On 2 April 2024, Tesla officially released its quarter 1 2024 (Q1 2024) financial results. Analysts pounced on these, highlighting disappointing car delivery numbers, large inventories of unsold cars and trucks parked up at shopping malls and airports across the USA and further rounds of price cuts to try to shift this inventory. So what has gone wrong? Can Musk save the company and indeed does Tesla need Musk?
A brief history of Tesla and Elon Musk
Contrary to what he likes people to believe, Elon Musk did not found Tesla. The founders, Martin Eberhard and Marc Tarpenning, left the company in 2007 after soliciting investment from Elon Musk in 2004. Musk in turn made his money when after his online payments company X.com (unrelated to the new name for Twitter) merged with its rival, Confinity, to become PayPal. PayPal was subsequently sold to eBay for US$1.5bn in 2002. Musk is estimated to have made US$175 million from the transaction.
Musk insisted on the name ‘X.com’ even though market research indicated most people thought that it had pornographic overtones, contrary to his belief that the association would be with treasure and ‘X marks the spot’. His fellow PayPal directors staged a boardroom coup and ousted Musk in September 2000, fearing his refusal to listen would risk harm to the fledgling company. Since Musk still owned some 11% of PayPal shares, he profited handsomely from the eBay buyout even after he was expelled from the company board.
Tesla’s initial growth and teething troubles
Eberhard and Tarpenning decided on an electric sports car as Tesla’s first product: this was the Tesla Roadster and it achieved some notable firsts. It was the first truly practical all-electric car that could easily achieve highway speeds with specifications that met consumer needs. The Roadster was not perfect: at this early stage of Tesla’s life, economies of scale had not been reached and it was priced at over US$100,000. Furthermore, charging was an issue – the Roadster needed between 24 and 48 hours to charge its battery from a standard household power socket. Tesla’s Supercharger network of high-power charging points was still in the future.
Tesla faced significant financial problems in the late 2000s. Despite Musk’s investment and his (alleged) ousting of Eberhard and Tarpenning followed by the layoff of around 25% of employees, the company was running out of cash. A loan of US$465mn from the Department of Energy, followed by the company going public on the New York Stock Exchange saved the day and allowed Tesla to launch its second product. This was the Model S luxury saloon in 2012 – the theory being that such a luxury car would have wider market appeal than a niche two-seater sports car, but also a good profit margin.
Model 3, Model X and Model Y
Further Tesla product launches followed: the Model X luxury crossover SUV in 2015, complete with ‘falcon wing’ doors (based on the Model S platform), the ‘mass market’ Model 3 in 2017 (after what Musk described as “manufacturing hell” scaling up for mass production) and Model Y (a mid-size crossover SUV based on the Model 3) in 2020. The latter two vehicles were made to be more affordable – Musk claimed in a 2006 interview that the Model 3 would begin at US$30,000. The cheapest Model 3 however ended up priced at US$35,000 and was only available for a very brief period before its price increased to US$37,000. Right hand drive production of Models S and X ceased in 2023 – with some markets finding their orders had literally been cancelled overnight.
Model 3 received a facelift in September 2023 (a minor restyle, leaving the bulk of the design unchanged) and Model Y is planned to receive a similar refresh in October 2024. The Tesla range received significant price cuts in April 2024 across all major markets in response to falling sales and competition in the market. Whilst Tesla introduced the much-vaunted Cybertruck pickup in 2024, sales have been modest with an estimate of 11,688 units sold in total as of June 2024. The design of the vehicle means that, at least for now, it is restricted to sales in North America. Not only that but per Musk’s own admission, it has a high production cost and require substantial modifications before it would meet the regulatory requirements of the EU or Australian markets.
The corporate structure of Tesla
Tesla is (or was) incorporated in the US state of Delaware. This is a popular option for US companies – the state offers low business rates and exemptions from corporate income tax for businesses that are registered but not trading there. The state also has a highly developed regulatory and legal environment for businesses most notably in the form of the Delaware Court of Chancery – a court made up of judges specialising in business and corporate law who ultimately oversee the activities of all Delaware corporations.
This court can resolve corporate disputes more quickly since it employs judges rather than juries and its well-developed and predictable history of legal decisions also tends to benefit businesses. The Court of Chancery was the same court that would ultimately have compelled Musk to complete his acquisition of Twitter had he not capitulated and agreed to go through with the deal. The decision to incorporate Tesla in Delaware and be subject to the Delaware Court of Chancery would have widespread ramifications for both Musk and Tesla, as we shall see.
Appealing the Court of Chancery
It’s important to be clear that the Court of Chancery is purely a Delaware state court. Its decisions are based entirely on Delaware state law and the final (and only) avenue for appeals of its decisions is the Delaware Supreme Court. No matter how much he might want to, Musk cannot easily appeal to the US Supreme Court, for the following reasons:
Firstly, there is a distinction drawn in US legal jurisprudence between state and federal court systems. State law cases can on some occasions be ‘removed’ to federal court but only if they raise a question of federal law or if the accused is a US federal officer “acting under color of their federal office” (i.e. performing aspects of their job description which involve duties under federal law) – an example of this would be Donald Trump’s co-accused former Chief of Staff Mark Meadows who has tried, and failed, to get state prosecutions against him for allegedly trying to overturn the 2020 US Presidential election removed to federal court. Under the US system this is not applicable to Musk and Tesla, since the court proceedings are purely questions of Delaware state law.
Secondly the Supreme Court will adjudicate on cases where there is a ‘circuit split’ – that is to say, two distinct branches of the US Federal Court appeals system reach different conclusions about the same legal issue. The cases involving Musk and Tesla in the Delaware Court of Chancery are state cases which not only cannot be removed to federal court but carry no risk of conflicting legal opinions, since the sole adjudicator is the Delaware state court system.
Thirdly, the US Supreme Court can hear a case if it presents a novel question of US constitutional law. But, as we shall see, the primary case Musk has to defend against in Delaware is one solely concerned with well-settled questions of Delaware state and business law. Whilst we cannot entirely rule out the question of Musk managing to twist these into novel constitutional questions there are, to say the least, a number of hurdles in the way of him doing so. Musk and Tesla’s legal team committed themselves to the jurisdiction of the Delaware courts despite some inventive legal manoeuvres, which we shall come to later in this article series.
Tesla’s mounting legal problems
With this background in place, my next articles will consider the multiple legal challenges facing Tesla and Musk. I’m mostly interested here in the problems facing Musk in the context of Tesla – some of his travails from the purchase of Twitter have been covered by our sister publication East Anglia Bylines.
Musk also faces employment law claims arising from his actions immediately after he purchased Twitter and dismissed Twitter staff either unfairly or without adequate or pre-agreed compensation. Some of these he has won, some he has lost but these employment law claims are frankly far less interesting to me than other claims that Musk and Tesla face, and arguably far less impactful too. To the extent that Musk’s companies overlap and that staff members move between them, there is some relevance to X/Twitter but the main focus of this article series will be on Tesla.
