When Tesla Crashes Main Street, Is there Any Safety for Shareholders?

As counsel to numerous entrepreneurs and high-growth startups, tensions at the top are more common than we might hope. Whether it’s a co-founder dispute, a board asserting influence, or investors growing concerned, these issues can quickly rise to the level of litigation and derail a company’s progress. Shakeups and even litigation are warranted when it protects the company and its shareholders. Nowhere is this more important than in publicly traded companies, where mismanagement at the top can impact Main Street.

Case in point: Tesla CEO Elon Musk’s controversial political activities caused the company’s stock to plummet as much as 50% in a matter of weeks, erasing over $150B in value from shareholders. Of course, Mr. Musk can withstand the blow, but what about mom and pop on Main Street who believed in this impressive automaker only to see its value crash?

As quick aside, these posts are not intended to be political or controversial—I leave that to the stars of the show. The purpose of this writing is to promote legal learning and best practices in business so we can build great companies and great products that uplift our society.

So how do we make sure mom and pop on Main Street don’t get injured when a CEO’s dangerous behavior wrecks a company’s value?

Bad Bromance: President Trump and Tesla CEO Elon Musk

Shareholder Derivative Suits: Can the Board Call for Elon Musk’s Removal?

In the world of corporate governance, the relationship between a company’s board of directors, its executives, and its shareholders is complex. One of the legal mechanisms that shareholders can use to ensure that their rights are protected is the shareholder derivative suit. These lawsuits are a powerful tool for shareholders to hold directors and executives accountable for misconduct or failures in fiduciary duties.

The world’s most high-profile tech entrepreneur, Elon Musk, has been the subject of much public scrutiny and legal action in recent years, particularly as his leadership style and decisions at companies like Tesla, SpaceX, and X have generated both admiration and controversy. But could the board of directors ever call for Musk’s removal through a shareholder derivative suit, or is that an unlikely scenario given his immense influence over the company?

Understanding Shareholder Derivative Suits

A shareholder derivative suit is a legal action brought by one or more shareholders on behalf of a corporation to address harm done to the company by the board of directors, corporate officers, or other executives. These lawsuits are typically filed when the board of directors refuses to take action against wrongdoing, or when the corporation’s leadership is involved in the alleged misconduct. In essence, the shareholder is stepping in where the company’s management is failing to act in its best interests.

Key Features of a Derivative Suit

Let's looks at some of the key features of a Derivative Suits in general before looking at Tesla's specific case. They include:

1. Standing to Sue: In order to bring a derivative suit, the shareholder must have standing, meaning they must have owned shares in the company at the time of the alleged wrongdoing.

2. Demand Requirement: Generally, the shareholder must first make a demand on the board of directors to address the issue. If the board refuses to act or fails to take action, the shareholder can proceed with the lawsuit. This is known as the demand futility requirement.

3. Fiduciary Duties: Shareholder derivative suits typically involve breaches of fiduciary duty, which can include negligence, mismanagement, self-dealing, or conflict of interest. Directors and officers have a duty to act in the best interests of the company and its shareholders.

4. Remedies: If the derivative suit is successful, the remedy typically involves the court ordering the company to take corrective actions. These actions may include financial compensation, changes to corporate governance, or even the removal of executives or directors.

   
   

Now, let’s look at a scenario where a prominent executive—like Elon Musk—could become the target of a shareholder derivative suit. Could the board of Tesla or another company in Musk’s portfolio call for his removal in such a suit? Let’s explore this question in greater detail.

Elon Musk and the Role of the Board of Directors

As of 2025, Elon Musk is one of the most influential figures in technology. But even before his foray into politics as the head of DOGE, his high-profile actions, and controversial behavior on social media often sparked debate regarding his management style and the corporate governance practices at the companies he leads. Now, with his political activity and the resulting decimation of share price, what if anything should be done at the Board level to shore up the company?

Tesla and the Board’s Role

Tesla’s board of directors plays an important role in overseeing the company’s operations and the behavior of its executives, including Musk. Musk, as the company’s CEO, has significant control over Tesla’s direction, but the board still retains the authority to make certain decisions, such as approving large financial transactions, setting executive compensation, and overseeing Musk’s actions to ensure that they align with the company’s interests.

The board is tasked with monitoring the actions of the CEO to ensure that those actions do not violate the company’s best interests. For instance, if the board were to believe that Musk was engaging in self-dealing or mismanagement, it could theoretically take action to remove him or even call for a shareholder derivative suit. However, this is a complex process.

Can the Board Call for Musk’s Removal?

The short answer is yes, the board can call for Musk’s removal from a position of leadership, but there are several hurdles to overcome in doing so.

Tesla’s Board and Its Legal Authority

Tesla’s board has the legal authority to remove the CEO under the company’s bylaws, and the board members are ultimately responsible for ensuring that the company is being managed in a way that maximizes shareholder value. However, because Musk is the company’s largest shareholder and is highly influential in the organization, removing him as CEO could be an incredibly difficult and controversial decision.

In principle, Tesla’s board could call for Musk’s removal if it determined that his actions violated his fiduciary duties to the company, harmed shareholder value, or endangered Tesla’s future. However, a few critical factors complicate this:

1. Musk’s Influence and Control: As the largest shareholder and a key figure in the company’s success, Musk wields significant power within Tesla. His position in the company’s governance structure means that removing him as CEO would require significant internal support, particularly from investors who rely on his vision and leadership.

2. The Board’s Composition: The composition of the board is another critical factor. If Musk has appointed or has significant sway over the majority of board members, it may be unlikely that the board will take action against him. For instance, in the case of Tesla, many of the board members have close ties to Musk or have been supporters of his leadership.

3. Legal Precedents and Fiduciary Duty: For a board to take action against the CEO, there must be clear evidence of a breach of fiduciary duty, such as mismanagement, self-dealing, or violating the interests of shareholders. The board would need to show that Musk’s actions harmed the company financially or reputationally. As of now, while Musk has faced legal scrutiny over various matters (such as his tweets about Tesla), it’s unclear whether these actions meet the legal standard required for his removal.

4. Shareholder Support: In publicly traded companies like Tesla, shareholders play a crucial role in the governance of the company. If shareholders support Musk’s leadership, the board may be less inclined to take drastic action. Conversely, if a majority of shareholders were to call for Musk’s removal, the board might be more willing to act.

   

Potential for a Shareholder Derivative Suit

If shareholders believe that Musk’s actions have harmed the company, they may attempt to bring a shareholder derivative suit. In such a suit, the shareholders would argue that the board of directors failed in its duty to act on the wrongdoing or misconduct and demand that the company take corrective action.

However, pursuing a derivative suit against Musk would require clear evidence of misconduct that harms the company. For example, shareholders might argue that Musk’s frequent social media posts (which sometimes affect Tesla’s stock price) constitute mismanagement or a failure to uphold fiduciary duties.

The board might be hesitant to move forward with such a suit if it does not believe that Musk’s actions constitute legal violations. In Tesla’s case, Musk’s leadership has been integral to the company’s growth, and shareholders may feel that his bold, risk-taking actions have led to success—even if some of them have been controversial.

Historical Precedents and Challenges for Derivative Suits

There have been instances where CEOs or other top executives were removed after shareholder derivative suits, but these are relatively rare, especially in high-profile companies like Tesla or SpaceX. Typically, these suits are brought against the board itself or its individual members for failure to act rather than against the CEO.

In the case of Tesla and Elon Musk, some legal experts argue that Musk’s personality and his unique vision for the company might give him a degree of protection that other CEOs may not have. In particular, Musk’s personal connection to Tesla and the company’s reliance on his innovative ideas makes it challenging to argue that his leadership is unequivocally detrimental to the company.

Can the Board Remove Elon Musk?

In theory, the board of directors at Tesla (or any company led by a CEO like Elon Musk) has the authority to call for the removal of the CEO if it believes that his actions have harmed the company or violated fiduciary duties. However, in practice, it would be extraordinarily difficult for the board to move forward with such a decision.

Musk’s influence, both as a key shareholder and a visionary leader, makes him a figure whose leadership the company may be reluctant to challenge. Unless there is clear evidence of misconduct or a significant breach of fiduciary duty, it is unlikely that the board would move to remove him from his position.

Ultimately, shareholder derivative suits remain a tool that can be used to hold executives accountable, but removing a high-profile CEO like Musk would require a level of shareholder consensus and legal backing that may not be easily achieved.

For the time being, Musk remains in control. Time will tell if Tesla continues downhill, or if the Board—or shareholders—will call for a change of course.

If your company is facing legal challenges or disputes, The Rhodes Law Firm is here to help. Contact us today.