WILMINGTON, Delaware — Tesla Inc.
The case dates back to 2016, when Mr. Musk was chairman of the two then unprofitable companies. His solution to improve their prospects: combine them into a partnership of about $ 2.1 billion to create a single clean energy company. The plaintiffs, which include several pension funds that owned Tesla stock, called the deal a ploy for itself and bail out a solar power company on the brink of insolvency.
A main question in the case is whether Mr. Musk, who owned around 22% of Tesla at the time, was in control of the transaction. Proving this claim is a challenge as Mr. Musk was a minority shareholder of Tesla and the company’s shareholders approved the acquisition. Lawyers for Mr Musk said SolarCity was worth more than Tesla paid for it and that members of the board of directors of the electric vehicle maker, including Mr Musk’s brother Kimbal Musk, acted as independently.
Other questions before the judge included whether Tesla’s board members were in conflict and whether vital information about the transaction was withheld from shareholders. Mr Musk said on Monday that an independent director handled the negotiation and that Tesla directors even rescinded his proposal that Tesla would provide temporary funding to SolarCity before the deal was reached.
Plaintiffs attorney Randall Baron then questioned Mr Musk, asking him why SolarCity’s performance varied significantly from projections Tesla gave shareholders in 2016. Mr Musk blamed the decline in panel installation solar power and Tesla’s urgently needed market share. to focus on developing its Model 3 car in 2017 and 2018. At the time, Tesla was struggling to bring the car to market.
More recently, Mr Musk said, the coronavirus pandemic has impacted Tesla’s ability to obtain permits for residential solar installations.
If Mr. Musk loses, we could ask him to fix Tesla. That payment could equal the value of the SolarCity transaction if the court president finds the solar company to be worthless when Tesla agreed to buy it.
The trial has been delayed for more than a year due to the pandemic. Mr. Musk is the only board member sued. The rest of Tesla’s board of directors at the time of the merger with SolarCity agreed to settle a combined $ 60 million last year, paid for by insurance. Board members, some of whom had interests in both Tesla and SolarCity, denied the wrongdoing.
Mr. Musk has built a reputation as an unusual and at times combative CEO. He has shown some of it already in the case, making a confrontational witness in a 2019 deposition, repeatedly goading Mr Baron, whom he called “reprehensible” for “attacking sustainable energy.”
“I think SolarCity would have worked great on their own and Tesla would have done really well, but in the long run they’re better together. And that is what the future will show, ”Mr. Musk said in the deposition.
Mr Musk presented the proposed deal to Tesla’s board of directors in early 2016, court records show. The plaintiffs describe SolarCity as having experienced serious financial difficulties prior to the transaction, risking stumbling over a debt commitment and without other fundraising options. Shareholders were not fully informed of the state of the company, they say.
Founded in 2006 by Mr. Musk’s cousins, SolarCity generated net losses of $ 769 million and $ 375 million in 2015 and 2014, respectively.
Lawyers for Mr Musk said SolarCity was creditworthy and could have looked for other fundraising options.
When Mr Musk testifies, he will likely be asked about his degree of involvement in the agreement with SolarCity, said Lawrence Hamermesh, executive director of the Institute for Law and Economics at the Carey Law School at the University of Pennsylvania. “One of the things the plaintiffs will want to show is whether he has had control over the negotiations, development and timing of the deal,” Hamermesh said ahead of the trial.
This information will help the court decide whether Tesla’s chief executive oversaw the company’s review of the merger, as will the conflict of interest testimony of some directors and whether they made their decisions independently.
If Vice Chancellor Joseph Slights III, the presiding judge, finds that Mr Musk has not checked the deal, the case is likely over for the plaintiffs, Mr Hamermesh said. Delaware case law generally relies on the business judgment of independent and duly motivated directors. On the other hand, if the evidence points to a check, the court would assess whether the transaction process and the price were fair and, if not, whether Mr Musk should be ordered to return the money to Tesla, said Mr. Hamermesh.
“The theory would be that Tesla was damaged and Musk is the responsible party,” he said. “He should make Tesla a whole. “
For Mr. Musk, now one of the richest people on the planet, the prospect of a loss would likely be more significant than any court-ordered financial judgment, said Seth Goldstein, analyst for Morningstar Research. Services LLC.
“You might see the board become very diligent about acquisitions that are not in Tesla’s current and existing industries,” Goldstein said.
Mr. Musk is no stranger to court appearances. In 2019 he was called to the stand in a case in which a British cave explorer accused him of libel. The jury found him not guilty.
The previous year, the Securities and Exchange Commission sued Musk and Tesla for misleading investors through its tweets. Mr. Musk and Tesla settled the lawsuit by paying $ 20 million each, and Mr. Musk agreed to have some of his tweets reviewed by Tesla’s attorneys before posting them.
Write to Dave Michaels at [email protected] and Rebecca Elliott at [email protected]
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