Tesla has updated its bylaws to require shareholders to hold at least 3% of outstanding shares, equivalent to around 97 million shares valued at $34 billion, to file derivative lawsuits against the company. This change follows new Texas corporate laws allowing such ownership thresholds.

Previous Legal Framework

• Delaware Rules: In Delaware, any shareholder regardless of their stake could sue, as seen in a past case where a shareholder with just nine shares challenged CEO Elon Musk.

• Recent Changes: The Texas statute allows companies to enforce a 3% ownership requirement to reduce frivolous litigation.

Details of the New Bylaw

• Litigation Limitations: Only those with at least 3% ownership can now bring claims alleging breaches of fiduciary duty.

• Aim of the Amendment: This strategy seeks to minimize irrelevant lawsuits and protect management from unnecessary distractions.

Tesla’s Financial Stability

Despite potential shareholder pushback, Tesla’s strong financial situation enables it to handle governance changes. With an AA- corporate rating and over $25 billion in cash, Tesla can effectively manage operational and legal costs.

Investor Implications

1. Governance Changes: New thresholds may safeguard management but might limit shareholder oversight.

2. Cost Management: By lowering litigation risks, Tesla targets reduced legal expenses, allowing focus on EV and energy development.

3. Engagement Opportunities: Institutional investors are encouraged to take a more active role in Tesla’s governance.