Tesla CEO Elon Musk is on trial Monday to defend the $ 2.6 billion acquisition of SolarCity

Elon Musk speaks at SolarCity’s Inside Energy Summit in New York.

Rashid Umar Abbasi | Reuters

Tesla CEO Elon Musk is due in court on Monday, and much is at stake – if he loses, he may have to pay more than $ 2 billion out of his sizable personal wealth.

Musk will be the first to witness a lawsuit defending his role in Tesla’s $ 2.6 billion acquisition of SolarCity. Shareholders have sued Musk and members of the Tesla board of directors, claiming the 2016 deal was a bailout for SolarCity.

They also claim that it has unfairly enriched the Musk family, which was among the largest shareholders, and that Musk and others failed to disclose all relevant details and breached their fiduciary duties. Musk has insisted that he be “completely withdrawn” from negotiating the deal.

Last year, the board members named in the lawsuit reached an agreement with Tesla shareholders over $ 60 million without admitting any wrongdoing. Musk, the second richest person in the world, was the only defendant to take the fight to court.

There is no convincing jury on this matter. His fate is determined by the Delaware Chancery Court Judge, Vice Chancellor Joseph Slights III.

Days in court

Musk has had its share of legal issues beyond SolarCity.

For example, the SEC sued him for fraud in 2018, with Musk and Tesla coming to an agreement and paying $ 20 million each. The charges came after Musk tweeted about taking Tesla private for $ 420 a share, a move that drove up Tesla’s share price. As one of the terms of the settlement, Musk had to temporarily resign from his position as chairman of Tesla.

In another case, he emerged victorious after cave explorer Vernon Unsworth said Musk defamed him when Tesla CEO called him the “pedo guy” on Twitter. His lawyers argued that “pedo guy” was heated rhetoric and not intended as a statement of fact.

Tesla and Musk are facing many other lawsuits, including one over Musk’s unprecedented compensation package for CEOs and a series of federal investigations into the company’s own financial records.

In the SolarCity case, the judge will have to determine whether Musk was a conflicted majority shareholder who met the “total fairness” standard in handling the SolarCity takeover.

In other words, was Musk acting in the best interests of Tesla shareholders? And has Musk told shareholders everything they should know?

This type of lawsuit, known as a shareholder derivatives lawsuit, is brought by investors on behalf of a company rather than by individuals or funds themselves. If the plaintiffs win, the proceeds can go to Tesla, not the parties who filed the lawsuit.

Company connections

According to a file filed with the firm’s court, Musk owned 22.1% of Tesla’s common stock and 21.9% of SolarCity at the time of the transaction. SolarCity was a troubled asset that shed money in the capital-intensive market for solar energy use in residential buildings.

Vehicles are parked in front of the Tesla Inc. solar module factory in Buffalo, New York, USA on Wednesday, December 26, 2018.

Andrew Harrer | Bloomberg | Getty Images

Musk’s lawyers are expected to argue that the SolarCity deal did no harm to shareholders at all and that they voted overwhelmingly to approve the takeover. After all, Tesla shares fell from a closing price of $ 43.92 on June 21, 2016 – when Tesla announced it would be bidding for SolarCity – to a closing price of $ 656.95 on July 9, 2021 (Friday) a five-to-one share price soared last year.

The company is now also part of the S&P 500 and reports profits on a regular basis.

SolarCity was founded and run by Musk’s cousins ​​Lyndon and Peter Rive, but supported by Musk, who served as chairman of the board. He has now also been Tesla’s CEO and chairman of the company.

It wasn’t his only potential conflict. SpaceX, Musk’s aerospace company, invested $ 255 million in SolarCity bonds from March 2015 to March 2016. Four members of Tesla’s board of directors directly or indirectly owned SolarCity shares at the time of the acquisition. And some Tesla board members also held shares in SpaceX and sat on the board.

How he opened it

For Musk and many of his supporters, the acquisition of SolarCity in 2016 was a natural combination of his companies and an opportunity for Tesla to pursue its environmental mission with a wider range of products. Homeowners could finance and install solar roof panels from the same company that provided their electric vehicle, home charging station, and a backup battery for energy storage.

Tesla had already started an energy division in late 2015 with a home battery called Powerwall and other large batteries for businesses and utilities.

By June 2016, Musk said Tesla would bid $ 2.8 billion to buy SolarCity. “I don’t think this means additional financial risk for Tesla,” he said at the time, calling a merger “blindly obvious”. However, Tesla investors were skeptical as the stock price plummeted more than 10% after the announcement.

In July 2016, Musk presented his vision of Tesla as an automotive innovator and renewable energy titan in his famous “Masterplan Part Deux”.

As CNBC previously reported, unsealed court documents, including emails between Musk and SolarCity executives, later revealed that he knew SolarCity was facing a “liquidity crisis” even as Tesla continued its acquisition.

“Three things have to happen to change investor sentiment: SolarCity solves its liquidity crisis, an LOI with Panasonic to address the production risk of solar cells, and a joint product demo,” Musk wrote to SolarCity executives in September of the same year. “Should be able to do all of this before the shareholders’ vote.”

In October 2018, Tesla and SolarCity jointly announced a combined solar roof and battery pack. Musk showed off what looked like a solar panel on the Hollywood set of Desperate Housewives, miniaturized and slim enough to be mistaken for high-end roofing materials.

After the deal

The hype event helped him turn investor sentiment. In November, the transaction was approved in a vote of 85% of the shareholders. But after the closure, Tesla’s SolarCity business would stall.

Over the years, the company repeatedly delayed the mass production of its solar glass roof tiles. The ones that Musk presented as a production-ready prototype in 2016 were actually a non-functional design prototype.

Walmart sued Tesla after fires broke out on panels the company installed on its facilities. A former Tesla Energy employee filed a whistleblower complaint with federal agencies about the fire hazard from Tesla’s solar roofs. And Panasonic left the Buffalo plant that Tesla had taken over when it became clear that Tesla would not manufacture its solar roof tiles there.

While Tesla’s solar roof tiles are yet to take off, the company’s energy storage products are by the wayside as demand for lower-cost electricity from renewable sources rises globally.

In the trial from Monday in Wilmington, Delaware, Musk will be represented by lawyers from Ross Aronstam & Moritz (David E. Ross, Garrett B. Moritz and Benjamin Z. Grossberg). The process is expected to run through July 23, 2021, unless the companies seek an agreement beforehand.

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