Page:Letter by Elizabeth Warren to the Securities and Exchange Commission requesting an investigation of Tesla, Inc.pdf/7

 This pattern of inaction and the Board members’ conflicts of interest call into question whether it is truly majority independent, as required by Nasdaq rules. The SEC should determine whether the Board is in fact independent, and if not, take whatever action is necessary to protect Tesla investors and the public.


 * 2. Potential Violations of SEC Disclosure Requirements Regarding Board Independence

The Board’s ties to Mr. Musk and Tesla also raise questions about its compliance with disclosure requirements about director independence. Regulation S-K governs how companies should disclose the non-financial statement portions of registration statements, periodic reports, and other filings under the Securities Act of 1933 and the Securities Exchange Act of 1934. Item 407 of that regulation requires that a company identify each director who is independent according to the relevant stock exchange standards. For each independent director, the company must disclose “any transactions, relationships or arrangements … that were considered by the board of directors under the applicable independence definitions in determining that the director is independent.” These disclosures “must be provided in such detail as is necessary to fully describe the nature of the transactions, relationships or arrangements.”

Tesla’s 14A proxy statement from April of this year states that its Board determined six of its eight directors, with the exception of Mr. Musk and his brother Kimball, to be independent. In two sentences, the Board notes it considered certain members’ “minority investments in certain companies or investment funds” involving other Tesla directors or with which Tesla has relationships and concluded that “none of these investments are material so as to impede the exercise of independent judgment.” Although Item 404 of Regulation S-K only requires disclosure of “material” transactions with all directors, Item 407 requires disclosure of any transactions, relationships, or arrangements with independent directors. Tesla cannot avoid disclosure by claiming independent directors’ transactions, relationships, and arrangements are not material. If Tesla failed to disclose in adequate detail all such relationships between each independent director and Mr. Musk or Tesla – several of which have been identified above and do not appear to be referenced in Tesla’s proxy statement – that the Board considered in determining director independence, this would amount to a violation of Item 407.