In a significant move that has sent ripples through the corporate governance landscape, Tesla has implemented a new bylaw amendment that substantially raises the barrier for shareholder litigation. The amendment requires shareholders to own at least 3% of Tesla’s common stock to initiate or maintain derivative lawsuits against the company’s directors or officers for breach of fiduciary duty.

The New Threshold and Its Implications

With Tesla’s current market valuation exceeding $1 trillion, this 3% threshold translates to approximately 97 million shares valued at about $34 billion. This effectively places derivative litigation out of reach for the vast majority of Tesla’s shareholders.

“The 3% requirement poses a significant obstacle for shareholder litigation against companies of Tesla’s size,” noted Ann Lipton, a professor at Tulane Law School, as reported by GuruFocus. The scale of this threshold becomes particularly apparent when compared to past litigation against the company.

The most notable example is the case of Richard Tornetta, who owned just nine shares when he filed a lawsuit against CEO Elon Musk and other directors over Musk’s $56 billion compensation package in 2018. This lawsuit, known as the “Tornetta case,” ultimately led to a Delaware judge invalidating Musk’s compensation package—a decision that the CEO is currently appealing.

Texas Law and Corporate Relocation

Tesla’s ability to implement this restrictive bylaw stems from its recent relocation to Texas. The company finalized its move from Delaware to Texas in 2024 after receiving shareholder approval. This strategic relocation has allowed Tesla to take advantage of Texas law, which permits companies to establish such thresholds to limit what it describes as “abusive shareholder litigation.”

When Tesla was incorporated in Delaware, no such threshold existed, allowing shareholders with minimal holdings to initiate derivative lawsuits. The company’s redomiciliation to Texas appears to be part of a broader strategy to gain more favorable regulatory conditions.

Corporate Governance Implications

Tesla’s bylaw amendment represents a significant shift in its corporate governance framework, potentially redefining the relationship between the company and its shareholders. By setting such a high threshold, Tesla is effectively limiting the ability of smaller investors to hold the board and executives accountable through legal means.

Derivative lawsuits serve as a unique legal mechanism where shareholders sue on behalf of the company against insiders such as executives or directors for actions deemed harmful to the corporation. These lawsuits are particularly important when the perceived harm affects the company rather than individual shareholders directly.

Market Response and Future Outlook

The timing of this bylaw amendment is particularly noteworthy, coming in the wake of the Delaware court’s decision on Musk’s compensation package. While Tesla has not explicitly connected the new bylaw to this case, the sequence of events suggests a strategic response to protect against similar challenges in the future.

As Tesla continues operations under Texas incorporation, industry observers are watching closely to see if other major corporations follow suit by relocating to jurisdictions with more favorable litigation environments. The move also raises questions about the balance of power between corporate leadership and shareholders, potentially setting a precedent for how large companies manage dissent among their investor base.

The outcome of Musk’s ongoing appeal regarding the 2018 compensation plan remains highly anticipated by the market, with potential implications for both Tesla’s governance structure and broader corporate accountability standards.