Author: Alicia Shapiro

Estimated Read Time: 5 minutes

Tesla Investors Sue Elon Musk Over Rival AI Company xAI

Several Tesla shareholders have filed a lawsuit against Elon Musk and the company’s board, alleging that Musk breached his fiduciary duty by founding a rival artificial intelligence company, xAI, and diverting resources from Tesla to support the new venture.

Allegations of Resource Diversion

The lawsuit claims that Musk, along with Tesla’s board, knowingly redirected talent and resources away from Tesla to benefit xAI, which was established in 2023 with the goal of understanding “the true nature of the universe.” The shareholders argue that this diversion of resources has harmed Tesla.

The plaintiffs, including the Cleveland Bakers and Teamsters Pension Fund and individual shareholders Daniel Hazen and Michael Giampietro, filed the lawsuit in Delaware, where Tesla is incorporated. This legal action comes just before a significant shareholder vote on a proposal to reincorporate Tesla in Texas, following a Delaware court judge's decision to void Musk’s substantial pay package.

Background and Financial Impact

Musk has long sought to position Tesla as more than just a car manufacturer, emphasizing its potential as a robotics and AI leader. This vision has driven Tesla’s stock price to unprecedented heights, surpassing the combined value of leading automakers. However, the lawsuit alleges that during this time, Musk was simultaneously funneling critical resources and talent to xAI.

The plaintiffs highlight Musk’s efforts to raise billions of dollars for xAI while leveraging Tesla’s AI-related data. Notably, xAI recently secured $6 billion in its initial funding round, which it plans to use to bring its first products to market. Among these products is Grok, an edgier alternative to OpenAI’s ChatGPT, currently available exclusively to Premium subscribers on X.

Specific Incidents Cited

The lawsuit references a recent CNBC report claiming that Musk diverted thousands of Nvidia-made AI chips, initially intended for Tesla, to his social media company. In response to this report, Musk posted on X, explaining that Tesla could not accept the Nvidia GPUs due to incomplete factory facilities in Austin, Texas. He projected that Tesla would spend $3–4 billion on AI chips from Nvidia in 2024.

Additionally, the plaintiffs point to Musk’s public statements suggesting he needs a 25 percent stake in Tesla to confidently grow the company into an AI and robotics leader. The lawsuit accuses Tesla’s board of failing to prevent Musk from misappropriating resources for the benefit of xAI, thereby creating significant AI-related value outside of Tesla.

Broader Legal Context

This lawsuit is not the only legal challenge Tesla faces this week. Another institutional investor has filed a separate lawsuit, accusing Musk of profiting billions of dollars from selling Tesla stock based on insider information. These legal battles underscore the growing scrutiny of Musk’s management decisions and their impact on Tesla and its shareholders.

Conclusion

The outcome of these lawsuits could have significant implications for Tesla’s governance and Musk’s future ventures. As Tesla shareholders await the court's decisions, the company's strategic direction and Musk's role in balancing his multiple business interests remain critical areas of focus.