Tesla chief executive office Elon Musk and the company's board of directors are being sued by shareholders who accuse them of breaching fiduciary duties by diverting resources and talent to Musk's AI venture xAI, which directly competes with Tesla's own artificial intelligence initiatives.

The lawsuit, filed Thursday in the Delaware Chancery Court by the Cleveland Bakers and Teamsters Pension Fund, Daniel Hazen and Michael Giampietro on behalf of Tesla itself, alleges Musk has engaged in "brazen disloyalty" by actively undermining Tesla to build out xAI.

Specific allegations include at least 11 Tesla employees departing to join xAI since its 2023 founding when Musk raised $6 billion for the startup; Musk redirecting a substantial shipment of high-powered Nvidia AI processors initially procured for Tesla over to X Corp, formerly Twitter, despite stating Tesla would invest $10 billion in such chips in 2023; Musk publicly suggesting a prominent AI researcher work for xAI rather than Tesla; and providing xAI with access to proprietary Tesla data pertaining to AI development.

"Musk has characterised Tesla as an AI company, not simply an automaker, inflating its valuation above established rivals," said the plaintiffs' attorney Adam Pritchard. "Yet he has actively subverted its AI roadmap to bolster xAI, with the board failing to uphold governance responsibilities."

The litigation seeks to compel Musk to relinquish his equity stake in xAI to Tesla as a remedy. Plaintiffs argue his actions breach Tesla's code of ethics and fiduciary obligations in a manner akin to "the Coca-Cola CEO founding a rival beverage firm and transferring ingredients."

The suit intensifies pressure on Musk who saw Tesla shareholders approve his $45 billion pay package on Thursday. Musk had initially demanded compensation worth around $56 billion in January, but this was nullified by a judge in Delaware who concluded that the figure could not be considered independent from Musk’s influence. The approved compensation package, along with an approved measure to move Tesla’s headquarters from Delaware to Texas, could cause further legal friction.

Elsewhere, Musk has been sued by eight former employees of SpaceX who accused the billionaire of firing them after they made complaints of sexual harassment at the satellite firm. The lawsuit alleges that Musk “knowingly and purposefully created an unwelcome hostile work environment based upon his conduct of interjecting into the workplace vile sexual photographs, memes, and commentary that demeaned women and/or the LGBTQ+ community”.

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