The hard part about maintaining a blog is finding interesting topics. It isn’t always easy coming up with things I want to write about. But when all else fails, I can always count on Elon Musk to come up with something. At regular intervals, Musk is out there saying and doing things that are not only interesting and provocative but that are solidly blogworthy. In the last few days, Musk has been at it again, not only making himself the largest shareholder of the social media company Twitter and thereby putting himself on the front pages of the business pages, but, as discussed below, drawing a securities class action lawsuit, as well.
Elon Musk is of course the founder of Tesla and Space X. He is also the world’s richest man. From time to time, Musk does really interesting things, many of them involving social media posts on Twitter. For example, in August 2018 , he caused quite a stir (and also drew a plethora of securities class action lawsuits) when he announced on Twitter that he was taking Tesla private. (He didn’t.) In his latest move, Musk is apparently positioning himself to take on Twitter itself.
Earlier this year, Musk began accumulating significant holdings in Twitter’s stock. According to Musk’s April 4, 2022 filing with the SEC on Schedule 13 (here), Musk has now accumulated over 9% of Twitter’s stock, apparently making him Twitter’s largest shareholder. Twitter reportedly offered Musk a seat on the company’s board, but according to news reports, Musk turned down the offered board seat.
There’s lots of speculation out there about what Musk is up to; the Wall Street Journal conjectured that, among other things, Musk aims to take on Twitter’s content-moderation practices. How this is all going to play out remains to be seen.
For what it may be worth, in an amended SEC filing (filed on April 11, 2022), Musk himself stated with respect to Twitter (the “Issuer”) that he may “engage in discussions with the Board and/or members of the Issuer’s management team concerning, including, without limitation, potential business combinations and strategic alternatives, the business, operations, capital structure, governance, management, strategy of the Issuer and other matters concerning the Issuer.” He stated further that he “may express his views to the Board and/or members of the Issuer’s management team and/or the public through social media or other channels with respect to the Issuer’s business, products and service offerings.” In other words, stay tuned, there’s more fun to come. (The Journal, in a particularly nice turn of phrase, referred to the possibility of a “potential fracas” between Musk and Twitter.)
Musk’s various moves regarding Twitter has garnered a great deal of media attention. Now, it appears, Musk’s Twitter play has also drawn a securities class action lawsuit.
The April 12 Lawsuit
On April 12, 2022, a plaintiff shareholder filed a securities class action lawsuit against Musk in Southern District of New York. A copy of the complaint can be found here. The complaint is based on the idea that Musk should have filed a Schedule 13 with the SEC (declaring that he had acquired 5% of Twitter’s stock) earlier than he did, and that when he finally did get around to filing the Schedule, Twitter’s share price shot up 27%.
The lawsuit is filed on behalf of persons who sold their Twitter shares between March 24, 2022 (the date on which the complaint alleges Musk should have filed his Schedule 13 with the SEC) and April 4, 2022 (the date when Musk did file the Schedule 13).
According to the complaint, by March 14, 2022, Musk had acquired more than a 5% ownership stake. The complaint further alleges that under Section 13(d) of the Securities Exchange Act of 1934 and Rule 13d-1 thereunder, Musk was required to file a Schedule 13(d) within ten days of crossing the 5% threshold, meaning (the complaint alleges) that Musk should have filed a Schedule 13 with the SEC on March 24, 2022. However, Musk did not file his Schedule 13 with the SEC until April 4, 2022.
The complaint alleges that “Investors who sold shares of Twitter stock between March 24, 2022, when Musk was required to have disclosed his Twitter ownership, and before the actual April 4, 2022, disclosure, missed the resulting share price increase as the market reacted to Musk’s purchases and were damaged thereby.”
The complaint also alleges that “By failing to disclose his ownership stake … Musk was able to acquire shares of Twitter less expensively during the class period.” The complaint alleges (in paragraph 38) that Musk “saved approximately $143 million on his Twitter purchases by delaying the filing of the required Schedule 13 G/D and purchasing additional shares at deflated prices.”
The complaint alleges that Musk violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the class.
All of the details about the timing of Musk’s SEC filings are reported in an April 5, 2022 Wall Street Journal article (here), which also suggests that Musk’s supposed delayed filing of the Schedule 13 could get Musk in hot water with the SEC.
The complaint is short – it weighs in at just ten pages. It is interesting and unusual in that it purports to represent not a class of purchasers who bought the shares of the company involved, but rather on behalf of persons who sold the shares of the company involved. Their allegation is basically that they would have realized a larger amount from their sales if Musk had filed his form with the plaintiffs say he should have.
The complaint is also interesting because instead of a long list of defendants, as is often the case with securities class action complaints, it names only one defendant, Musk himself. Twitter itself is not named as a defendant.
For students of D&O claims, the capacity in which Musk is named as a defendant is also interesting. Musk is not named in his capacity as a director or officer of any of his other companies. He is not named in any corporate capacity at Twitter, either. Musk is named solely in his capacity as an individual — that is, as an investor in and shareholder of Twitter. All else equal and assuming customary insurance arrangements, there likely would not be insurance coverage available for Musk under Twitter’s insurance, nor under any insurance that any of his other companies might maintain. As the world’s richest man, the availability of D&O insurance may not be Musk’s first concern, but the circumstances alleged in the claim do present an interesting example of the significance of capacity for purposes of establishing D&O insurance coverage.
Anyway, this is an interesting situation. I suspect that before all is said and done, a lot more interesting things are going to happen. Watch this space for future blog posts.