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Ever since Elon Musk’s now infamous tweet on Aug. 7, 2018, Tesla’s stock price has been on a roller coaster ride.
Although this episode has led to a number of market and legal consequences, it has broader implications for boards and corporate governance in our increasingly digital age.
To gain some traction on this, it is important to start at the beginning – on Aug. 7, 2018 Elon Musk, CEO and Chairperson of Tesla (and a few other firms), tweeted “Am considering taking Tesla private at $420. Funding secured.” Prior to the tweet, Tesla’s stock was trading at about $357 per share so suggesting a price of $420 was a substantial premium over the then market price.
This, unsurprisingly, generated a large stock price response with Tesla’s stock closing that day a little above $379. However, the fact that Tesla’s closing price was still substantially below the $420 mentioned in the tweet suggests that the market was somewhat skeptical of Musk’s proposed going private transaction from the beginning. Nonetheless, when the tweet was retracted a few weeks later there was substantial controversy and negative publicity for both Musk and Tesla.
Musk claimed he was tweeting from his car and later hinted that “short-selling” was one reason behind the tweet (short-selling tends to drive down the price of a firm’s stock whereas going private at a substantial premium above market price tends to push the firm’s price up).
Whatever the reasons, within two months it appeared that the U.S. Securities and Exchange Commission (SEC) was on the verge of settling the matter with Musk and Tesla, but at the last minute Musk pulled away from the settlement. This apparently led the SEC to file charges against Musk for violations of Section 10(b) of the Securities Exchange Act 1934 for allegedly making “false and misleading statements” in the tweet.
The allegations were that Musk did not have “funding secured” and had no intention of going private when he tweeted and that these misstatements harmed investors who purchased Tesla’s shares in the period after the statements became known and before accurate information was provided.
The SEC also sought, as one of its remedies, to prohibit Musk from serving as an officer (which likely would have caused large declines in Tesla’s stock price as well as perhaps other firms – such as SpaceX – of which Musk was the CEO). This then led to a renewed round of intense negotiations culminating, some two days later, with a settlement on the following terms and conditions:
- Mr. Musk will continue as Tesla’s CEO and step down as its Chairperson (to be replaced by an independent Chairman). Mr. Musk will be ineligible to be re-elected Chairman for three years.
- Mr. Musk and Tesla will each pay a separate $20 million penalty. The $40 million in penalties will be distributed to harmed investors under a court-approved process.
- Tesla will appoint a total of two new independent directors to its board.
- Tesla will establish a new committee of independent directors and put in place additional controls and procedures to oversee Musk’s communications.
This settlement seemed to acknowledge Mr. Musk’s critical role at Tesla and the very negative reaction for Tesla’s share price, should Mr. Musk no longer be permitted to be CEO – presumably something the SEC wished to avoid. In spite of this, even after the settlement, Mr. Musk has continued to tweet negatively about the SEC (calling it the “Shortseller Enrichment Commission” in a recent tweet) and shortsellers in general. This has only contributed, along with other factors, to Tesla’s continuing yo-yo price movements.
Just want to that the Shortseller Enrichment Commission is doing incredible work. And the name change is so on point!— Elon Musk (@elonmusk) October 4, 2018
The breathtaking speed (and volatility) of these developments should lead us to pause and ask a number of questions, such as:
- What does this episode tell us about corporate communications in the digital age?
- What sort of processes should the board have in place to address concerns arising from this?
- How should the board monitor and perhaps restrict the communications of a “well regarded” controller?
- Was Tesla’s board (which prior to this was staffed by people with close connections to Musk) a real constraint on Musk?
- What role should the stock market regulator play here – keeping a close rein may deter controllers from providing useful information and chill discussion, but a relaxed approach may harm investors who transact while relying on these communications or tweets.
On the first question, it is becoming ever more clear that the digital age raises many possibilities and pitfalls for corporations. The opportunity to communicate quickly with investors, customers and other stakeholders can be of great benefit to firms in terms of getting their message out and being “ahead of the story”, but that speed comes with the risk that what is said may not be as carefully vetted. Simply put, with Facebook, Twitter, and other forms of social media pushing corporate communications ever faster, the opportunity for careful vetting is dwindling.
From a governance perspective issuing quick statements that are not carefully thought out, risks misleading or harming investors, burning the firm’s reputation, and triggering regulatory action, amongst other things.
In light of this, one would expect firms to develop processes or strategies for addressing these kinds of concerns with the newer communication technologies. Indeed, it appears that some corporations do expend considerable energy and resources on structuring their online communications and monitoring the traffic this generates. This suggests that firms should be thinking explicitly about how they intend to best utilise the increasing forms of online communication to benefit the firm, while containing the potential downside risks. At a minimum, this would require some coordination and consistency on the message.
Of course, board efforts can be evaded or stymied by a determined controlling shareholder. That suggests that when a firm is controlled the board should adopt procedures designed to bring the controller’s firm-related communications to the board before they are sent out so that the coordination and consistency can be addressed. This is particularly important with a well known controller because the market is likely to believe, probably correctly, that the controller knows more about the firm than anyone else, and her statements carry substantial weight. In light of that, one would expect the board (and probably the Chief Legal Officer) to speak with the controller often, and try to develop a coordinated and consistent message.
This is, of course, not easy because many directors might feel quite loyal or deferential to the controller. Indeed, this seems to be what was happening at Tesla. Its board is composed of people who are closely tied to Musk (including his brother Kimble) and might not be reasonably expected to constrain his online communications.
"Indeed, Musk’s tweets playing on the SEC’s acronym so soon after the settlement do not instill confidence in the current board’s ability or willingness to constrain Musk’s communications."
Further, it is understandable that the SEC has not taken any further action after Musk’s SEC tweet because it is not directly related to Tesla’s business (and it would not appear likely to mislead investors because reasonable investors may not consider his SEC tweet to contain material information related to Tesla). Further, the SEC is not per se interested in policing Musk’s communications except to the extent they may impact reasonable shareholders and trigger concerns that undergird the SEC’s mandate.
Although the Elon Musk saga has many insights for managing the communications issues arising from newer technologies, it should be said that Indian firms do not, thus far, appear to have had the communications quagmire witnessed at Tesla.
In part, this may be because controllers in India (which are more common than in the U.S.) seem unlikely to tweet about major issues without either executive, board or family consultation. This tends to provide some kind of vetting function. Moreover, the use of online communications for most publicly traded firms in India is not as ubiquitous as at U.S. firms.
Nonetheless, it is fairly clear that these issues will confront Indian firms as these communications technologies get utilised more in India and as tech and biotech driven firms, with younger founders, rise up the ranks in corporate India.
The Elon Musk saga provides useful lessons as we face that bold new world.
Vikramaditya S. Khanna, the William W. Cook Professor of Law, is faculty director of the Directors' College for Global Business and Law and codirector of the Joint Centre for Global Corporate and Financial Law & Policy, a collaboration between Michigan Law and India's Jindal Global Law School. He is the founding and current editor of both India Law Abstracts and White Collar Crime Abstracts on the Social Science Research Network.
The views expressed here are those of the author’s and do not necessarily represent the views of Bloomberg Quint or its editorial team.
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