By: Dowdy White, Fall 2018 IAC Student Intern
Elon Musk doesn’t always tweet, but when he does, there’s a potential that he could be slapped with a fine worth millions and millions of dollars. How would you feel if you could cost yourself and your company a total of $40 million with just one click? Your stomach would drop, right? What would the ramifications be of such an action? Well, we have an idea of what the SEC believes is a fair consequence.
On September 29, 2018, the SEC issued a press release stating that Musk had reached a settlement with the SEC over his antifraud charges regarding his tweet about Tesla. According to the SEC, the settlement will result in “comprehensive corporate governance and other reforms at Tesla—including Musk’s removal as Chairman of the Tesla board—and the payment by Musk and Tesla of financial penalties.”
Specifically, under the settlement, Musk and Tesla will each pay a separate $20 million penalty. The combined $40 million in penalties will be distributed to harmed investors under a court-approved process. In addition, Musk will be forced to step down as Tesla’s chairman and be replaced by a new independent Chairman. Musk will also be ineligible to be re-elected Chairman for three years.
According to the SEC’s complaint against Tesla specifically, although the company notified the market in 2013 that it intended to use Musk’s Twitter account as a means of announcing material information about Tesla and further encouraged investors to review Musk’s tweets, Tesla never implemented any procedures to determine whether or not Musk’s tweets contained information that was required to be included in Tesla’s SEC filings.
Tesla, as a result of the settlement, will now be required to appoint two new independent directors to its board as well as establish a new committee of independent directors and put in place additional controls and procedures to oversee Musk’s communications. To justify this penalty, the SEC stated that the “resolution is intended to prevent further market disruption and harm to Tesla’s shareholders.”
Considering the weight and significance of the penalties to be levied against Musk and Tesla, I would advise any chairman to be careful about Tweeting. Market disruption can have serious consequences, and as a result, such infractions carry serious penalties.