Tesla has adopted a new corporate bylaw that significantly restricts shareholders’ ability to sue company leadership for breaches of fiduciary duty, marking a consequential shift in its legal governance following its reincorporation in Texas.
The amendment, disclosed in a regulatory filing on Friday, introduces a 3 percent ownership threshold for initiating or maintaining derivative proceedings—lawsuits brought by shareholders on behalf of the company against directors or executives accused of wrongdoing.
“Tesla has adopted an ownership threshold requiring any shareholder or group of shareholders to hold shares of common stock sufficient to meet an ownership threshold of at least 3% of Tesla’s issued and outstanding shares in order to institute or maintain a derivative proceeding,” the filing stated. The change took effect as of May 15.
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Given Tesla’s current market capitalization, which exceeds $1 trillion, a shareholder would need to hold a stake valued at more than $30 billion to meet this threshold, effectively barring all but the largest institutional investors from suing.
The automaker did not respond to requests for comment on the bylaw change.
Legal Experts Warn of Accountability Risks
Corporate law experts have raised concerns about the implications for shareholder rights. Ann Lipton, a securities law professor at Tulane University and former trial attorney, said the change is legally permissible under Texas law but poses a significant hurdle for accountability.
“Obviously, for a company of Tesla’s size, that would be a formidable barrier to anyone bringing a lawsuit for breach of fiduciary duty,” Lipton wrote in an email.
She noted that Tesla’s move leverages a Texas law that allows companies to set minimum ownership requirements for derivative suits. Tesla officially moved its incorporation from Delaware to Texas in June 2024, following shareholder approval and CEO Elon Musk’s strong criticism of Delaware’s judiciary after a major legal setback.
Fallout from Tornetta Ruling
The backdrop to this governance change is the high-profile Delaware case brought by Tesla shareholder Richard Tornetta, who held just nine shares when he sued to void Musk’s 2018 pay package. In January 2024, Delaware Chancery Court Chancellor Kathaleen McCormick ruled in Tornetta’s favor, rescinding Musk’s $56 billion compensation deal.
McCormick found that Musk exercised de facto control over Tesla’s board during the approval process for the pay plan and that the directors failed to negotiate at arm’s length.
“In fact, there is barely any evidence of negotiations at all. Rather than negotiate against Musk with the mindset of a third party, the compensation committee worked alongside him, almost as an advisory body,” leading the court to conclude that the shareholder vote had been tainted by incomplete and misleading disclosures.
Following the decision, Musk responded with a terse post on X: “Never incorporate your company in the state of Delaware.” Within months, Tesla shareholders approved a resolution to reincorporate in Texas, a state whose laws are considered more favorable to executives and boards.
Tesla has since appealed the Tornetta ruling. Delaware’s Supreme Court is expected to decide whether Musk can retain the shares granted through the voided pay package.
Shareholders’ Accountability Concern
Shareholder advocates and governance analysts say the 3% rule, while legally valid in Texas, severely restricts the ability of retail and mid-sized institutional investors to check executive power through the courts.
Some believe the Texas law is being weaponized to entrench corporate power, referencing the growing trend of companies like Tesla and SpaceX shifting to Texas jurisdictions amid public disputes with Delaware courts or federal regulators.
Tesla’s change also underscores broader concerns about the use of state-level legal levers to neutralize shareholder oversight. In Delaware, Tornetta’s lawsuit was permitted despite his minimal stake, highlighting the comparative openness of Delaware’s corporate law to minority shareholders.
By contrast, in Texas, the law now being applied by Tesla permits companies to bar virtually all derivative suits unless initiated by ultra-wealthy investors or coalitions of major funds—a requirement that may be practically impossible to meet in a timely or cohesive manner.
Tesla’s bylaw amendment could prompt similar actions by other Texas-incorporated firms or those considering reincorporation. The company has been at the forefront of challenging regulatory norms across jurisdictions, from environmental policies to labor laws and now corporate governance.
Analysts believe that the ruling of the Delaware Supreme Court will likely shape future shareholder litigation risk, not just for Tesla but for executives at other major corporations eyeing more favorable legal jurisdictions.