Tesla shareholders are suing Elon Musk, alleging he shifted key resources from Tesla to xAI

The tech industry’s new-found focus on AI may have done wonders for the likes of Microsoft, Google, and Apple, but it has also created its fair share of problems. A simmering tension within Tesla has erupted into a legal firestorm, with a group of shareholders at the EV company filing a lawsuit against CEO Elon Musk and the company’s board of directors, accusing them of prioritizing Musk’s personal venture, xAI, at the expense of Tesla’s own AI development.

The lawsuit was filed in Delaware, just before Tesla’s annual shareholder meeting, which will see a vote on re-ratifying Musk’s $56 billion compensation package, previously nullified by a judge.

This lawsuit, filed in Delaware, claims that Musk’s actions constitute a severe breach of fiduciary duty and “brazen disloyalty” to Tesla and its shareholders. The plaintiffs in the lawsuit, including the Cleveland Bakers and Teamsters Pension Fund, Michael Giampietro, and Daniel Hazen, allege that since founding xAI in 2023, Musk has systematically poached AI-focused employees from Tesla. They claim that at least 11 key AI personnel have been transferred from Tesla to xAI, significantly undermining Tesla’s AI capabilities. The plaintiffs argue that Musk’s actions violate Tesla’s code of business ethics, which mandates prioritizing the company’s interests.

And if this is not enough, the lawsuit further details how the billionaire allegedly redirected Nvidia graphics processing units (GPUs) from Tesla to xAI. These GPUs, for those who are unaware, are critical for AI research and development, particularly for Tesla’s (currently problematic) autonomous driving technology. The plaintiffs argue that this diversion of resources not only hampers Tesla’s development but also benefits Musk’s private ventures at the expense of Tesla’s growth. This reallocation of resources could significantly slow down Tesla’s AI development efforts, potentially delaying the rollout of new AI-powered features in its vehicles.

The lawsuit also criticizes the Tesla board of directors for failing to fulfill their fiduciary duty, which essentially means acting in the best interests of the company and its shareholders. The plaintiffs claim that the board has remained passive in the face of Musk’s alleged resource diversion and potential self-dealing. They argue that the board should have taken steps to prevent the transfer of crucial AI talent and resources to xAI, prioritizing Tesla’s own AI development needs. For now, the plaintiffs demand that Musk and the board be held accountable for their actions. They seek restitution for the value that has allegedly been diverted from Tesla and request that Musk be compelled to return any misappropriated resources.

“The Board has allowed Musk—the CEO and largest stockholder of Tesla—to found and lead another AI company; to plunder resources from Tesla and divert them to xAI; and to create billions in AI-related value at a company other than Tesla,” the lawsuit said.

For years, Musk has promoted Tesla as more than just an electric vehicle manufacturer, positioning the enterprise as a leader not only in electric vehicles but also in AI technology. The company’s self-driving car systems and its aspirations for autonomous vehicles rely heavily on advanced AI algorithms. Tesla’s stock price has benefited significantly from this dual focus, with investors valuing the company’s potential in the rapidly evolving AI landscape. During Tesla’s quarterly earnings report in April, the company unveiled plans for a robo-taxi fleet, which boosted investor confidence despite weaker-than-expected financial results.