On 7 August 2018, Tesla CEO and Chairman Elon Musk tweeted "Am considering taking Tesla private at $420. Funding Secured." Musk initially released no details regarding the purported funding, but six days later he tweeted again, citing discussions with Saudi Arabia's sovereign wealth fund and work with financial advisors. On 27 September 2018, the SEC filed a complaint against Musk, alleging that this series of tweets was false and misleading, and that Musk had not in fact discussed or confirmed key deal terms with any potential funding source. On 29 September 2018, the SEC and Musk announced a settlement, which has not yet been finalized. Under the terms of this settlement:

  • Musk neither admits nor denies the allegations in the agency's lawsuit against him;
  • Musk will step down as Tesla's Chairman and be replaced by an independent Chairman. Musk will be ineligible to be re-elected Chairman for three years;
  • Tesla will appoint a total of two new independent directors, establish a new committee of independent directors and put in place additional controls and procedures to oversee Musk's communications; and
  • Musk and Tesla will each pay a separate $20 million penalty. The $40 million in penalties will be distributed to harmed investors under a court-approved process.

Tesla's share price has experienced extreme volatility as a result of these events, rising initially to nearly $380 as a result of the privatization tweet, and falling most recently to under $262.

Notably, on 4 October 2018 U.S. District Judge Alison Nathan demanded that Musk and the SEC justify their settlement, asserting that the court needs to see justification that the settlement is "fair and reasonable." The parties have until 11 October 2018 to submit a joint letter explaining why the deal should be cleared. Federal courts have previously refused to accept SEC settlements if they think the agency is too lenient.

This episode exemplifies the potential pitfalls of the use of social media by public companies. Companies should ensure that disclosures made by senior executives on social media are subject to disclosure controls and procedures, as companies are subject to anti-fraud liability for such disclosures.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.