Tesla, Elon Musk Cannot Dismiss Shareholder Claims Over SolarCity Acquisition

(CN) – The Delaware Chancery Court refused to dismiss shareholder claims stemming from Tesla’s controversial acquisition of SolarCity, finding it conceivable that CEO Elon Musk, a controlling stockholder of both companies, unduly influenced the board’s decision.

A 2016 shareholder lawsuit accused Tesla Motors of bailing out SolarCity by grossly overpaying for the troubled energy company because the two companies are intertwined financially and through family ties. Tesla CEO Elon Musk is also chairman of the board for SolarCity Inc., while his two cousins, Lyndon and Peter Rive, run SolarCity.

The conflict of interest does not stop there, the City of Riviera Beach Police Pension Fund claims, as six of seven Tesla board members are either beholden to Musk or directly own SolarCity shares themselves, about $560 million worth.

The pension fund’s complaint has since been consolidated with other shareholder actions against Tesla, Musk and its board of directors.

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.”

While not required to do so, Tesla submitted the $2.6 billion acquisition to Tesla stockholders for approval, and a majority approved the deal.

Vice Chancellor Joseph Slights denied Tesla’s motion to dismiss the shareholder suits.

“In a close call, I conclude it is reasonably conceivable that Musk, as a controlling stockholder, controlled the Tesla Board in connection with the acquisition,” Slights said.

Musk holds 22 percent of the voting power in Tesla, but as a minority blockholder exercises control over the business affairs of Tesla, the judge found, especially given his public position as a visionary CEO and his strong connections with members of the board.

The 58-page opinion notes that Musk has publicly called Tesla “his company” and said Tesla, SolarCity and SpaceX form a “pyramid” with him sitting at the top.

“The combination of well-pled facts relating to Musk’s voting influence, his domination of the Board during the process leading up to the acquisition against the backdrop of his extraordinary influence within the Company generally, the Board level conflicts that diminished the Board’s resistance to Musk’s influence, and the Company’s and Musk’s own acknowledgements of his outsized influence, all told, satisfy Plaintiffs’ burden to plead that Musk’s status as a Tesla controlling stockholder is reasonably conceivable,” Slights concluded.

 

 

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