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Tesla shareholders have been forced to drop a lawsuit over the company's toxic workplace, according to a federal court ruling. They failed to prove that they were exempt from initially discussing the matter with Tesla's board of directors and other elements of their claim.

Tesla investors can not bring a lawsuit against CEO Elon Musk and other directors and officers alleging they contributed to a “toxic workplace culture,” a federal court has ruled. Shareholders were unable to prove they were exempt from the original requirement for the company's board of directors to sue, Bloomberg Law reports. This statement was made by Judge David Alan Ezra in an opinion docketed Monday in the US District Court for the Western District of Texas. Such a ruling suggests that the lawsuit was improperly prepared and that at least some of the defendants are unlikely to be responsible for what they are accused of.

In the derivative lawsuit, investors said the company's directors and executives caused financial and reputational damage to the manufacturer. They argued that the company not only tolerated but even encouraged, a “toxic workplace culture grounded in racist and sexist abuse and discrimination.” However, shareholders did not approach the board directly before filing suit.

The defendants asked for dismissal on the grounds that investors did not ask the board of directors to act. Moreover, they also failed to show that their appeal to the board of directors would have been futile even if it had taken place. In July Magistrate Judge Dustin M. Howell agreed with Tesla and recommended dismissal.

To determine whether a demand would be futile, courts consider whether each director “received a material personal benefit from the alleged misconduct,” “faces a substantial likelihood of liability on any of the claims,” or lacks independence from a person who received such a benefit or faces liability, Ezra said. Futility is found if the answer is “yes” for more than half of the board, he said.

Regarding interests and independence, Ezra said there were fewer directors to consider than in the report. Some of them had already left the board of directors before the lawsuit was filed. Investors' argument that Musk's dominance on the board affects the independence of other directors continues to fail. The plaintiffs have not demonstrated the possible liability of Musk himself, the judge said.

© 2023, Eva Fox | Tesmanian. All rights reserved.

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