Criticism from New York Officials on Tesla's Bylaw Changes Restricting Lawsuits

Tesla recently amended its corporate bylaws, setting a high bar for investors to pursue legal action. Now, to bring a lawsuit against the company for fiduciary breaches, shareholders must own at least 3% of Tesla's stock—valued around $30 billion currently. This has drawn opposition from New York state officials.

Officials overseeing the New York State Common Retirement Fund, possessing about 0.1% of Tesla shares, formally conveyed their opposition through a proxy proposal and letter to the company on July 11, shared later with CNBC. They accuse Tesla of a 'bait-and-switch' to gain shareholder approval on moving its incorporation from Delaware to Texas, planned for June 2024.

Elon Musk initiated this transition after a Delaware judge questioned his $56 billion compensation package from Tesla, marking the largest-ever public company pay deal. In persuading shareholders, Tesla assured that stakeholders' rights would remain largely similar between Delaware and Texas legal frameworks.

However, nearly a year post-move, Texas enacted a law allowing corporations to demand a 3% ownership requirement for filing derivative lawsuits. The following day, Tesla adjusted its bylaws accordingly, effectively shielding its board from shareholder-driven accountability, per a letter by Gianna McCarthy, corporate governance director for the retirement fund and New York State Comptroller Thomas DiNapoli.

As it stands, just three entities hold at least 3% of Tesla's shares, reducing the likelihood of accountability through derivative suits.

The officials emphasize that derivative actions are crucial as a last-resort mechanism enabling shareholders to protect their rights when company leadership breaches fiduciary duties, branding Tesla's bylaw modification as 'particularly concerning.'

In correspondence with CNBC, Comptroller DiNapoli voiced concerns, accusing Tesla of misleading shareholders by asserting consistent rights post-relocation to Texas. He argues these bylaw changes sharply contradict principles of sound corporate governance, requiring immediate reversal.