Tesla shareholders are suing Elon Musk and the company’s board for starting a rival AI company because they believe Musk’s new company, xAI, is competing with Tesla.
They argue that Musk is taking talent and resources away from Tesla to support xAI. This lawsuit is a major challenge to Musk’s decision to start xAI.
The lawsuit was filed just before Tesla’s annual meeting, where shareholders are set to vote on Musk’s $56 billion compensation package.
Also, in a separate case earlier this week, other Tesla shareholders sued Musk, stating that he used insider information to make billions by selling Tesla stock in 2021 and 2022.
Musk has often said that Tesla is more than just an electric car company; it’s an AI company. This belief is one reason Tesla’s stock is so highly valued, even more than the top four automakers combined.
Musk launched xAI in 2023 and secured $6 billion in funding to compete with companies like OpenAI, Microsoft, and Alphabet.
The Cleveland Bakers and Teamsters Pension Fund, along with Daniel Hazen and Michael Giampietro, filed the lawsuit on behalf of Tesla in Delaware Chancery Court.
They claim Musk and the board broke their duties to shareholders and enriched Musk unfairly by letting him start a rival company.
The plaintiffs also argue that Musk violated Tesla’s code of business ethics by creating and running xAI, and that the board has done nothing to stop him. They want the court to make Musk give up his stake in xAI to Tesla.
The lawsuit describes Musk’s actions as absurd saying it’s unthinkable that a CEO of a public company could start a competing business and divert resources to it with the board’s approval.
The lawsuit also claims that Tesla started losing talent and resources to xAI soon after. At least 11 employees moved from Tesla to xAI, and Tesla allegedly gave xAI access to its AI data.
The plaintiffs also reference a report from CNBC that Musk redirected a large shipment of Nvidia AI processors meant for Tesla to his social media company X (formerly Twitter).
Musk justified this by saying Tesla’s new data center in Texas wasn’t ready to store the processors.
Taking everything into account, the Tesla board has violated the agreement and has been criticized for allowing Musk to lead another AI company and take resources from Tesla, accusing them of failing to protect Tesla and its shareholders.