Sat. Sep 23rd, 2023
    Tesla Shareholders’ Lawsuit Dismissed by Federal Court

    A federal court has ruled that investors in Tesla Inc. cannot proceed with their lawsuit against CEO Elon Musk and other directors and officers. The lawsuit alleged that these individuals fostered a “toxic workplace culture” at Tesla. However, Judge David Alan Ezra stated that the shareholders failed to demonstrate that they were excused from making a demand to the company’s board before taking legal action.

    While the dismissal on these grounds suggests that some of the defendants may not be liable, the court did note that the investors could attempt to address the deficiencies in a new version of the complaint.

    Tesla has faced legal battles with California regulators in recent months, with allegations of harassment and discrimination. The company has also dealt with multiple worker discrimination suits over the years. Some employees have been forced into arbitration, while others have been successful in winning significant damages.

    In the derivative suit brought forward by the investors, they claimed that company directors and executives caused financial and reputational harm to Tesla by enabling a “toxic workplace culture” rooted in racism and sexism. The plaintiffs argued that the work environment posed significant liability risks for the company.

    The defendants sought dismissal of the lawsuit, arguing that the investors had not made a demand to the board and had not established that doing so would have been futile. Magistrate Judge Dustin M. Howell recommended dismissal, and Judge David Alan Ezra ultimately agreed, while differing on some points.

    In determining whether a demand would be futile, the court considers factors such as whether directors received personal benefits from alleged misconduct or face a substantial likelihood of liability. Judge Ezra concluded that the majority of the board does not face liability for their oversight of corporate activities or their role in issuing a proxy statement.

    Representation for the investors was provided by Robbins LLP and the Kendall Law Group, PLLC, while Ewell, Brown, Blanke & Knight LLP and Freshfields Bruckhaus Deringer US LLP represented the defendants.

    – FactSet
    – In re Tesla Inc. S’holder Derivative Litig., 2023 BL 326974, W.D. Tex., No. 1:22-CV-00592, 9/15/23.