Elon Musk's Tesla Under Fire From New York Officials Over Bylaw Blocking Shareholder Lawsuits: Investor Calls It 'Bait-and-Switch'

Tesla Inc. TSLA is facing criticism from New York state officials over a bylaw change that restricts shareholder lawsuits.

What Happened: The electric vehicle manufacturer revised its corporate bylaws in May, necessitating investors to hold at least 3% of the stock, valued at around $30 billion today, to file a derivative lawsuit for breach of fiduciary duties against the company. This change has drawn the ire of New York state officials, who are now demanding that Tesla scrap the bylaw altogether, reported CNBC.

On July 11, the New York State Common Retirement Fund — which owns about 0.1% of Tesla's shares — submitted a formal proxy proposal and letter to the company, accusing Tesla of using a "bait-and-switch" strategy to gain shareholder approval for its relocation from Delaware to Texas in June 2024.

The move followed a Delaware judge's decision to void the $56 billion compensation package granted to CEO Elon Musk in 2018.

New York officials allege that Tesla misled shareholders by promising their rights would remain intact under Texas law, only to amend its bylaws the day after Texas introduced a rule requiring 3% ownership to file shareholder derivative lawsuits.

According to New York officials, these actions effectively protect Tesla's directors and executives from being held accountable by shareholders.

The letter, representing both the retirement fund and New York State Comptroller Thomas DiNapoli, was signed by Gianna McCarthy, the fund's director of corporate governance.

Why It Matters: The bylaw change by Tesla has sparked a significant controversy, especially in light of the ongoing tensions between Musk and the U.S. government.

Major investors have urged the company’s Board of Directors to hold the annual shareholders meeting amid the escalating feud between Musk and President Donald Trump. The meeting is now set for November 6th, with Musk’s $56 billion pay package expected to be a key focus of the discussions.

Meanwhile, veteran investor Gary Black has suggested that a shareholder vote would be the fairest way to decide on a potential merger between Tesla and xAI, questioning Musk’s plans to sell xAI.

Price Action: Tesla closed Wednesday at $321.67, up 3.50%, and edged higher to $322.60 in pre-market trading, according to Benzinga Pro data.

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