Tesla investors sue Elon Musk for diverting automaker resources to xAI

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A group of Tesla investors sued Elon Musk, the company and members of its board of directors yesterday, alleging that Tesla was harmed by Musk’s diversion of resources to his company xAI. The diversion of resources includes hiring AI employees away from Tesla, diverting microchips from Tesla to X (formerly Twitter) and xAI, and “xAI’s use of Tesla data to develop its own software/hardware.” of xAI, all without compensation to Tesla,” the lawsuit says. .

The lawsuit in Delaware Court of Chancery was filed by three Tesla shareholders: the Cleveland Bakers and Teamsters Pension Fund, Daniel Hazen and Michael Giampietro. It seeks financial damages for Tesla and the return of Musk’s stake in xAI to Tesla.

“Could the CEO of Coca-Cola loyally start a competing soft drink company and then divert scarce ingredients from Coca-Cola to the startup? Could the CEO of Goldman Sachs loyally start a competing financial advisory company and then hire bankers Goldman Sachs key to the startup Could the board of either company fairly permit such conduct without doing so? anything about it? “Of course not,” the lawsuit says.

Tesla and Musk have touted artificial intelligence “as the key to Tesla’s future” and described Tesla as an artificial intelligence company, according to the lawsuit. By founding xAI, Musk started a competing company “and then diverted[ed] talent and resources of his corporation to the startup,” with the apparent approval of Tesla’s board of directors, according to the lawsuit.

After founding xAI in March 2023, “Musk hired numerous key AI-focused employees from Tesla to xAI” and then diverted Nvidia GPUs from Tesla to X and xAI, according to the lawsuit. The GPU bypass was recently confirmed by Nvidia emails that were revealed in a CNBC report.

GPU Bypass

Before founding xAI, “Musk stated that Tesla needed more Nvidia H100 GPUs than Nvidia had available for sale, a common problem in the AI ‚Äč‚Äčindustry… However, after Musk established xAI, he began directing personally to Nvidia to reroute Tesla’s GPUs to xAI and

The investors suing Musk and Tesla do not believe Musk’s justification. “For his part, Musk dubiously claimed in a post on , so they would have just been left in a warehouse,'” the lawsuit says.

The complaint says a pitch deck for potential investors in xAI said the startup “intended to collect data from X and Tesla to help xAI catch up to artificial intelligence companies OpenAI and Anthropic. X would provide data from the social media users and Tesla would provide video data from its cars.”

“It is evident that Musk has attracted potential investors in xAI in part by exploiting Tesla’s proprietary information,” the lawsuit also says. “On information and belief, Musk has already obtained or intends to have xAI collect data from Tesla without adequately compensating Tesla, although X has already been provided capital from xAI for his data contributions. None of this would be necessary if Musk properly created xAI as a subsidiary of Tesla.”

We contacted Tesla today and will update this article if the company provides a response to the lawsuit. TechCrunch previously reported on the filing of the complaint.

The same court annulled Musk’s salary

The Delaware Court of Chancery is the same one that voided Elon Musk’s 2018 pay package following a different investor lawsuit. Tesla shareholders re-approved the $44.9 billion pay plan yesterday, with 72 percent voting in favor of the proposal, but the new vote does not end the legal battle over Musk’s salary. Tesla shareholders also approved a corporate move from Delaware to Texas, proposed by Musk and Tesla after the court ruling on the payment plan.

That drama influences the lawsuit filed yesterday. After the pay ruling that effectively reduced Musk’s stake in Tesla, “Musk accelerated his efforts to grow xAI” by “raising billions of dollars and poaching at least eleven “Tesla employees,” the new lawsuit says. The lawsuit also notes Musk’s threat “that he would only build an artificial intelligence and robotics business within Tesla if Tesla gave him at least 25% voting power.”

The lawsuit accuses Tesla’s board of directors of “allowing[ting] Musk to create and grow xAI, hampering Tesla’s AI development efforts and diverting billions of dollars in value from Tesla to xAI.” The board’s inaction is alleged to be “an obvious breach of unwavering duty fiduciary of its members to protect the interests of Tesla and its shareholders.”

Tesla board members’ close ties to Musk could play a key role in the case. In ruling on the payment plan, Delaware Court of Chancery Judge Kathaleen McCormick found that most of Tesla’s board members were either beholden to Musk or had compromising conflicts. The lawsuit filed yesterday points to the court’s previous findings about those board members, including Kimbal Musk, Elon Musk’s brother; and James Murdoch, an old friend of Musk.

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