Catching up on the Musk-Tesla-SolarCity acquisition case

In 2016, Tesla acquired solar panel installer and financier SolarCity for $2.6 billion and the assumption of $3 billion in debt.

Investors were skeptical of the deal from the beginning, and Tesla stock plummeted by more than 10% upon the June announcement. Going into 2016, SolarCity stock was already plunging and the company was going through layoffs.

Shaky start

One of the biggest issues with the deal was that Elon Musk was the largest shareholder of both Tesla and SolarCity at the time of the acquisition. Additionally, Musk and his cousins, who served as CEO and CTO at SolarCity, founded the solar installer in 2006, while Musk served as the company’s chairman. Another five of Tesla’s directors were direct or indirect owners of SolarCity stock.

Making matters worse, it was alleged that Musk knew of SolarCity’s financial troubles at the time of the deal – so it appeared to be more of a bailout than an acquisition.

Some argued that Musk was able to get the Tesla board to approve the purchase of SolarCity by misrepresenting the financial health of the company, saying it would be cash-flow positive within six months of the purchase. Many believe that the massive deal was not properly scrutinized and SolarCity’s financial peril was hidden by a rushed analysis of the company’s finances by an outside firm.

Those against Musk and this purchase of SolarCity also believed that the outspoken entrepreneur sought to convince Tesla shareholders that the deal was a good one by promoting the unveiling of a SolarCity product that didn’t yet exist: glass solar roof tiles.

After the $2.6 billion deal went through for Tesla to buy SolarCity, Tesla shareholders filed a lawsuit against Tesla/SolarCity/Musk and sought $2.6 billion in damages – or the cost of the SolarCity acquisition.

The shareholders argued Musk “breached his fiduciary duties, squandered Tesla’s assets and unjustly enriched himself by pushing to buy the money-losing solar company in which he was the biggest investor,” according to Reuters.

As pv magazine reported back in March 2018, a Delaware judge rejected a request from Musk and Tesla to dismiss the lawsuit. The dismissal was based on the argument that Musk wasn’t the controlling stockholder, since he didn’t own a majority of the stock in either company. Since that point, a couple of things have happened in the Musk/Tesla/SolarCity struggle.

New developments

In January of this yeaar, every single one of Tesla’s directors, with the exception of Elon Musk, agreed to a $60 million settlement to resolve shareholder disputes regarding the Tesla acquisition of SolarCity in 2016. That settlement covered the following five current directors at Tesla: Robyn Denholm, Ira Ehrenpreis, Antonio Gracias, Stephen Jurveston, and Kimbal Musk. One additional director, Brad Buss, is no longer part of Tesla’s board, but was at the time of the deal and was also part of the settlement.

That $60 million bill will be footed by insurers covering Tesla’s directors and executives as part of a derivative settlement agreement. Neither Tesla nor the directors gave comment on the partial settlement but court filings had Tesla officials defending the SolarCity acquisition by saying “both the process and the price of this acquisition were inherently fair to Tesla’s shareholders.”

The glaring omission from the January settlement agreement was Musk, who has every intention of proceeding to trial and defending himself and his company against the claims made against him and the $2.6 billion SolarCity purchase.

This brings us to the latest update in this multi-pronged legal battle. Court proceedings in the Delaware Court of Chancery related to Tesla’s purchase were all set to begin on March 16.  But, as the coronavirus pandemic has impacted everything from the finances of Americans to the future of college, the court proceedings for the Tesla-Musk-SolarCity battle were postponed on March 13.

The trial has been postponed indefinitely and a new date has not yet been set. The case-presiding judge Joseph Slights offered the following statement:

“Please know that this was not an easy decision to reach, given the time and resources I know you have dedicated to prepare for this trial, and the last minute nature of this decision. We are expecting that more than 100 people may well gather in connection with this trial. And while I certainly would not characterize this trial, or any other trial, as ‘non-essential,’ it is not expedited and no irreparable harm will flow from an adjournment.”

Musk was set to be the first witness during the trial to defend his decisions as Tesla’s CEO.

When the trial eventually gets underway, how the outspoken and brash Musk handles his testimony and behavior will likely be a key determinant of the outcome.

By Mike Brown

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As Director of Communications at LendEDU, Mike Brown uses data, usually from surveys and publicly available resources, to identify emerging personal finance trends and tell unique stories. His work, which has been featured in outlets like The Wall Street Journal and The Washington Post, provides consumers with a personal finance measuring stick and can help them make informed finance decisions.