By Emma Nitzsche
Tesla CEO Elon Musk defended his company’s $2.6 billion purchase of SolarCity in court on Monday. Randall Baron, a long-running shareholder lawyer, asserts that Musk caused other Tesla directors to breach their fiduciary duties by agreeing to buy the company.
The lawsuit alleges the celebrity CEO forced Tesla’s board of directors into draining the company’s assets with the $42.6 billion all-stock deal for SolarCity. According to Baron’s presentation, Musk is accused of dominating the board’s discussions, pushing Tesla to pay more for SolarCity, and misleading shareholders about the company’s deteriorating financial health. The two-week trial in Wilmington, Delaware, will include testimony from Tesla board members and others involved in the SolarCity deal.
The case began in 2016 when Musk was the chairman of both Tesla and SolarCity. At the time, the two companies were unprofitable. Musk’s solution was to combine them both in a $2.1 billion tie-up to establish a single business centered around clean energy. However, critics of the decision argue that the deal was a scheme to benefit Musk himself and bail out SolarCity on the verge of insolvency. The question is whether Musk, who owned 22 percent of Tesla at the time of the merger, solely dominated the transaction.
In five hours of testimony, Musk asserted that an independent director handled the negotiation and that Tesla directors even overruled his SolarCity financial plan before the deal went through. He said the merger was aimed at combining Tesla’s battery business with SolarCity’s sustainable energy generation.
“I don’t think SolarCity was financially troubled,” Musk said. “In order to have a compelling product, you really need to have a tightly integrated solar and battery solution. And we could not create a well-integrated product if SolarCity was a separate company.”
Musk’s lawyers argued that SolarCity was worth more than Tesla paid for it, and the board members acted independently. In his defense, Musk told the court that the Tesla board handled the SolarCity deal and that he was not on the board committee that negotiated the terms. Additionally, Musk’s defense noted that Tesla’s 2006 plans included SolarCity. Therefore, ten years later, when the SolarCity financial transaction occurred, it could not have been an emergency bailout but rather a continuation of an earlier master plan.
Baron responded by pointing out that the 2006 plan only mentioned a potential marketing arrangement, not a full-fledged merger or acquisition of Tesla and SolarCity. Baron tried to establish that Musk ran Tesla without interference during cross-examination and, therefore, is responsible for any financial failures. Musk conceded none of Baron’s allegations.
Musk told the court he has a troubled relationship with Baron because the lawyer had once worked at a law firm whose partners became engulfed in an ethics scandal that resulted in prison time for their actions. In his typical style, Musk called Baron a “bad human being” during his testimony.
If Musk loses the case, he might have to pay the value of the transaction out of pocket. Currently, Delaware case law defers the business’ judgment of independent and properly motivated directors. Proving that Musk forced his directors into the deal will be a challenge because Musk was a minority shareholder of Tesla, and the shareholders approved the acquisition. However, if the court does conclude that Musk asserted complete control, he would be forced to pay the money back to Tesla.
