Tesla Shareholders Call SolarCity Deal Unfair

(CN) – Two Tesla shareholders claim Elon Musk, founder of the luxury electric car company, and other directors lied about finances to secure enough votes to acquire a solar-energy venture founded by Musk’s cousins.

In a lawsuit filed last week in Delaware federal court, Tesla shareholders Francis Freeman Jr. and Marnie Walski McMahon accuse Musk and Tesla directors of issuing false and misleading financial statements that caused Tesla to overpay for SolarCity.

The current and formers directors named in the complaint are Brad W. Buss, Ira Ehrenpreis, Antonio J. Gracias, Stephen T. Jurvetson, Robyn M. Denholm and Kimbal Musk.

Musk was chairman of SolarCity prior to its acquisition by Tesla. He is also a cousin of SolarCity’s founders, Lyndon and Peter Rive.

SolarCity, a solar energy company based in San Mateo, Calif., was “spiraling into bankruptcy” before its deal with Tesla, according to the complaint.

“Prior to its recent acquisition by Tesla, SolarCity had consistently failed to turn a profit, had mounting debt, and was burning through cash at an unsustainable rate. During its ten-year history, SolarCity had accumulated over $3 billion in debt, nearly $1.5 billion of which was scheduled to become due before the end of 2017,” the complaint states. “Despite SolarCity’s bleak future, on June 21, 2016, Tesla announced an offer to acquire SolarCity at a significant premium.”

Freeman and McMahon claim that Tesla’s acquisition of SolarCity benefitted Musk and the directors to the detriment of Tesla and its shareholders by salvaging their investments in SolarCity.

Freeman, who has been a Tesla shareholder since 2015, and McMahon, who has been a shareholder since 2013, sued derivatively on behalf of the Palo Alto, Calif.-based Tesla and shareholders other than Musk and the directors.

They claim Musk and the other defendants filed a joint proxy statement with the SEC that omitted or misrepresented information about the acquisition and the actual value of both Tesla and SolarCity.

“To make SolarCity look more attractive, Tesla’s officers and directors manipulated the valuation analyses of both Tesla and SolarCity, failed to disclose numerous significant facts regarding SolarCity’s operations and the full extent of SolarCity’s cash drain and the effect it would have on Tesla after the acquisition, and many other material facts concerning the acquisition,” the lawsuit states.

The Tesla directors also did not form an independent committee to analyze the deal, Freeman and McMahon claim.

Musk allegedly received over half a billion dollars of Tesla stock in exchange for his SolarCity shares.

“Defendants’ violations of law caused significant damages to Tesla by causing Tesla to significantly overpay for SolarCity and acquire a company that was not a strategic fit for Tesla and which had significant debt,” the lawsuit states.

Freeman and McMahon accuse Musk and the other defendants of breaches of fiduciary duties, insider trading and misappropriation of information, unjust enrichment, and corporate waste, going back to June 2016.

The two shareholders are represented by Blake Bennett with Cooch and Taylor in Wilmington, Del., and by the law firm Bottini & Bottini in La Jolla, Calif.

Tesla did not respond to a request for comment.

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