Tesla shareholders sue Musk for starting competing AI company

Tesla shareholders are suing CEO Elon Musk and members of the automaker’s board of directors after Musk decided to start xAI, which he says will be a competing AI company, and then shift talent and resources from Tesla to the new startup.

The lawsuit is one of the most direct challenges to Musk’s decision to start xAI, and comes after he threatened to develop AI outside of Tesla unless he was given greater voting control over the company.

The suit was filed just hours before Tesla’s annual meeting, where shareholders will likely vote to re-approve a $56 billion compensation package that was rejected by a judge earlier this year.

Musk has long claimed that Tesla’s true value is that it’s not just an electric vehicle maker, but that it’s actually an AI company. This claim is one reason Tesla’s stock price is as high as that of a tech company, and higher than the value of all four top automakers combined.

The new complaint was filed Thursday in Delaware Chancery Court by the Cleveland Bakers and Teamsters Pension Fund and Daniel Hazen and Michael Giampietro on behalf of Tesla. In it, they allege that Musk and Tesla’s board members breached fiduciary duties to shareholders and unjustly enriched Musk by allowing the CEO to start a competing company.

The plaintiffs in the case also say that Musk violated Tesla’s code of business ethics by creating and leading xAI, and that the board allowed Musk to violate this code. They are requesting the court to force Musk to divest his stake in xAI and hand it over to Tesla.

“The notion that the CEO of a major, publicly traded Delaware corporation could — with the express approval of his board — start a competing company, and then commit talent and resources from his corporation to the startup, is ridiculous,” the complaint reads. It compares Musk’s actions to a hypothetical situation in which the CEO of Coca-Cola starts a rival soft-drink company and sends it materials.

Musk launches xAI in 2023 and recently raised $6 billion in funding for the startup, which aims to compete with rivals such as OpenAI, Microsoft, and Alphabet.

The plaintiffs reported that shortly thereafter Tesla began transferring talent and resources from Tesla to xAI. The lawsuit states that at least 11 employees have joined xAI directly from Tesla, and details how Tesla is allegedly providing xAI with access to its AI-related data.

The plaintiffs also point to a CNBC report that said Musk had reserved a large shipment of AI processors from Nvidia for Tesla, formerly known as Twitter. Musk posted on X a few weeks ago that Tesla would spend $10 billion this year in “combined training and inference AI,” and he has also said Tesla would need Nvidia’s expensive chips to help it become “the leader in AI and robotics.”

Musk admits Accused of diverting chips to X, it was claimed that Tesla’s new data center in Texas was still under construction and there was no space to store the chips.

“The Board has allowed Musk, Tesla’s CEO and largest shareholder, to found and lead another AI company; to plunder resources from Tesla and convert them to xAI; and to create billions of dollars in AI-related value at a company other than Tesla,” the plaintiffs write. “Consistent with its long-standing history of sycophancy toward Musk, the Tesla Board has completely failed to even attempt to fulfill its unshakable duty to protect the interests of Tesla and its shareholders in the face of Musk’s shameless swindling.”

Earlier this week, other Tesla shareholders filed a separate lawsuit against Musk, claiming he made billions of dollars by selling the automaker’s stock in 2021 and 2022 using insider information.