Shareholder Decries |Tesla-SolarCity Merger

     (CN) — An institutional shareholder claims Tesla Motors is bailing out SolarCity by grossly overpaying for the troubled energy company because the two companies are intertwined financially and by family.
     Tesla CEO Elon Musk is also chairman of the board for SolarCity Inc., while his two cousins, Lyndon and Peter Rive, run SolarCity, according to a lawsuit filed Thursday in Delaware Chancery Court by City of Riviera Beach Police Pension Fund.
     The conflict of interest does not stop there, the complaint states, as six of seven Tesla board members are either beholden to Musk or directly own SolarCity shares themselves, about $560 million worth.
     Musk’s brother, Kimbal Musk, also serves on the Tesla board and is a director of SpaceX, another Musk company that holds approximately $165 million in SolarCity bonds. Those bonds “will be worthless if SolarCity collapses,” according to the shareholder complaint.
     The lawsuit alleges that, with “SolarCity in jeopardy, Elon Musk devised a plan to use another of his companies, Tesla, to bail it out.”
     Although Musk and Antonio Gracias, who serves on both the Tesla and SolarCity boards, have formally recused themselves from voting on the SolarCity deal, the proposed merger is all but sealed by the financial and familial entanglements, according to the lawsuit.
     “Elon Musk dominates the Tesla board through his 18.4% stock ownership and his positions as the CEO and chairman of the board, and because a majority of the Tesla board is intimately involved with other Musk companies,” the complaint states.
     According to the City of Riviera Beach Police Pension Fund, Elon Musk is not only the chairman of the coard for SolarCity, but he is the single largest shareholder, owning over 22.1 percent of the company, currently worth nearly $500 million.
     Tesla’s original proposal for SolarCity was $2.8 billion, “but when SolarCity’s debt is taken into account, the real purchase price of SolarCity for Tesla shareholders is well above $5 billion,” the pension fund alleges.
     In the stock-for-stock merger, the original proposal allegedly represents a value of SolarCity’s stock that is 21 to 30 percent higher than the company’s June 20 closing price.
     “The market immediately saw that the deal was a tremendous windfall for SolarCity and a negative for Tesla. Thus, SolarCity shares rose more than 15 percent after hours on the original proposal – while Tesla shares dropped as much as 10 percent, trading below $200 per share for the first time since March 2016,” the complaint states.
     The plaintiff pension fund says that “Tesla is acquiring a gravely troubled company.”
     “Indeed, SolarCity has been suffering a downward trajectory for some time with few signs of recovery,” the lawsuit states.
     If SolarCity goes bankrupt, according to the complaint, not only would Musk lose his approximate $500 million SolarCity investment, but he and Gracias could “suffer significant reputational harms from being associated with a failed company that could affect the rest of their careers as corporate directors.”
     Financial analysts have bemoaned the deal since its announcement, which has now progressed to the final proposal stage and is set for a shareholder vote in mid-September.
     Thursday’s complaint quotes several top financial analysts challenging the supposed “synergies” created by Tesla buying a solar energy company, including UBS, which wrote that “‘we continue to remain cautious on the deal given the lack of compelling synergies …and the fact this is an unneeded distraction for [Tesla] management which already faces challenges with the Model 3 launch and significant production targets.'”
     Brian Solomon, writing for Forbes in a June 22 article, said that the purported synergies “were nothing more than Elon Musk dressing up a SolarCity bailout as a benefit to Tesla.”
     “Tesla is at a critical phase in its corporate development with its new Model 3 car on the horizon,” and the SolarCity deal is a “distraction from Tesla’s real business,” the 58-page lawsuit states.
     According to Tesla’s website, the Model 3 is a premium electric-powered sedan that “achieves 215 miles of range per charge while starting at only $35,000 before incentives.” Deliveries are set for late 2017.
     Tesla currently sells two premium electric cars, the Model S and Model X.
     The City of Riviera Beach Police Pension Fund seeks to hold Tesla management accountable “for the waste of corporate assets suffered by Tesla in negotiating the original and final proposals, and for the irreparable damage to Tesla if the final proposal is consummated.”
     The pension fund is represented by Carmella Keener of Rosenthal Monhait in Wilmington, Del., and by Seth Ottensoser of Benstein Liebhard in New York City.

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