Oh Elon. What have you done now?
It’s hard to say whether Tesla CEO Elon Musk’s tweet heard ‘round the world was some kind of cry for help, a needle to the ribs of stuffed shirts on Wall Street, or a petulant CEO deciding to take his ball and go home. But everyone wants to know. Discerning the motivation behind Musk’s bizarrely casual announcement of a plan to take Tesla private at $420 per share (first by tweet, then by blog post, then by more tweets) is not just the business world’s favorite parlor game. Determining Musk’s mindset as he thumbed out his tweet could also determine the extent of his, and Tesla’s, legal liability for his antics.
Musk’s actions over the past few days raise more legal questions than a securities law exam, but they cluster in two broad areas: (1) whether the medium for his message is legally problematic, and (2) whether the substance of his message is.
On the first point, respected opinions differ. The conventional vehicle for announcing a radical plan for the largest going private transaction in corporate history would be an 8-K filing, but no one expects Musk to go the conventional route. The question is whether, in taking to his personal Twitter, Musk violated Regulation FD’s requirement that when public companies release material information, they spread it to the public broadly and evenly.
The SEC opined on an analogous situation after Netflix’s CEO once announced some material news on his personal Facebook page. The commission said then that “[p]ersonal social media sites of individuals employed by a public company would not ordinarily be assumed to be channels through which the company would disclose material corporate information.” But that was written about Reed Hastings in 2013. Here, we’re talking about Elon Musk in 2018. That’s all Bloomberg’s Matt Levine needed to bat away the question of whether using Twitter violated Regulation FD: “No, come on, this is Tesla, everyone is reading Musk’s tweets,” he said. In the opposing corner, Columbia Law School professor John Coffee, one of the great authorities on corporate law, says: “This approach doesn’t even come close to adhering to S.E.C. rules.”
We won’t resolve that dispute here, so let’s move on to the second question – about the substance of Musk’s comments. This is where true danger lies for Tesla. Any false statement made by Musk will surely become the basis for a 10b-5 securities fraud suit, and he made a whole lot of factual statements that could later be proven false. In his original tweet alone (“Am considering taking Tesla private at $420. Funding secured.”), there are two big assertions: the specific price point for the buyout and the claim that funding is “secured.” That’s before you get to still more problematic statements, like the company blog post in which he lays out a utopian-sounding plan to take the company “private” while still allowing public shareholders to keep their equity. At best, that’s unprecedented; at worst, it’s an oxymoron. Or take the Tuesday tweet claiming that the “[o]nly reason why this is not certain is that it’s contingent on a shareholder vote, which could go wrong in any number of ways (a board vote on the plan, for instance, could fail to pass).
Of course, none of this stopped the stock from rocketing up more than 10 percent on Tuesday, which kept most shareholders happy for the moment. But the short sellers who lost money, and any shareholders who do on future dips, will claim that Musk’s statements constituted securities fraud. At that point, courts must determine whether Musk made any misstatements “knowingly or recklessly” – which gets back to the question of Musk’s intent. On that, there are three big possibilities:
Musk had malicious intent: On the one hand, it’s crazy to even contemplate the possibility that the CEO of a company like Tesla would try to manipulate price action in his own stock to hurt third parties. But then, Elon Musk will go farther than most to get back at short sellers, who have clearly rented space in his head. (To pick one example out of the air, on May 4th Musk tweeted: “Short burn of the century coming soon.”) Musk’s frequent carping about short sellers – including in Tuesday’s blog post – make this a conceivable possibility. And, of course, would lead to massive 10b-5 liability if losses can be shown.
Musk was ignorant: Elon Musk has a habit of announcing things – like production deadlines – that don’t come to pass. In such cases, as with his take-private plan, any statements that ultimately turn out to be false were likely made not out of malice, but well-meaning enthusiasm. Or even, perhaps, ignorance. Musk’s blog post, for instance, analogizes his plan for Tesla to SpaceX’s funding structure – and in doing so, mischaracterizes it. But innocent mistakes won’t get Musk off the hook here. If his statements can be called “reckless,” they can still be the basis for liability – and a good lawyer could make hay with an argument that Musk’s approach here has been the very definition of “reckless.”
Elon Musk is crazy like a fox: All of the above assumes that Musk’s statements will be proven wrong. But Elon Musk has been defying people who think he will be proven wrong for a long time. He’s made a career out of it. We hope, for the sake of Tesla employees, shareholders, and Musk himself, he keeps it up – as unlikely as it may now appear.