Musk testifies on Tesla’s $2.6 billion acquisition of SolarCity

For more than ten years, Elon Musk has been the incarnation of Tesla. He has made himself the company’s gorgeous image ambassador for the electric car revolution. On Monday, the performer’s chief executive will try to prove to a Delaware judge that he cannot control the company regardless of his reputation.

In the trial of Tesla’s acquisition of SolarCity, Musk was the first and most anticipated witness. His solar start-up company was once all the rage, when Tesla sold $2.6 billion in Tesla shares in 2016. Faltering before the sudden acquisition.

Dissident Tesla shareholders claimed that Musk planned the acquisition not to create a comprehensive clean energy giant as he claimed, but to use the automaker’s balance sheet to rescue his grand project.

Although Musk’s economic and voting rights in the company are only 22%, the shareholders who are sued claim that Musk’s personal absolute power enables him to dominate Tesla’s board of directors, and even independent directors are grateful to him.

Tesla denied this argument and added that Tesla’s non-affiliated shareholders voted overwhelmingly to approve the acquisition of SolarCity. If the court finds that Musk is the controlling shareholder, Musk will face a higher legal threshold to prove that the transaction is reasonable for all shareholders.

This decision may have a significant impact, as company law is working hard to deal with the influence of the Almighty Founder and CEO, especially in the technology industry.

Ann Lipton, professor of law at Tulane University, said: “This case can not only provide more guidance to the court, it can also provide more guidance to transaction planners to understand whether the court is determining whether someone is a controller. Factors that may be considered at the time.” In New Orleans.

During home installation in New Jersey, SolarCity employees unloaded solar panels from trucks

SolarCity was founded in 2006 by Elon Musk and his two cousins ​​© Michael Nagle/Bloomberg

SolarCity was founded in 2006 by Musk and his cousins ​​Peter and Lyndon Rive. The company installed rooftop solar panels for customers, and then customers will pay SolarCity for the electricity generated. By 2016, SolarCity was listed, but the capital intensive nature of its business model allowed its total debt to exceed $3 billion, and there was a risk of breaching the minimum liquidity contract.

On June 21, 2016, the day SolarCity announced the merger, Tesla’s stock price fell by one-tenth and the market value evaporated by $3 billion, a figure higher than the purchase price.

Goldman Sachs stock research analysts wrote at the time that the energy company was the “worst-cased” company among solar startups.

Nevertheless, in late 2016, nearly 90% of unaffiliated Tesla shareholders voted to approve the transaction, supporting Musk’s vision for the combined company. The completion of the acquisition does not require a shareholder vote, but Tesla hopes that by voting it will protect it from chaotic legal challenges.

Opponents of the deal filed a lawsuit anyway.

Storage deployment (GWh) line chart shows that Telsa's consumer solar business has begun to grow

In early 2018, Joseph Slaters, the deputy president of the Delaware Court of Justice, dismissed the board’s motion to dismiss the shareholder challenge, writing “It is reasonable to imagine that Musk, as the controlling shareholder, controls the Tesla board of directors related to the acquisition.” , And “actually did not take any measures to separate Musk from the board’s consideration of the acquisition.”

In court documents, Musk’s lawyer wrote: “The trial evidence will show that Musk does not control the Tesla board of directors related to the acquisition. Musk was evaded in the board vote related to the acquisition. Did not exercise actual control. In fact, Tesla’s board of directors exercised power independent of Musk.”

Delaware courts generally do not consider that only about one-fifth of the shares are eligible for control. But the foresight of the founders and CEOs of Silicon Valley startups may prove to be a unique corporate governance dilemma.

Law professor Lipton said: “Shareholder lawyers have always been creative in putting pressure on the controlling shareholder principle, and judges in the Office of the Chancellor increasingly want to weigh the pros and cons on this issue.

In addition to the controller argument, the shareholders suing Tesla also raised allegations that may impose higher legal standards on Musk. They claim that Tesla directors—many of those connected with Musk through SolarCity or his SpaceX business—have conflicts. They also claimed that the terrible condition of SolarCity was not correctly disclosed in the US Securities and Exchange Commission documents.

Although their lawsuit argues that SolarCity is insolvent and therefore worthless, the transaction value was approximately US$2 billion before Tesla disclosed its 2016 offer.

Stock price ($) line chart showing the performance of Telsa stock

Tesla’s stock price is more than 15 times higher than its June 2016 level. The company’s solar deployment (measured in megawatts) has increased by nearly one-fifth in 2020 compared to the previous year.

In January 2020, Tesla directors except Musk settled their claims with 60 million U.S. dollars, funded by the company’s corporate insurance. Musk remains the only outstanding defendant.

If his testimony in this case in June 2019 shows any signs, his testimony may prove to be colorful.

Musk has repeatedly criticized the shareholder lawyer Randall Barron who questioned him, calling him a “shameful man without a conscience” and an “economic failure”, making Musk “sorrowful for the future.”

Musk also provided a summary of his legal arguments in his testimony. He said that the Tesla/SolarCity transaction was a “stock-for-stock transaction” and the lawsuit was “an attempt to get expert investors to make a second guess on the ratio of the merger.” “enter [legal] As a precedent, this will be a disaster for the United States. “

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