New Musk / SEC Agreement – Will It Work? – Red Flags – If I Were The Judge

At this point most reasonable people would not dispute that Mr. Musk has difficulty wording his communications (tweets) in a manner that is acceptable or more likely to be acceptable under the securities laws. Greatly summarizing the law, ask yourself if the wording and information that Mr. Musk has communicated or is proposing to communicate is or would be (1) viewed as being material to the average investor, (2) vague puffery, (3) a statement or assertion of current fact, (4) a statement or assertion of forward-looking wording and information, or (5) a mixed combination of any of (1)-(4)?

Vague puffery should not be actionable. Information that is not “material” also should not be actionable; however, whether information is material (quantitatively or qualitatively) can be a slippery slope question of fact, and you might ask why Mr. Musk would be communicating the information if he did not consider the information to be important as to Tesla? Regarding (3), well . . . is the statement or assertion of current fact true and accurate as expressed? Regarding (4), well . . . even if the statement or assertion includes forward-looking warnings or disclaimers (which it should/must), is there a reasonable factual basis for making and believing the truth and accuracy of the forward-looking statement or assertion?

The players involved at least include Mr. Musk, the SEC, the Board, the Audit Committee, the Disclosure Controls Committee, and the new experienced securities attorney who is supposed to review, fix/modify, and authorize Mr. Musk’s communications before Mr. Musk makes them. Obviously, this has been, and will be a challenge for Ms. Musk. Presumably, he views Tesla and Tesla’s further future success, or not, as his creation, and rightly so. Mr. Musk has accomplished an amazing task thus far. But public companies have rules of communication that must be followed. And it is arguable that at this point his manner of communications might be hurting Tesla as much as they help. Assertions of current fact, and assertions of forward-looking statements certainly can be made, and it is arguable that they are supposed to be or at times must be made or disclosed, but they need to be made in an appropriate manner.

Where has the Board been in all of this? We don’t know, because the Board has not said. The Board is overall responsible for risk management.

These certainly are risk management, governance, and internal controls issues.

Where has the Audit Committee been in all of this? We don’t know, because the Audit Committee has not said. The Audit Committee Charter in part states that the Audit Committee assists the Board with oversight of the Company’s compliance with legal and regulatory requirements, and also assists the Board with oversight of the Company’s risk management. The Charter further states that the Audit Committee also is involved in the oversight of internal controls and at least some of Tesla’s corporate communications.

Tesla also has a Disclosure Controls Committee. Where has the Disclosure Controls Committee been in all of this? We don’t know because the Disclosure Controls Committee has not said.

And, assuming that the Court approves the new Musk / SEC agreement, going forward where will then be the experienced securities attorney who is supposed to review, fix/modify, and authorize Mr. Musk’s communications before Mr. Musk makes them?

Thus far, oversight has not worked. And, there are red flags all over the place. Although Boards, and Board Committees (e.g., the Audit Committee), and in-house legal and compliance professionals usually are not personally liable for unlawful activities of the company or its officers, that is a changing environment, and cases also do hold that liability can attach when red flags are ignored or not remedied.

This is really easy to resolve if Mr. Musk wants to modify how he does his communications, as frustrating as that might be for him.

What will/should the Judge do? I would approve the new agreement, perhaps with a few minor changes. I would put in place a process for meet and confer between the parties, and then also quick Court involvement if there is a perceived new violation of the new agreement, and I would schedule a new status hearing in the not-to-distant future, such as 30 days.

Every case and situation is different. You do need to consult with an attorney and other professionals about your particular situation. This post is not a solicitation for legal or other services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation or as legal or other professional advice or representation.

Thank you for reading this website. I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only.

Blogs: Trust, estate/probate, power of attorney, conservatorship, elder and dependent adult abuse, nursing home and care, disability, discrimination, personal injury, responsibilities and rights, and other related litigation, and contentious administrations; Business, D&O, board, director, audit committee, shareholder, founder, owner, and investor litigation, governance, responsibilities and rights, compliance, investigations, and risk management

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Elon Musk / Tesla – purported SEC settlement, but corporate governance and board member judicial independence questions also remain

To say the least, it must have been a stressful couple of months for Tesla board members – how do you get your undisputed CEO leader and visionary to control himself, to take care of his mental and physical health, stop doing stupid or ill-advised things and making stupid or ill-advised public communications, and stop causing self-inflicted wounds? Or, at this point, how much do you need Mr. Musk to be the CEO of Tesla – can’t some other person take the helm – someone who is better qualified to build cars, and who also is an electric/battery power visionary? And where was the board in all of this? Well . . . we don’t know because they were silent to the public.  

You might have heard the news that the SEC filed suit against Mr. Musk last week as a result of an ill-advised and possibly unlawful public comment that he made. Yesterday (Saturday) I read two articles about possible settlement or actual settlement with the SEC. The following earlier-in-the-day article represents that Mr. Musk had rejected a settlement offer made by the SEC.  But please be aware that I never simply accept a news or other article as being correct – the article might be correct, or some of it might be correct, or none of it might be correct, you can be reasonably certain that the article is not entirely complete, and I also watch for the adjectives used and the opinions and conclusions reached as opposed to facts and whether or not those facts are supported with objective, credible evidence and sources. Thus, although I am using articles below, I am not representing or suggesting that they are correct or entirely correct. 

I found the first, earlier-in-the-day article interesting because of its discussion about the terms (presumably only some of the terms) of settlement purportedly offered by the SEC, and more interesting for the purported reasons why the settlement offer was rejected. The reasons for rejection, for example, do not include whether or not acceptance of the settlement would be in the best interests of Tesla and its stockholders. The reasons suggest that the settlement was rejected based on reasons personal to Mr. Musk, the reasons suggest a desire to maintain and not lose board control, and the reasons suggest a lack of board member involvement in whether or not the settlement should be accepted, and a lack of board member active diligent governance, oversight, and independence. Of course, obviously there are additional facts about which we are not aware.

In terms of board member independence, I am talking about possible lack of judicial independence, not independence as defined by stock exchange or similar rules, or whether or not the board member is an officer of Tesla. Board member judicial independence is an evolving and increasingly important attribute and evaluation – for example, does the board member truly diligently and prudently evaluate the issues at hand in the best interests of the stockholders and the company, and make decisions that are independent of the director’s self interests and independent of the director’s relationships with the executive officers and with the other directors. As you might be aware, judicial independence, for example, also takes into consideration business, financial, social, family, and friend interactions, relationships, and influences or pressures.

The following is the earlier-in-the-day article representing that settlement with the SEC was rejected and at least some of the purported reasons for the possible rejection – see a picture from the earlier-in-the-day first article below or  Click Here For Article

Musk reportedly doesn't settle with SEC

A later-in-the-day article then represented that settlement with the SEC had been accepted, and at least some of the purported terms of the settlement. I would view acceptance of the purported settlement as a good decision in the right direction for Tesla and its stockholders, and also for Mr. Musk. I will be interested in hearing who the two new directors will be, the process for and who nominates/selects the new directors and what Mr. Musk’s involvement will be in that process, and who the independent directors will be and whether they will be and are judicially independent as they should be judicially independent after taking into consideration that matters, issues and people over which they will have specific oversight and responsibility. See a picture from the later-in-the-day second article below or Click Here For Article

Musk reportedly settles with the SEC

Best to you, David Tate, Esq. (and inactive California CPA), Royse Law Firm, Menlo Park, California office, with offices in northern and southern California.  My blogs: trust, estate, elder abuse and conservatorship litigation, D&O, boards, audit committees, governance, etc., workplace

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Disclaimer. This post is not a solicitation for legal or other services inside or outside of California, and also does not provide legal or other professional advice to you or to anyone else, or about a specific situation – remember that laws are always changing – and also remember and be aware that you need to consult with an appropriate lawyer or other professional about your situation. This post also is not intended to and does not apply to any particular situation or person, nor does it provide and is not intended to provide any opinion or any other comments that in any manner state, suggest or imply that anyone or any entity has done anything unlawful, wrong or wrongful – instead, each situation must be fully evaluated with all of the evidence, whereas this post only includes summary comments about information that may or may not be accurate and that most likely will change over time.