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Elon Musk Can Remain Tesla CEO but Must Step Aside as Chairman in SEC Settlement

A settlement with the SEC doesn’t require Elon Musk to surrender the role of Tesla’s chief executive.
A settlement with the SEC doesn’t require Elon Musk to surrender the role of Tesla’s chief executive. Photo: Joshua Lott/Getty Images

Elon Musk reached a settlement with the Securities and Exchange Commission that allows him to remain chief executive of Tesla Inc. TSLA -13.90% but requires that he step aside from the chairman role for three years.

The surprising twist, announced Saturday by the SEC, comes after Mr. Musk rejected a settlement Thursday and appeared to be hunkering down to fight a lawsuit by the agency. The SEC alleged he misled investors with Twitter messages on Aug. 7 that claimed the company had funding in place to take the auto maker private. A person familiar with his thinking said on Friday that he believed he could win in court against the SEC.

Instead, on Saturday, the SEC announced that Mr. Musk had settled the lawsuit that sought to ban him from running publicly traded companies. He agreed to step down as chairman and remain ineligible to be re-elected to that position for three years. Mr. Musk will remain on the Tesla board.

Tesla has agreed to appoint two new independent board members, establish a new committee of directors and create controls to oversee Mr. Musk’s communications, according to the SEC.

Mr. Musk and Tesla each agreed to pay a fine of $20 million.

Mr. Musk didn’t admit or deny wrongdoing as part of the settlement. He changed his mind about fighting the SEC allegation after coming to believe that a resolution was in the best interests of the company, himself and shareholders, said a person familiar with the matter.

Mr. Musk’s lawyer, Steven Farina of Williams & Connolly, emailed the SEC’s top enforcement officials late Thursday—after the lawsuit had been filed—with a request to talk about the case, according to another person familiar with the matter. The email arrived so late, SEC officials were asleep and didn’t see it until Friday morning, the person said.

When the two sides spoke Friday, Mr. Farina made it clear that Mr. Musk had changed his mind about litigating and wanted to settle for the same terms of a deal that would have been made public Thursday, before Mr. Musk backed out of it, the person said.

The SEC team, angry about Mr. Musk ditching the first settlement, told Mr. Farina they didn’t believe the same terms would be available, the person said. Mr. Musk’s decision to fight the agency had caused more pain for shareholders, as the stock dropped further during afterhours trading Thursday, the SEC officials reasoned.

Mr. Musk’s financial penalty would have to increase, SEC officials told Mr. Musk’s lawyer.

The SEC’s co-directors of enforcement, Stephanie Avakian and Steven Peikin, put the terms on the table: the $20 million penalty, Mr. Musk stepping down as chairman for three years and the two new independent directors. The SEC said the terms were take-it-or-leave-it, the person said.

Mr. Farina said Mr. Musk would agree.

Internally, the SEC was pleased with the deal. The officials knew Mr. Musk could afford to pay any penalty, and the money will go toward reimbursing harmed shareholders. But the officials believe they succeeded in adding directors who can improve Tesla’s governance, the person said.

Tesla has already begun the process of identifying who the two new directors might be, one of the people familiar with the matter said.

In complying with the settlement, Tesla plans to enhance its social-media usage policy for executives and Mr. Musk will be required to have the company sign off on any written statements that could be deemed material, a person familiar with the matter said.

The settlement is “specifically designed to address the misconduct at issue by strengthening Tesla’s corporate governance and oversight in order to protect investors,” Ms. Avakian said in a statement.

Tesla’s $20 million fine isn’t to settle allegations of fraud, but instead charges that it violated rules requiring companies to maintain systems that ensure disclosures to investors are accurate.

The SEC had early in its investigation insisted Tesla was responsible for Mr. Musk’s tweets and that it could be charged with fraud, a person familiar with the matter said. The company’s lawyers at Cahill Gordon & Reindel LLP argued to shield Tesla from a fraud charge.

The lawyers submitted a 60-page white paper to the SEC this month that argued why the company couldn’t legally be on the hook for any of Mr. Musk’s tweets, to the extent the regulator believed they were misleading, the person said. The paper insisted there was nothing wrong with Mr. Musk’s communications in the first place, the person said.

The SEC lawsuit was among the highest-profile cases in years, and the speed with which regulators brought it suggested they were confident they could win.

Mr. Musk’s use of Twitter on Aug. 7 to announce funding was secured for a possible deal to take Tesla private threw Wall Street into confusion.

Subsequent communications by Mr. Musk and the company in the days that followed revealed a deal wasn’t as far along as he had suggested. Instead, he and Tesla’s board raced to put into place teams of lawyers and advisers needed to consider such a plan.

Mr. Musk said in a company blog post in August that he had engaged in meetings with Saudi Arabia’s sovereign-wealth fund about its interest in helping take Tesla private.

Seventeen days after announcing the idea, Mr. Musk issued another shocking statement, saying in a late-night company blog post that he had changed his mind, in part out of concern that small investors wouldn’t be able to participate if Tesla were a private company.

The episode, meanwhile, had become an enormous distraction at a time when Tesla was under intense pressure to consistently build Model 3 sedans and achieve Mr. Musk’s aim of making more-affordable electric vehicles and evolving from a niche luxury-car company.

Mr. Musk has said Tesla’s ability to churn out about 5,000 Model 3s on a weekly basis throughout the quarter will enable it to generate the cash it needs to avoid raising more money. He has targeted turning a profit in the third quarter, and has been pushing employees to deliver as many cars as possible before the quarter ends this weekend.

How Mr. Musk handled his idea to take Tesla private and a series of other self-inflicted missteps have raised questions about the CEO’s ability to manage the company.

In July, he suggested on Twitter that one of the cave explorers who helped rescue a boys soccer team in Thailand was a pedophile, a claim that led to a defamation lawsuit. Earlier this month, Mr. Musk took a puff of a blunt during a live interview broadcast on YouTube.

Write to Tim Higgins at Tim.Higgins@WSJ.com and Dave Michaels at dave.michaels@wsj.com

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