Musk Faces Another Setback as Judge Orders Him to Testify in Twitter Probe

Tesla CEO Elon Musk is no stranger to controversies but his legal woes have worsened in 2024 after a judge ordered him to testify in the SEC’s Twitter probe. The move comes days after a Delaware court voided his 2018 compensation package.

A California federal court ruled that Musk must agree to a date and location for the testimony within a week. The billionaire had missed his interview last September which his attorneys say was because the regulator leaked information to the media ahead of the sit-down.

Judge orders Musk to testify in SEC’s Twitter Investigation

In her order, US magistrate judge Laurel Beeler said Musk and SEC initially agreed to an interview date “but ultimately the respondent (Musk) did not appear and resists the subpoena on the grounds that the SEC’s investigation is baseless and harassing and seeks irrelevant information”.

The judge ruled, “The court enforces the subpoena: the evidence is relevant and material to the SEC’s investigation, and the testimony is not unduly burdensome. As to the argument that the subpoena exceeds the SEC’s authority, the Exchange Act authorizes the subpoena, and the staff attorneys who issue subpoenas are not inferior officers subject to the Appointments Clause.”

What’s The Twitter Case?

The SEC’s investigation is related to Musk’s acquisition of Twitter (later renamed X) – and whether the Tesla CEO followed due process in filing the paperwork and whether were there any misleading statements.

Notably, Musk’s Twitter acquisition wasn’t without controversies and he admitted that he bought the company only because of legal pressure – for context Twitter sued Musk to complete the deal after the billionaire had second thoughts on his $44 billion acquisition, apparently due to valuation issues.

Musk and SEC have a long history of confrontation

Musk and the SEC have a long history of confrontation and the agency fined him and Tesla for his infamous 2018 “taking Tesla private” tweet. As part of the settlement, Musk relinquished his position as Tesla’s CEO and his tweets were required to be vetted by a Tesla lawyer.

Meanwhile, Musk’s Twitter acquisition not only led to a steep fall in the social media company’s valuation but even Tesla stock fell prey to the controversies, losing two-thirds of its market cap in 2022.

Musk’s Legal Troubles Compound

Last month, a Delaware court voided Musk’s 2018 $56 billion compensation plan in yet another blow to the mercurial CEO. In her 200-page ruling, Chancery Court Judge Kathaleen McCormick said, “In addition to his 21.9% equity stake, Musk was the paradigmatic “Superstar CEO,” who held some of the most influential corporate positions (CEO, Chair, and founder), enjoyed thick ties with the directors tasked with negotiating on behalf of Tesla, and dominated the process that led to board approval of his compensation plan. At least as to this transaction, Musk controlled Tesla.”

Notably, the ruling came a few days after Musk sought more voting rights at Tesla as part of his compensation.

Musk threatened to build AI products elsewhere

In a post on X, Musk said, “I am uncomfortable growing Tesla to be a leader in AI & robotics without having ~25% voting control. Enough to be influential, but not so much that I can’t be overturned.”

Musk added, “Unless that is the case, I would prefer to build products outside of Tesla. You don’t seem to understand that Tesla is not one startup, but a dozen. Simply look at the delta between what Tesla does and GM. As for stock ownership itself being enough motivation, Fidelity and other own similar stakes to me. Why don’t they show up for work?”

Here it is worth noting that AI and software including autonomous driving account for the bulk of Tesla’s valuation. The company’s market cap is currently at around $600 billion and peaked at above $1.2 billion in November 2021.

Musk has also acknowledged multiple times that the bulk of Tesla’s valuation comes from the software business. That said, the automotive business still accounts for the bulk of Tesla’s valuation.

Musk publicly calls for more Tesla voting rights

Currently, Musk owns around 13% stake in Tesla and his ownership fell after he sold shares to fund his Twitter acquisition. In his Twitter thread, Musk said, “If I have 25%, it means I am influential, but can be overridden if twice as many shareholders vote against me vs for me. At 15% or lower, the for/against ratio to override me makes a takeover by dubious interests too easy. I would be fine with a dual class voting structure to achieve this, but am told it is impossible to achieve post-IPO in Delaware.”

His public call for higher voting rights in Tesla was seen as a ploy to pressure the Tesla board for a new compensation structure.

Tesla is looking to move its incorporation to Texas

Meanwhile, after the Delaware court struck down his fat compensation and raised doubts about the new compensation, Musk is now looking to move Tesla’s incorporation to Texas. The company had already moved its headquarters to the state after Musk blamed California’s tax policies,

Tesla’s troubles have only compounded amid the slowdown in electric vehicle (EV) sales and the company expects 2024 delivery growth to be significantly below the last year. Also, the price war is taking a toll on the company’s profitability and its operating margins are down sharply over the last year.

Tesla is facing tough competition from Chinese EV companies and BYD became the world’s largest seller of new energy vehicles – which includes both battery electric cars and hybrids. The Chinese EV giant delivered over 3 million cars in 2023 which was in line with its guidance. Importantly, it delivered 525,409 electric cars in Q4 which was ahead of Tesla.

While Tesla is still the EV market leader in terms of full-year EV deliveries, BYD was the biggest global seller of EVs in Q4. The bulk of BYD’s sales however come from its home market of China even as it is trying to expand into new geographies.