Elon Musk, the world’s richest person, has recently come under scrutiny for his alleged drug use. Reports suggest that Musk has used recreational and illegal drugs such as LSD, cocaine, ecstasy, and psychedelic mushrooms. He also reportedly has an active prescription for ketamine. These revelations have raised concerns about potential shareholder claims and the implications for his companies, including Tesla Inc. and Space Exploration Technologies Corp. (SpaceX). In this article, we will explore the potential risks and consequences of Musk’s alleged drug use for his companies and their boards.
The Role of Directors and Officers Insurance
Directors and officers (D&O) insurance is meant to protect companies and their board members from financial losses resulting from legal claims. However, Musk’s reported drug use poses a challenge for D&O insurance coverage. The board directors of his companies have a duty to shareholders to oversee his executive role, and the companies themselves forbid the use of drugs, especially on work premises. Moreover, drug use in the workplace can be a violation of federal law, which is particularly concerning for companies like SpaceX that contract with the government. As a result, Musk’s alleged drug use leaves his companies and their boards exposed to potential shareholder claims that D&O insurance may not cover.
“The principal exposure for both Musk and his directors are investors’ ‘breach of fiduciary duty claims for how they choose to address, or not address, any actual drug use and how it might affect decision-making and company operations and results.'” – Mike Manire, Partner at Manire Galla Curley LLP
Coverage Concerns
Musk’s companies may face challenges in obtaining D&O insurance coverage due to the high exposure associated with his alleged drug use. In April 2020, Tesla announced that it would no longer purchase outside D&O policies. Instead, Musk reportedly decided to personally pay for insurance coverage, with the company later reimbursing him for the short-term coverage he provided. While it is unclear whether Tesla and SpaceX currently have D&O insurance coverage, it is likely that D&O insurers would charge higher premiums, impose more restrictive terms, or even refuse to cover Musk and his companies altogether due to the perceived risks associated with his behavior.
“It’s a question of whether a D&O insurer wants to ‘take on the risk of someone like Elon Musk, who has proven to be controversial and proven to attract claims.'” – Kevin LaCroix, EVP at R-T Specialty
Scrutiny of Executives’ Drug Use
Musk’s behavior, including his alleged drug use, has already attracted attention and legal action in the past. For instance, Musk’s tweet about taking Tesla private in 2018 resulted in a lawsuit from investors against Musk, Tesla, and the company’s board. Given these incidents, D&O insurers may be prompted to scrutinize executives’ drug use more closely. Although D&O policies do not explicitly address drug use, insurers may consider adding exclusions related to drug use in the future.
“Any underwriter now would likely consider adding such an exclusion.” – Mike Manire, Partner at Manire Galla Curley LLP
Potential Consequences for Board Directors
The board directors of Musk’s companies, including his brother Kimbal Musk and others closely tied to the CEO, may find themselves in a challenging position due to the recent reports of Musk’s drug use. The issue of D&O insurance coverage further complicates matters. Class action attorneys could demand that the boards stay informed about Musk’s drug use on behalf of investors. SpaceX, in particular, may be viewed as a vulnerable target due to its relationship with NASA and federal requirements for drug-free work environments.
“The board needs to figure out whether ‘Musk has engaged in behavior that could imperil that key relationship with NASA now.'” – Kevin LaCroix, EVP at R-T Specialty
Conducting an Investigation
To address the concerns raised by Musk’s alleged drug use, the boards of Tesla and SpaceX can conduct internal investigations. These investigations can demonstrate that the issue is not being ignored and that appropriate steps are being taken to mitigate any potential harm. It may also be advisable for the companies to hire an outside law firm with no prior relationship to the company to ensure an unbiased investigation.
“The conservative thing for companies to do when they receive information about the alleged misconduct of senior executives is to investigate and to take appropriate steps.” – Kevin LaCroix, EVP at R-T Specialty
Musk’s Response
Despite the reports of his drug use, Musk appears unfazed and minimizes any potential financial impact on his companies. In a recent post on his social media platform, he expressed confidence in Tesla and SpaceX, stating, “Whatever I’m doing, I should obviously keep doing it!” He even jokingly mentioned that if drugs helped improve his productivity, he would certainly take them. However, Musk’s history of being a “lightning rod” for private securities claims and SEC enforcement actions raises questions about the level of risk involved in insuring him.
“The question any prospective D&O insurer would want to ask is: is that the kind of risk you want in your portfolio?” – Kevin LaCroix, EVP at R-T Specialty
Conclusion
Elon Musk’s alleged drug use poses significant challenges for his companies and their boards. The potential shareholder claims and implications for D&O insurance coverage highlight the need for careful consideration and investigation by the boards of Tesla and SpaceX. The boards must demonstrate that they are taking the issue seriously and that they are committed to protecting the interests of shareholders and maintaining important relationships with entities like NASA. As the situation unfolds, it remains to be seen how Musk’s alleged drug use will impact his companies and their stakeholders.