Why Tornetta v. Musk (CA No. 2018-0408-KSLM) is a Frivolous Case
In Tornetta v. Musk, lead plaintiff Richard Tornetta, who owned just 9 shares of Tesla common stock, challenged the fairness of Elon Musk’s compensation package. The package awarded Musk approximately 264 million shares, valued at around $56 billion, based on Tesla’s market capitalization appreciated additional $560 billion.
In January 2024, the Delaware Court of Chancellor ruled in favor of the plaintiffs, ordering Musk to rescind the award. The plaintiffs’ attorneys subsequently requested the court to award them legal fees amounting to 11% of the rescinded shares—approximately 29 million shares valued at over $6 billion. The court’s decision on this request is still pending.
This article argues that the case is frivolous and should have been dismissed from the outset.
Lack of Subject Matter Jurisdiction
The Delaware court lacked subject matter jurisdiction to hear this case, as the plaintiffs failed to demonstrate material financial loss as required by Article III, Section 2, Clause 1 of the U.S. Constitution. Tornetta purchased his Tesla shares in or before 2018 when the stock price was around $20 per share. With Tesla now trading at roughly $200 per share, his initial $180 investment has grown to approximately $1,800. Tornetta’s claim that Musk’s compensation diluted the value of his shares is highly speculative. Even if the court rescinded Musk’s 264 million shares, Tesla’s outstanding shares would only decrease by 8.2%, based on the 3,194 million outstanding shares as of June 30, 2024. This would increase the paper value of Tornetta’s shares by only $144.
However, for a plaintiff to have standing under Article III, the alleged property loss must be concrete and material, not abstract or speculative. Tesla’s stock has a book value of about $21 per share, which is only 10% of its market price. The significant premiums in the stock price are based on investor expectations of future technological advancements—largely due to Elon Musk’s contributions to Tesla. Given the inherent uncertainty in the market, the stock price fluctuates significantly. For example, in 2018, Tesla’s stock price ranged from $16.31 to $25.83, while from 2023 to today, it has traded between $101.81 and $299.29—still below its peak of $414.50 per share reached in November 2021. When compared to the massive 2,541% price variation from peak to trough, the 8.2% theoretical impact of rescinding Musk’s shares is insignificant. Speculative less appreciation of paper profits by 8.2% does not meet the threshold for substantial financial loss required to sustain a lawsuit. Moreover, rescinding Musk’s shares could raise concerns among investors about potential negative repercussions on the share value, considering Musk’s invaluable contributions to Tesla.
Inadequacy of the Lead Plaintiff
This case should be considered a shareholder class action against Musk and Tesla’s board. However, it fundamentally violates Rule 23 of the Federal Rules of Civil Procedure, which governs class actions, and 15 U.S.C. § 78u-4, the Private Securities Litigation Reform Act (PSLRA). According to 15 U.S.C. § 78u-4(a)(3)(B)(i), the lead plaintiff must be “the most capable of adequately representing the interests of class members” and typically has the greatest financial stake in the outcome of the case.
With a potential maximum paper gain of only $144, Tornetta is not a qualified lead plaintiff, particularly in a case where legal fees could exceed $6 billion. Identifying class members accurately is a rigorous process, and only those who held Tesla shares before the 2018 award program became effective—and who voted against or abstained from voting on the compensation package in 2018 shareholder meeting—should qualify as members of this class. More than 8,000 Tesla shareholders have submitted over 1,500 letters and objections regarding the attorneys’ fees, indicating potential flaws in the certification of class members.
Legal Precedent
The shareholder class action should adhere to the PSLRA, and relevant case law suggests that Tornetta v. Musk is frivolous. In In re Cendant Corp. Litigation, 264 F.3d 201 (3d Cir. 2001), and In re Cavanaugh, 306 F.3d 726 (9th Cir. 2002), the courts emphasized the importance of appointing a lead plaintiff with a significant financial interest in the case. Tornetta’s minor stake in Tesla pales in comparison to the multi-billion-dollar implications of this lawsuit, further underscoring the frivolity of the case.
September 1, 2024, Andrew Chien
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