Tesla Inc. Chief Executive Officer Elon Musk arrives in court during the SolarCity trial in Wilmington, Delaware, Tuesday, July 13, 2021.
Al Drago | 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 claimed the company’s acquisition of the solar installer amounted to a bailout enforced by Musk, who was on both company boards at the time. Shareholders also claimed that Musk controlled Tesla’s board of directors, though he appeared to back down from some SolarCity deal negotiations.
Had he lost, Musk would have had to pay more than $2 billion. The matter could be appealed to the Delaware Supreme Court.
Vice Chancellor Joseph R. Slights, who decided the case shortly before his retirement, sided with Musk, writing, “Elon was more involved in the process than a conflicted trustee should be. And conflicts between other Tesla board members have not been fully neutralized. So saying, the Tesla board of directors made sense of the acquisition, and Elon didn’t stand in the way.”
SolarCity was founded in 2006 by Musk’s cousins Peter and Lyndon Rive. It was backed by Musk, who was CEO at both 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 go through with the deal. He also said the merger allows Tesla to combine its battery business with Solar City’s solar photovoltaic assets.
During the trial, Musk said the SolarCity deal was part of his “master plan” he wrote in 2006 to accelerate the advent of sustainable energy.
The case was a shareholder derivation lawsuit, a lawsuit brought by investors on behalf of a company and not by individuals or funds. If the plaintiffs had won, the proceeds would have gone to Tesla and not to the stakeholders who filed the lawsuit.
Investors were skeptical of the deal when Tesla proposed it in June 2016, with the stock falling more than 10% on the announcement.
According to emails that were part of the evidence at the trial, on September 18, 2016, Musk wrote an email to Brad Buss, SolarCity’s CFO, saying that SolarCity needed to fix the deal in order to Investors to get on board liquidity problem and sign a letter of intent for a contract with Panasonic.
“Three things need to happen for investor sentiment to change: SolarCity resolves its liquidity crisis, an LOI with Panasonic to address solar cell production risk, and a joint product demo,” Musk wrote. “Should be able to do all this before the shareholder vote.”
During his testimony, contradicting those emails, Musk repeatedly argued that Solar City would have been able to raise capital even if it hadn’t been acquired by Tesla.
Tesla’s acquisition of SolarCity was completed in November 2016.
The plaintiffs argued that the only way Musk could approve the SolarCity acquisition was by misrepresenting SolarCity’s financial health, saying it should be cash flow positive within six months. They also claimed that due diligence by outside companies, including Evercore, was rushed to hide SolarCity’s problems.
Shareholders also argued in the lawsuit that Musk introduced a product that wasn’t working yet — glass solar roof tiles — to convince investors that there was real intellectual property in SolarCity and a product that was close to commercial viability.
Slights also acknowledged in his opinion, “Tesla has continued to rely on other solar companies to manufacture, manufacture, install and sell parts of its solar products, as an experiment.” Despite these challenges, Tesla’s value has increased massively since the acquisition.”