By Anne Sherry, J.D.
Tesla CEO Elon Musk once again agreed to oversight of his social media posts after SEC contempt proceedings revealed that he had not sought preapproval of any tweets. This version 2.0 of the parties’ settlement, if approved by the Southern District of New York, would substitute a list of categories of written communication requiring preapproval by a designated in-house attorney. Version 1.0 simply stated that preapproval was required for posts that could contain material information (SEC v. Musk, April 26, 2019).
The catalyst for Settlement 1.0 was a series of tweets in which Musk said that he had secured funding to take Tesla private; this turned out not to be the case. The SEC charged Musk with fraud and the parties reached a settlement that, among other things, required Tesla to implement procedures to preapprove "any written communications that contain, or reasonably could contain, information material to the Company or its shareholders." Tesla also undertook to designate an experienced securities lawyer charged with reviewing those communications.
Five months later, Musk tweeted that Tesla would make “around 500k” cars in 2019. The Tesla attorney saw the tweet and met with Musk, who clarified in another tweet a few hours later that Tesla’s annualized rate of production would reach 500,000 by the end of the year. The SEC brought proceedings to hold Musk in contempt of the court’s order approving Settlement 1.0, noting that Musk had admitted that he had not sought approval for the misleading tweet. In fact, as the SEC argued, Musk had not sought preapproval for a single tweet since the October 2018 settlement.
Musk’s response to the contempt proceedings argued that the “500k” tweet could not reasonably be considered material. Settlement 2.0 attempts to clear up any ambiguity by substituting a more specific list of topics for 1.0’s materiality standard. Pointedly, the list includes “potential or proposed mergers, acquisitions, dispositions, tender offers, or joint ventures” and “production numbers or sales or delivery numbers” that are new or deviate from previously published guidance.
It also includes information about earnings and guidance, projections and forecasts, new or proposed business lines unrelated to existing ones, events regarding Tesla securities or financing, nonpublic legal or regulatory findings, changes in control, and a catch-all: other topics that the company or a majority of independent board members request, if “they believe pre-approval of communications regarding such additional topics would protect the interests of the Company’s shareholders.”
The case is No. 18-cv-8865.