Elon Musk wins shareholder lawsuit over Tesla-SolarCity deal
Tesla Inc. CEO Elon Musk arrives in court during the SolarCity trial in Wilmington, Delaware, U.S., Tuesday, July 13, 2021.
Al-Draco | Bloomberg | Getty Images
A Delaware court on Wednesday ruled in favor of defendant Elon Musk in a shareholder lawsuit over Tesla’s $2.6 billion acquisition of SolarCity.
Tesla shareholders alleged that the company’s acquisition of the solar installer amounted to a bailout, pushed by Musk who served on the boards of both companies at the time. Shareholders also alleged that Musk controlled Tesla’s board of directors, even though he appeared to recuse himself from some negotiations regarding SolarCity.
Had he lost, Musk would have had to pay over $2 billion. The case could be appealed to the Delaware Supreme Court.
Vice Chancellor Joseph R. Slights, who decided the case shortly before retiring, sided with Musk, writing, “Elon was more involved in the process than a conflicted fiduciary is. should be. And the conflicts between the other members of Tesla’s board of directors have not been completely neutralized. said, Tesla’s board of directors has meaningfully vetted the acquisition, and Elon has not stood in its way.”
SolarCity was founded in 2006 by Musk’s cousins Peter and Lyndon Rive. He was backed by Musk, who served as chairman of the board of Tesla and SolarCity. Musk’s aerospace company, SpaceX, had also bought tens of millions of dollars worth of solar bonds from SolarCity.
Musk denied pressuring Tesla’s board of directors to agree to the transaction. He also said the merger allows Tesla to combine its battery business with Solar City’s solar photovoltaic facilities.
During the lawsuit, Musk said the SolarCity deal was part of his “master plan,” which he drafted in 2006 and aimed to accelerate the advent of sustainable energy.
The case was a derivative shareholder action, a lawsuit brought by investors on behalf of a company, rather than individuals or funds. If the plaintiffs had won, the proceeds would have gone to Tesla and not the stakeholders who filed the lawsuit.
Investors were skeptical of the deal when Tesla offered it in June 2016, with the stock plunging more than 10% on the announcement.
According to emails that were part of the trial evidence, Musk wrote an email to SolarCity CFO Brad Buss on September 18, 2016, saying that in order to get Tesla investors on board the deal, SolarCity needed to master its liquidity problem and sign a letter of intent for a contract with Panasonic.
“Three things need to happen to change investor sentiment: SolarCity resolves its liquidity crisis, a letter of intent with Panasonic to address solar cell production risk, and a joint product demonstration,” Musk wrote. “Should be able to do all of this before the shareholder vote.”
During his testimony, contradicting those emails, Musk repeatedly argued that Solar City could have raised capital even if it hadn’t been acquired by Tesla.
Tesla’s acquisition of SolarCity was completed in November 2016.
The plaintiffs argued that Musk was only able to get approval for the SolarCity acquisition by misrepresenting SolarCity’s financial well-being, saying cash flow should be positive within six months. They also alleged that the due diligence of outside companies, including Evercore, was rushed to hide SolarCity’s problems.
Shareholders also argued in the lawsuit that Musk had unveiled a product that was not yet working – glass solar tiles – to convince investors that there was genuine intellectual property and a product close to commercial viability in the market. SolarCity.
Slights also acknowledged in its opinion: “At the time of the trial, Tesla continued to rely on other solar companies to manufacture, produce, install and sell portions of its solar products. In other words, the synergistic integration Tesla hoped for is still a work in progress. Despite these challenges, Tesla’s value has increased significantly following the acquisition.