Elon Musk (Photo by Diego Donamaria/Getty Images for SXSW)
In 2016, electric automaker Tesla acquired solar energy installer SolarCity for $2.6 billion. Now, a shareholder derivative suit turns on the question of whether that was a fair bargain for Tesla, or a sweetheart deal meant to pad the pockets of a few select insiders.
If you need a little refresher, a shareholder derivative action is a lawsuit brought on behalf of a corporation. Derivative suits often target corporate insiders, like directors or officers, who other company leaders may be reluctant to sue. Typically, to bring a derivative suit the corporation itself must have refused to pursue a colorable legal cause of action. Then, if the shareholder who brought the derivative action succeeds, the corporation gets the proceeds.
Originally there were seven Tesla shareholder lawsuits over the SolarCity acquisition. These suits were eventually consolidated into one case alleging that Tesla directors breached fiduciary duties by acceding to CEO Elon Musk’s demands to purchase SolarCity.
At the time of the deal, Musk owned about 22 percent of both Tesla and SolarCity, the latter of which was founded by his cousins. Late last summer, a $60 million settlement, paid by insurance, resolved the claims against the directors on Tesla’s board without any admission of fault.
However, there was one exception to the settlement: Elon Musk. Musk refused to settle, leaving him as the sole remaining defendant, and leading to the trial that kicked off this week with Musk himself taking the stand.
The first day of questioning elicited several entertaining exchanges of the type you’d expect in a trial involving Elon Musk.
When asked by shareholder attorney Randall Baron whether the Tesla board vetted his self-granted title change earlier this year to “Technoking,” Musk said, “It generated a whole bunch of free press and Tesla doesn’t advertise and it’s helpful to general sales.”
Musk called the Technoking title a joke, and added, “I think I’m funny.”
For what it’s worth, so do I.
Musk also called Baron “a bad human being” from the stand.
Now, I don’t know the guy, but just judging by the fact that Baron is a plaintiffs’ lawyer, Musk probably has a better than 50-50 chance of being right on that one.
As many sparks flew in Musk’s second day of testimony as in the first.
“Your questions are so deceptive,” said Musk in another exchange with Baron.
At one point, a member of Baron’s legal team vomited in the courtroom, forcing a brief recess. Substantively, Musk admitted that he recommended $28.50 per share as an acquisition price for SolarCity, but pointed out that the board ultimately decided to offer the lower price range of $26.50 to $28.50 a share.
“They don’t listen to me, obviously,” quipped Musk.
Musk also argued that the cash flow from SolarCity’s previous solar installations was itself sufficient justification for the purchase, calling the deal “a no-brainer.” Ultimately, Musk did recuse himself from some of the negotiations concerning the SolarCity acquisition, and he did not participate in the SolarCity vote.
After two days of intense questioning, Elon Musk’s testimony is over, but other witnesses will follow. When the trial ends, Vice Chancellor Joseph Slights of the Delaware Court of Chancery will have several months to make a decision.
Even if Musk loses and has to pay personally for the entire SolarCity deal, $2.6 billion won’t really hurt the man who is currently the world’s third-richest individual (he has an estimated net worth of approximately $163 billion). Although it would certainly seem to be to Elon Musk’s chagrin to know that even one penny of his fortune was going to line the pockets of Randall Baron in a contingency fee eventuality.
As to this Tesla shareholder’s opinion, well, I acquired my shares right around the time of the SolarCity deal, and they’re up something in the neighborhood of 1,300 percent since then. Musk and the Tesla board must be doing something right.
Jonathan Wolf is a civil litigator and author of Your Debt-Free JD (affiliate link). He has taught legal writing, written for a wide variety of publications, and made it both his business and his pleasure to be financially and scientifically literate. Any views he expresses are probably pure gold, but are nonetheless solely his own and should not be attributed to any organization with which he is affiliated. He wouldn’t want to share the credit anyway. He can be reached at jon_wolf@hotmail.com.