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 over Musk’s decision to start xAI, which they say is a competing AI company, and then divert 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 it comes on the heels of his threat to develop AI outside of Tesla unless he is awarded more voting control over the company. 

The suit was also filed just a few hours before Tesla is scheduled to host its annual meeting, where shareholders will likely vote to re-ratify the $56 billion compensation package that was struck down by a judge earlier this year.

Musk has long claimed that Tesla’s real value is that it’s not just a maker of electric vehicles, but that it’s actually an AI company. That claim is one reason why Tesla’s stock is priced as high as that of a tech company, and more valuable than all four top automakers combined.

This new complaint was filed Thursday by Cleveland Bakers and Teamsters Pension Fund in Delaware Chancery Court, Daniel Hazen and Michael Giampietro on behalf of Tesla itself. In it, they allege that Musk and members of Tesla’s board breached fiduciary duties to shareholders and unjustly enriched Musk by allowing the CEO to launch 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 has allowed Musk to continue to violate this code unimpeded. They are asking the court to force Musk to disgorge 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 evident approval of his board — start a competing company, and then divert talent and resources from his corporation to the startup, is preposterous,” the complaint reads. It compares Musk’s actions to a hypothetical situation involving the CEO of Coca-Cola starting a rival soft-drink company and sending ingredients to it.

Musk launched xAI in 2023 and recently pulled in $6 billion in funding for the startup that aims to compete with rivals like OpenAI, Microsoft and Alphabet. 

The plaintiffs note that, soon after, Tesla began diverting talent and resources from Tesla to xAI. The lawsuit says at least 11 employees have joined xAI directly from Tesla, and points to how Tesla has reportedly been providing xAI access to its AI-related data. 

The plaintiffs also point to CNBC’s reporting that Musk diverted a sizable shipment of AI processors from Nvidia that had been reserved for Tesla to his social media company X, formerly known as Twitter. Musk had posted on X a few weeks prior that Tesla would spend $10 billion this year “in combined training and inference AI,” and he’s also said that Nvidia’s pricey chips would be needed to help Tesla grow into a “leader in AI & robotics.”

Musk admitted to diverting the chips to X, claiming that Tesla’s new data center in Texas was still under construction and didn’t have room to store them.

“The Board has allowed Musk—the CEO and largest stockholder of Tesla—to found and lead another AI company; to plunder resources from Tesla and divert them to xAI; and to create billions in AI-related value at a company other than Tesla,” the plaintiffs write. “Consistent with its long history of obsequiousness to Musk, the Tesla Board has utterly failed to even attempt to meet its unyielding fiduciary duty to protect the interests of Tesla and its stockholders in the face of Musk’s brazen disloyalty.”

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