Tesla’s Retail Investors Stung By Massive Lawsuit Barrier — Will It End Up Hurting The Stock?

FREDERIC J. BROWN/Getty Images

Tesla recently made a move that effectively tells “small” investors — specifically, those with a position in the stock that’s worth less than $33 billion or so — to pound sand. Unless an investor (or group of shareholders) has a massive position in the stock, they have no power to meaningfully object to corporate changes. The electric vehicle maker effectively told investors that Tesla and CEO Elon Musk will do what they like, and only the largest investors will be able to sue them for breach of duty moving forward. 

Tesla’s move matters to investors because good corporate governance can positively impact a stock’s performance. And that’s why all investors need to be wary of companies that don’t treat outside shareholders like the real owners of the business, because poor stock returns may be on the way.

Tesla limits who can sue the board to 3% owners: What to know

The headline news here is that, effective May 15, Tesla’s corporate bylaws now require an investor or group of investors to own at least 3 percent of Tesla’s stock in order to sue executives or the board for breach of fiduciary duty. With Tesla’s market capitalization at $1.11 trillion, an investor (or group) would need at least $33.3 billion to try to stop the company from an action that they deem a breach of duty. That’s not a small hurdle for any investor. 

The bylaw change is connected directly to Musk’s controversial 2018 pay package and Tesla’s decision to change its state of incorporation from Delaware to Texas, a move that occurred in 2024. After a Delaware judge tossed Musk’s $56 billion pay package — which has since swollen to more than $100 billion, depending on Tesla’s stock price — Musk went on the offensive, leading Tesla to hold a shareholder vote on changing the automaker’s state of incorporation to Texas.

Texas law allows companies incorporated there to restrict investors’ lawsuits against executives or directors for breach of fiduciary duty to those investors (or a group acting together) who own at least 3 percent of the stock. In contrast, in Delaware, a shareholder with nine shares sued the company to stop Musk’s 2018 compensation deal — and succeeded, at least in initial rulings.

Tesla’s change in bylaws is also significant because the company reportedly plans to offer Musk make-up compensation if the original deal doesn’t go through. So the change helps insulate the board and execs if and when they need to re-issue compensation that’s already been revoked in court. 

All this comes while Tesla is showing anything but “ludicrous” speed on the sales front, with 2024 revenue up just 1 percent and automotive sales falling nearly 8 percent. The first quarter of 2025 was not kind to Tesla, either, and 2025 sales have plunged by double-digit percentages in many European markets due in part to Musk’s political activities and an aging model line-up.

Why Tesla’s actions should raise eyebrows for both small and large investors

It may sound like just another day in high finance as a trillion-dollar company tells investors to get lost. Tesla’s action is the latest salvo by publicly traded companies that tell shareholders they need to be quiet and let insiders run the ship. Of course, the reason it matters to investors is that corporate governance has a huge impact on the price investors will pay for the stock.

The reason is simple. Good corporate governance shows that management is responsive to the needs of investors — and they will often pay more for companies that demonstrate this. When the board shows that they only care about what the largest investors think about a crucial issue — in this case, executive compensation, potentially overcompensation — they’re also showing that they’re not really that interested in general shareholders’ welfare. Of course, Tesla has performed phenomenally since Musk inked his comp package in 2018. 

Using poor corporate governance, companies have a number of ways to help insiders entrench themselves, including the following:

These governance strategies typically hurt the stock, even as these moves are often insiders’ response to shareholders trying to course-correct the company’s poor operating performance. So entrenching actions such as these often occur as a company’s performance is falling apart.

Both large and small investors need to pay attention to corporate governance when a company shows through its actions what it thinks about outside shareholders. A company’s attitude toward shareholders — all of them — shows how willing it may be to make smart decisions that benefit investors and not those that merely entrench directors and executives. 

But investors continue to see mixed messages from Tesla. On the one hand, Musk has urged Tesla’s employees to hold on to their stock as the company strives for audacious goals such as the robotaxi. On the other hand, company insiders such as the CEO’s brother and director Kimbal Musk have been selling tens of millions in Tesla stock in recent months.

Bottom line

It’s important to remember, though easy to forget, that shareholders legally own the company, so both the board and the company’s management work on behalf of the investor-owners. Corporate-governance signals such as what Tesla is demonstrating with its change in bylaws often give outside shareholders a good picture of how insiders view them. In the case of Tesla, public shareholders should pay careful attention when insiders try to muzzle legitimate criticism. 

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.