Step away from the phone! That’s the message Elon Musk, the now former Chairman of Tesla and habitual Twitter user, should have heeded in August before he sent one of his latest ill-advised tweets. Unfortunately, Musk let his critics (this time the short sellers of Tesla’s stock) get the better of him, and now Tesla and Musk are paying a high price for what amounts to an off the cuff remark.
The background, as you may recall, is that back in August, Musk tweeted that he was contemplating taking Tesla private at $420 per share and that he had “funding secured.” Of course, as it was later discovered the $420 per share price was only loosely based on a financial model or expected financial performance of Tesla. Rather, the SEC claims the price had more to do with impressing his girlfriend. And the “funding secured” part had very little basis in reality either.
As a general matter, I would recommend against launching a going private transaction via tweet. The SEC seems to agree. On September 29, 2018, Musk and Tesla quickly settled an SEC lawsuit by Musk agreeing to step down as Chairman of Tesla for at least three years, each of Musk and Tesla paying a $20 million fine (to be distributed to harmed stockholders), Tesla agreeing to add two new independent directors to its Board, and Tesla agreeing to put in place new controls to review all social media communications of Tesla’s senior management, including company pre-approval of all Musk social media postings that may contain material nonpublic information. The penalty is fairly harsh, but it is actually more mild than was originally intended – the SEC’ s lawsuit sought a bar from Musk serving as a director or an officer of a public company.
Given that Musk and Tesla settled the lawsuit two days after it was filed, Musk and Tesla must have believed that the SEC would not go away quietly or quickly. The SEC clearly used a lawsuit against an outspoken