Tesla Shareholders File Lawsuit Against Elon Musk Over xAI Startup

Tesla shareholders have taken legal action against CEO Elon Musk and the board of directors, alleging that Musk's establishment of xAI—a competing AI venture—has diverted essential talent and resources away from Tesla.

A Significant Legal Challenge

This lawsuit marks a pivotal challenge to Musk’s decision to launch xAI, especially in light of his recent threats to pursue AI development outside Tesla unless granted greater voting power. The timing is notable, as the suit was filed just before Tesla's annual meeting, where shareholders will vote on a contentious $56 billion compensation package previously rejected by a judge.

The Value of AI in Tesla

Musk has long claimed that Tesla is not merely an electric vehicle manufacturer but a leader in artificial intelligence. This assertion has significantly influenced the stock’s valuation, which rivals top tech firms and surpasses the total market cap of the largest automotive companies combined.

Details of the Lawsuit

The complaint, filed by the Cleveland Bakers and Teamsters Pension Fund in Delaware Chancery Court, includes allegations from plaintiffs Daniel Hazen and Michael Giampietro on behalf of Tesla. They argue that Musk and the board have breached their fiduciary duties and allowed Musk to enrich himself through the creation of a competing enterprise.

The plaintiffs assert that Musk's actions violate Tesla’s code of ethics and call for a court order to compel him to relinquish his ownership in xAI back to Tesla.

Comparisons and Allegations

The lawsuit compares Musk’s situation to a hypothetical scenario involving a Coca-Cola CEO starting a rival beverage brand while misappropriating company resources.

Musk launched xAI in 2023, raising an impressive $6 billion to compete with AI giants like OpenAI and Microsoft. The lawsuit claims that Tesla has seen at least 11 employees transition to xAI, highlighting a troubling shift of resources.

Furthermore, allegations have surfaced that Musk redirected a significant shipment of AI processors from Nvidia, initially intended for Tesla, to his social media platform, X (formerly Twitter). Despite asserting that Tesla would invest $10 billion in AI this year, Musk admitted to diverting the chips, citing storage limitations in Tesla's new Texas data center.

Board’s Alleged Failures

“The Board has allowed Musk—the CEO and largest stockholder of Tesla—to establish and lead another AI company; to siphon resources from Tesla to xAI; and to create billions in AI-related value outside of Tesla.”

This lawsuit amplifies the growing legal challenges Musk faces, including another recent suit from shareholders claiming he profited billions by selling Tesla stock based on insider information in 2021 and 2022.