Two days following its announcement of charges against Tesla Chair & CEO Elon Musk for securities fraud based on false and misleading tweets that he had secured funding to take the company private at a substantial premium to the then-trading price, the SEC announced its settlement of the charges against Musk and Tesla. The tweets, which reportedly were unsubstantiated by the actual facts and circumstances, allegedly triggered a stock price rise of more than 6% and "significant market disruption."
The settlements (see Musk and Tesla) - which are still subject to court approval - require these and other governance reforms:
- Musk's resignation as Tesla board chair and replacement by an independent chair within 45 days. Musk will be ineligible to be reappointed as chair for three years unless his reappointment is approved by a majority shareholder vote.
- Appointment of two new independent directors (which may include the new independent chair) to the board
- Establishment of a new standing committee of independent directors - whose charter and composition is subject to SEC Staff review & approval - to oversee (i) implementation of the settlement terms, (ii) the company's and its senior executives' public disclosures/communications, and (iii) review & resolution of HR issues or executives' conflicts of interest issues
- Implementation of additional controls & procedures to oversee Musk’s communications
- Employment or designation and maintenance of an experienced securities lawyer "whose qualifications are not unacceptable to the staff" for so long as Tesla remains a reporting company and who will - among other things - ensure compliance with the company's disclosure policy & procedures
- Payment by each of Musk and Tesla of a $20 million penalty, which will be distributed to harmed investors under a court-approved process
Notably (among many other things), Tesla allegedly lacked disclosure controls & procedures to evaluate whether Musk's tweets contained information required to be timely disclosed in the company's SEC filings and processes to assess the accuracy & completeness of information disclosed in his tweets, notwithstanding the company's 2013 Item 8.01 Form 8-K that it intended to use Musk's Twitter account as a means to publicly disclose material information about the company.
SEC Chair Clayton commented:
I also fully support the settlements agreed today and believe that the prompt resolution of this matter on the agreed terms, including the addition of two independent directors to the Tesla board and the other governance enhancements at Tesla, is in the best interests of our markets and our investors, including the shareholders of Tesla.
This matter reaffirms an important principle embodied in our disclosure-based federal securities laws. Specifically, when companies and corporate insiders make statements, they must act responsibly, including endeavoring to ensure the statements are not false or misleading and do not omit information a reasonable investor would consider important in making an investment decision.