As several companies have learned the hard way over the past few
months, many things can result from having a presence on social
media – and a lot of them aren’t good for business.
Social media presents necessary but treacherous terrain for
companies: Many brands must maintain an active presence to remain
relevant and compete in the marketplace, but misuse, or even
perceived misuse, presents hazards that can attract U.S. Securities
and Exchange Commission investigations and shareholder
A recent lawsuit, filed against Tesla Inc. on March 11,
showcases the legal perils that can follow missteps on social
In 2018, Tesla founder and CEO Elon Musk made headlines with a
series of splashy tweets in which he mentioned plans to take the
company private, target goals for Tesla’s upcoming production
of electric cars and solar roofs, and his opinion that Tesla’s
stock price was too high.
Three years later, the fallout continues, as a stockholder has
filed a derivative action claiming that Musk’s tweets caused
Tesla’s stock price to plummet and alleging that he and the
board of directors breached fiduciary duties owed to the
The complaint also claims that Tesla canceled its directors and
officers liability insurance policy – and Musk himself is
personally indemnifying Tesla’s directors against liability
arising from their service on the board.2
For companies without billionaire CEOs willing and able to
personally indemnify their directors, D&O insurance represents
the only financial protection for securities lawsuits.
Derivative Securities Lawsuit Filed Against Tesla’s
Directors for Breach of Fiduciary Duties
The events giving rise to the stockholder’s lawsuit go back
to 2018, when Musk made a series of controversial tweets.
The stockholder alleges that Tesla uses Musk’s personal
Twitter account to announce material information to the public
about the company and its products and services, including
forward-looking guidance regarding Tesla’s financial metrics
and key nonfinancial information such as production forecasts,
production achievements and new product releases.3
The complaint goes on to allege that Musk tweeted that he was
“considering taking Tesla private at$420” with
“[f]unding secured.”4 However, by the close of
trading the next day, Tesla’s stock price allegedly dropped
because its board of directors issued a press release stating that
it was investigating Musk’s tweet but did not confirm that
funding had been secured for any going-private
The stockholder alleges that a few days later, Musk then doubled
down on his claims by tweeting that
he was working with The Goldman Sachs Group Inc. and other
financial advisers on the proposal to take Tesla
Media reports later contradicted Musk’s claims that he had
retained financial advisers, which further caused Tesla’s stock
price to drop.7 Two days later, the SEC allegedly
subpoenaed Tesla regarding Musk’s tweets, causing the stock
price to sink further.8
The stockholder further alleges that Musk’s tweets were
false and misleading, as neither he nor Tesla had lined up the
financing necessary to take the company private.9 The
complaint also claims that Musk’s tweets drew unwanted
attention from the SEC, which filed a complaint charging Musk with
Two days later, Musk and Tesla entered into settlements
requiring that Tesla implement mandatory procedures regarding the
oversight of the company’s social media communications,
including Twitter posts by Musk; Musk step down as Tesla’s
chairman and be replaced by an independent one; and Musk and Tesla
each pay a $20 million penalty.11
Musk then allegedly continued to flout the SEC’s authority,
tweeting that the $20 million fine was worth it.12
Despite’s Tesla’s implementation of a policy prohibiting
executives from issuing written communications that contain
information material to Tesla’s stockholders without prior
approval, the stockholder claims that in 2019, Musk returned to
Twitter and announced that “Tesla made 0 cars in 2011, but
will make around 500k in 2019.”13
The complaint alleges that Musk tweeted this information without
prior approval, once again incurring the wrath of the SEC, which
filed a motion for a show-cause order seeking to hold Musk in
contempt for violating the settlement agreement.14
This contempt motion allegedly resulted in a revised settlement
agreement requiring Tesla to amend its policy and force Musk to get
written preapproval before posting any information about
Tesla’s production, sales or delivery numbers that the company
had not previously published via preapproved written
Yet within three months, Musk tweeted that Tesla would produce
1,000 solar roofs per week by the end of 2019, also allegedly
without prior approval.16 Musk also tweeted that “Tesla stock is too high [in my opinion].”17
The stockholder alleges that this tweet caused Tesla’s stock
price to drop nearly 10% in the following hours, destroying almost
$14 billion in Tesla’s market capitalization.18
The complaint brings causes of action against both Musk and
Tesla’s board of directors for allegedly breaching their
fiduciary duties of due care, good faith and loyalty.19
Specifically, the complaint alleges that Tesla’s board failed
to appoint an independent general counsel who would rein in Musk,
instead allowing him to install loyalists who failed to implement
The stockholder also claims that Tesla canceled its D&O
policy for the 2019-20 year due to high
premiums (caused by Musk’s erratic behavior and the board’s
failure to oversee his misconduct) and instead, Musk himself
personally indemnifies Tesla’s directors for personal liability
arising from their service on Tesla’s board.21
While this arrangement may work for Tesla, companies without
billionaire CEOs willing to personally indemnify their directors
can nonetheless protect themselves from similar stock drop claims
with D&O insurance policies.
D&O Policies Cover Stock Drop Lawsuits and Alleged Breaches
of Fiduciary Duties
Public company D&O policies cover a wide range of claims
brought against directors and officers, either directly to the
individuals when the company does not indemnify them or directly to
the company when it indemnifies those individuals, as well as
securities lawsuits brought directly against a company itself.
Typical insuring agreements cover claims made during the policy
period against the directors, officers and company for any wrongful
act, normally defined as any actual or alleged act, error,
omission, misleading statement, misstatement, neglect or breach of
duty allegedly committed or attempted by any of the directors and
officers or the company itself.
These D&O provisions cover stock drop derivative actions
because shareholders’ allegations that a company’s
directors and officers breached their fiduciary duties qualify as
covered wrongful acts.
In addition, the definition of covered claims often includes
securities claims, which cover derivative suits alleging one or
more violations of laws, rules or regulations brought by security
holders arising out of the purchase, sale or offer to purchase or
sell securities of the insured company.
Side A coverage requires the insurer to pay for loss (including
damages, settlements, judgments and defense costs) for which the
corporation does not indemnify its directors and officers.
For example, under Delaware law – Tesla is incorporated in
Delaware – a corporation cannot
indemnify, or hold harmless, its directors and officers for
derivative actions that result in a judgment that they are liable
to the corporation.22
The reasoning is that a corporation’s indemnification of
directors for judgments or settlements in a derivative suit would
be circular, as the corporation would be essentially paying itself
for injury caused to it by the same directors it was
indemnifying.23 Side A coverage typically applies when a
company is insolvent. Otherwise the corporation would indemnify the
individual directors or officers.
Side B coverage addresses the situation where the company
indemnifies the individual directors or officers. Delaware law also
allows corporations to indemnify their directors and officers for
expenses, including attorney fees, incurred in the defense against
derivative actions, if the director or officer acted in good faith
and in a manner the person reasonably believed to be in the best
interests of the corporation.24
Side C coverage provides coverage for the company itself, but
for public companies is generally
limited to securities claims.
Securities claims are often defined to include claims alleging
violations of any law, rule or regulation, whether statutory or
common law, including but not limited to the purchase or sale or
offer or solicitation of an offer to purchase or sell securities,
brought by any person or entity arising out of the purchase or sale
of any securities of the insured organization, or a security holder
with respect to his or her interest in the securities of such
organization, in addition to derivative suits.
The value of Side C coverage is that it covers governmental
investigations, and if a lawsuit is filed, defense of the claim.
Covered claims include demands for alternative dispute resolution,
such as mediation or arbitration; civil, criminal, administrative
or regulatory lawsuits and proceedings; and derivative demands,
among other things.
D&O policies can also cover investigations of a
company’s directors and officers, which often begin before an
actual lawsuit is filed and commence with informal requests for
information and witness interviews, formal document requests,
requests to toll or waive statutes of limitation, target letters,
subpoenas, grand jury subpoenas, search warrants, administrative
orders, civil investigative demands, or similar documents.
Insurers often try to deny coverage for these kinds of
documents, but several decisions have held that they are covered
claims sufficient to trigger D&O coverage.25
While paying to indemnify Tesla’s board of directors may
amount to no more than a drop in the
bucket for Musk, most companies do not have the same luxury of
having a free-spending billionaire as CEO willing to personally
cover the costs of litigation resulting from missteps on social
For example, in recent weeks, major companies such as Delta Air
Lines Inc. and The Coca-Cola Co. have found themselves in hot
water, and facing boycotts threatened on social media, after making
controversial statements about Georgia’s new voting law.
In the current age of political polarization, for companies with
an active presence on social media, the question is when, not if,
the court of public opinion will eventually turn against them.
Companies can prepare for the storm by double- and triple-checking
to make sure their D&O policies limit their exposure in the
event shareholders file derivative lawsuits against them in the
fallout after social media gaffes.
This article was also published in Law360.
1 Dave Simpson, Musk, Tesla Face Another Investor Suit
Over ‘Erratic’ Tweets, Law360 (Mar. 12, 2021, 11:36 PM),
2 V. Stockholder Derivative Compl., Gharrity v. Musk, No.
2021-0199, ¶ 90 (Del. Ch. Mar. 11,
3 Id. at ¶¶ 96-97.
4 Id. at ¶¶ 11, 116.
5 Id. at ¶ 121.
6 Id. at ¶ 122.
7 Id. at ¶¶ 123-24.
8 Id. at ¶ 125.
9 Id. at ¶ 134.
10 Id. at ¶ 151.
11 Id. at ¶¶ 153-54.
12 Id. at ¶ 160.
13 Id. at ¶¶ 164, 170.
14 Id. at ¶¶ 174-76.
15 Id. at ¶¶ 184-85.
16 Id. at ¶¶ 23, 187, 189.
17 Id. at ¶ 198.
18 Id. at ¶¶ 203-04.
19 Id. at ¶¶ 309-11, 316-19.
20 Id. at ¶¶ 212, 215, 243, 245.
21 Id. at ¶ 90.
22 Del. Code Ann. tit. 8, § 145(b) (West
23 Arnold v. Soc’y for Sav. Bancorp, Inc ., 678 A.2d
533, 540 n.18 (Del. 1996).
24 Del. Code Ann. tit. 8, § 145(b) (West 2020). 25
E.g., MBIA Inc. v. Fed. Ins. Co ., 652 F.3d 152, 159 (2d Cir.
2011); Polychron v. Crum & Forster Ins. Cos ., 916 F.2d 461,
463 (8th Cir. 1990); Minuteman Int’l, Inc. v. Great Am. Ins. Co
., No. 03 C 6067, 2004 WL 603482, at *7 (N.D. Ill. Mar. 22,
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