Tesla's change in bylaws to limit shareholder lawsuits slammed by New York state officials

In a significant move this May, Tesla revised its corporate bylaws, mandating that shareholders must own at least 3% of the company's stock—valued at approximately $30 billion—to initiate a derivative lawsuit against the automaker for breaches of fiduciary duties. This change has drawn sharp criticism from New York State officials, who are now urging Tesla to eliminate this bylaw altogether. The New York State Common Retirement Fund, which holds around 0.1% of Tesla's shares, formally proposed the repeal in a letter submitted to Tesla on July 11. The fund's overseers argue that the company misled shareholders during a contentious transition from Delaware to Texas, which is set to take effect in June 2024. This transition follows a Delaware judge's ruling that invalidated a massive $56 billion compensation package awarded to CEO Elon Musk in 2018, marking it as the largest pay plan in the history of public companies. During the campaign for shareholder approval of the incorporation shift, Tesla asserted that the rights of stakeholders would remain largely unchanged under Texas law. However, on May 14, Texas amended its laws to permit companies to set a 3% ownership threshold for shareholder derivative actions. The very next day, Tesla's board adjusted its bylaws to this new maximum, effectively reducing accountability for its directors and officers, as highlighted in the New York letter. Gianna McCarthy, a corporate governance director for the retirement fund, signed the letter on behalf of the fund and New York State Comptroller Thomas DiNapoli. Presently, only three entities possess the required 3% ownership of Tesla's outstanding shares. The fund’s representatives assert that derivative actions are crucial for shareholders, serving as a final measure to uphold their rights when corporate executives or directors fail to fulfill their fiduciary responsibilities. They deem Tesla's recent actions as 'egregious'. In response to the situation, DiNapoli stated in an email that Tesla has 'deceived shareholders' by assuring them that their rights would remain secure in Texas. He emphasized that such actions contravene fundamental principles of sound corporate governance and need to be reversed.