In a significant challenge to Tesla CEO Elon Musk's decision to start xAI, a competing AI company, shareholders of Tesla have filed a lawsuit accusing Musk and the automaker's board of directors of breaching their fiduciary duties. The suit alleges that Musk directed talent and resources away from Tesla and towards xAI, thereby unjustly enriching himself.

The legal complaint, filed on Thursday in Delaware Chancery Court by Cleveland Bakers and Teamsters Pension Fund on behalf of Tesla, claims that Musk violated Tesla's code of business ethics by establishing and leading xAI. The plaintiffs argue that the board allowed Musk to continue violating this code without any repercussions.

The lawsuit argues that the notion of a CEO launching a competing company, with the apparent approval of their board, and diverting resources from the original corporation is absurd. To illustrate this point, the complaint draws a parallel with the CEO of Coca-Cola starting a rival soft-drink company and sending ingredients to it.

Musk founded xAI in 2023, and the startup recently secured $6 billion in funding to compete with established rivals like OpenAI, Microsoft, and Alphabet. The plaintiffs allege that Tesla subsequently began redirecting talent and resources from Tesla to xAI, citing at least 11 employees who transitioned directly from Tesla to the competing company. Furthermore, the lawsuit refers to reports suggesting that Tesla had provided xAI access to its AI-related data.

The plaintiffs also accuse Musk of diverting a significant shipment of AI processors from Nvidia, which was initially intended for Tesla, to his social media company X (formerly Twitter). Musk attributed this diversion to insufficient storage capacity at Tesla's new data center in Texas, as it was still under construction.

The plaintiffs are seeking a court order to compel Musk to relinquish his stake in xAI and transfer it to Tesla. They contend that Musk, as the CEO and largest stockholder of Tesla, has been allowed by the Tesla board to establish and lead a competing AI company, divert resources from Tesla to xAI, and generate substantial AI-related value at a separate entity.

This legal action comes shortly before Tesla's annual meeting, where shareholders are expected to vote on re-ratifying a $56 billion compensation package that was previously invalidated by a judge earlier this year. Musk has emphasized that Tesla's value extends beyond being solely an electric vehicle manufacturer, asserting that it is also an AI-focused company. This positioning has contributed to Tesla's stock being valued as high as that of a tech company, surpassing the combined value of the top four automakers.

Apart from this lawsuit, additional Tesla shareholders have filed a separate suit against Musk, alleging that he made billions of dollars by selling Tesla stock in 2021 and 2022 using insider information.

The outcome of these legal proceedings could have significant implications for Tesla's future trajectory and the authority exercised by its CEO and board of directors.