After the 7 August tweet about taking Tesla private, the US securities regulator sued Musk on 27 September and settled with him on the 29th. What the deal says and what it teaches about informing the market.
On 7 August 2018, Elon Musk, Tesla’s chief executive and chairman, wrote on Twitter to his roughly 22 million followers that he could take the company private at $420 a share and that funding was secured: all that remained, he said, was a shareholder vote. On 24 August he said Tesla would stay public. On 27 September the US Securities and Exchange Commission (SEC) filed a suit against him, and on 29 September a settlement with Musk and with the company was announced.
What the SEC alleges
According to the complaint, filed in a federal court in New York, Musk had not discussed the terms of the deal, including the price, with any potential financing partner, knew it was uncertain and subject to numerous contingencies, and had no adequate basis in fact for his statements. The SEC adds that his messages pushed the share price up by more than 6% that day and caused significant market disruption. It sought a court order against further violations, the return of ill-gotten gains, civil penalties and a bar on serving as an officer or director of a public company. These are the regulator’s allegations, not a judgment.
Tesla was also charged, for a different reason: failing to maintain disclosure controls and procedures. According to the SEC, the company said in 2013 that it would use Musk’s Twitter account to announce material information and encouraged investors to read it, but had no controls to determine whether those messages contained information that had to appear in its official filings, nor processes to ensure they were accurate or complete.
The settlement
On 29 September, Musk and Tesla agreed to resolve the case without admitting or denying the allegations; the settlement must be approved by a court. Musk steps down as chairman of the board, to be replaced by an independent chairman, and cannot be re-elected to that role for three years. He remains chief executive. Tesla will appoint two more independent directors and set up a committee of independent directors, with additional controls, to oversee Musk’s communications. Each will pay a $20 million penalty, $40 million in total, which will go to harmed investors through a court-approved process.
Two figures show how far a message can move a company’s share price: the SEC attributes to the tweet a rise of more than 6% on 7 August, and on Friday 28 September, the day after the lawsuit, Tesla shares fell 14%, according to the Associated Press.
What to review
In the European Union, Regulation (EU) 596/2014 on market abuse requires issuers to make public as soon as possible inside information that directly concerns them, and prohibits spreading by any means, including the internet, information that gives false or misleading signals about a share price when the person knows or ought to know that it is so. In Spain, compliance is overseen by the National Securities Market Commission (CNMV), where listed companies disclose material information.
For a listed company, or one with outside investors, the case suggests three practical checks: who is authorised to speak on the company’s behalf, which channel publishes material information first (the official one, before social media), and what is verified before announcing a transaction, especially if it mentions a price or funding. Anyone holding shares in a listed company can tell the difference between an intention expressed on social media and a formal offer, and turn to the documents the company files with the regulator. For your own situation, ask your adviser.
A sentence on social media can have the same consequences as an official statement.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
