Sales have plummeted, and Tesla stock spiraled downward, too, though it has regained much of its value.

This upheaval and the larger perception change of Musk from groundbreaker to villain could stifle the uptake of EVs, which is one of the many things necessary to slow the rapid rise of global temperatures caused by the burning of fossil fuels for energy.

What's being done about Tesla's policy change?

It would take a massive coalition of shareholders to fight back against this move by Tesla, though companies are generally amenable to public pressure — especially when it comes to consumers' spending power. Tesla, for example, is shifting its focus from EV manufacturing to a robotaxi service and robotics to stabilize its future.