Tesla Emerges as Test for Texas’ Curbs on Shareholder Power

Investors are asking Tesla to let shareholders vote before applying a Texas law that would severely curb smaller stockholders’ ability to raise concerns at annual company meetings.

A state law scheduled to go into effect in September would allow Tesla Inc. and other Texas-based public companies to require shareholders that hold the lesser of either a 3% stake in the company or $1 million of voting shares before submitting a resolution for consideration at annual meetings.

ESG wealth manager Newground Social Investment last week submitted a proposal for Tesla’s November annual meeting asking the EV maker to let shareholders vote on whether to adopt the Texas statute into its bylaws. The New York State Comptroller’s office also submitted a proposal challenging another facet of the ownership threshold requirements.

The proposals act as test cases for a novel prong of Texas’ legislative push to attract more companies with a less-stringent regulatory environment. Tesla moved its headquarters from California to Texas in 2021, then reincorporated there last summer after a Delaware court blocked founder Elon Musk’s nearly $56 billion executive pay package.

As of Monday, only Musk, Vanguard Group Inc., BlackRock Inc., and State Street Corp. owned more than 3% of outstanding Tesla shares, according to Bloomberg Terminal data.

Bruce Herbert, Newground’s chief executive, called the law a direct attack on shareholder democracy.

“The premise underlying this is that if you’re rich you have good ideas, and if you don’t have wealth in the form of investment assets, you don’t have any good ideas,” Herbert said. The right to file shareholder proposals is a “cornerstone of ownership,” not a loophole, he said.

“This is intended to alert the company to investors’ position” on ownership minimums, added Danielle Fugere, president and chief counsel for progressive shareholder advocacy group As You Sow, which helped draft Newground’s proposal. “Shareholders want to have the ability to vote on this.”

Under the new law, the company is only required to give notice before making a change on who can offer shareholder proposals. Texas state Sen. Tan Parker, a Republican who authored the ownership threshold legislation, billed the statute as a way to entice more public companies and ensure shareholder proposals only come from “serious investors.”

Last month, Tesla found itself nearly in breach of another recent Texas law, one requiring companies to hold annual shareholder meetings within 13 months of the previous meeting. The company set its annual meeting date for Nov. 6 following media reports about the looming deadline.

The Texas law on proxy proposals doesn’t end with ownership thresholds — it also requires companies that meet initial requirements to “solicit support” from 67% of shareholders in order to submit a resolution.

Tesla has already tapped Texas business law to curb other types of shareholder engagement. The company amended its bylaws in May to prevent shareholders who own less than 3% of the company from filing derivative suits—a shareholder complaint on behalf of a company and against its management. Texas SB 29, which went into effect the same month, allowed the internal change.

In response, the New York State Comptroller’s Office in July filed a shareholder proposal seeking to nix Tesla’s new derivative suit ownership thresholds, calling the bylaws amendment an attempt to “insulate its Board and officers from almost all accountability.”

Tesla’s ownership mix is another issue with the Texas shareholder proposal ownership thresholds, Herbert said. Most investors’ portfolios are too diversified to own $1 million worth of outstanding shares in a single company, much less a 3% stake in a company like Tesla, whose market cap exceeds $990 billion.

The Securities and Exchange Commission as of July 30 had not recorded any requests from Tesla to exclude either shareholder proposal from its proxy statement, and the company did not respond to a request for comment.

Herbert says Newground’s resolution is likely to end up on the ballot, even with the Trump administration’s recent changes that make it easier for companies to toss proposals.

“It’s a straightforward, right-down-the-middle corporate governance proposal,” he said. “It really is foundationally important.”