Vested Interests? Musk Sued Over Tesla’s Acquisition of SolarCity​

By Adelina Budulan​

The Story

Tesla CEO Elon Musk recently took the stand before the Delaware Court of Chancery, to defend Tesla’s acquisition of SolarCity (In re Tesla Motors, Inc. Stockholder Litigation). The lawsuit was brought by a group of Tesla shareholders, who allege that the $2.6 billion deal was tainted by a conflict of interest, which ultimately damaged their investments in the famed carmaker (The Economist). At the time of the deal, Musk was the chairman of, and the largest investor in SolarCity – a heavily indebted company founded by his cousins (Financial Times). The shareholders claim that Musk took advantage of his huge influence at Tesla to instigate the deal, effectively using one of his companies to bail out another one (The Economist).

The self-proclaimed “technoking of Tesla” denies the allegations. He maintains that the acquisition was part of a long-standing plan to create a vertically integrated* sustainable energy company (Wall Street Journal). Musk also argues that it would have been impossible for him to sway Tesla’s large institutional investors in his favour, given that he only owned 22% of the company’s shares (Financial Times). The court must decide whether Musk controlled Tesla or not at the time of the SolarCity deal.

* Vertical integration refers to a situation where a company mergers with or acquires another company within its own supply chain to reduce costs.
Click to expand...

What It Means For Businesses And Law Firms

The lawsuit raises important questions of corporate governance for founder-owners, especially within the tech sector. Musk is a case in point – although he founded the company, he does not actually own a controlling stake in Tesla (a controlling stake is more than 50% of the shares). Still, he is widely known as “the company’s flamboyant ambassador” with his infamous tweets, interviews, and media appearances (Financial Times). It remains to be seen whether such a deep-seated association with a company can be equated with ‘control’ in the eyes of the law. If the Delaware court responds affirmatively, founder-owners may be incentivised to reconsider their companies’ corporate governance structures. It has been argued that “[a] lower-key style might even become fashionable among tech entrepreneurs” (The Economist).

Lawyers from Cravath, Swaine and Moore LLP, and Ross Aronstam & Moritz LLP are representing Musk in the lawsuit (In re Tesla Motors, Inc. Stockholder Litigation). The former is an elite firm known for undertaking big-ticket litigation, and the latter is a “well-regarded litigation boutique with a strong track record” in the Delaware Court of Chancery (Chambers and Partners). Should the lawsuit against Musk become a cautionary tale for founder-owners, law firms with designated corporate governance practices may be called upon to advise clients on how to avoid finding themselves in Musk’s shoes.

Image Credit: Milan Csizmadia/Unsplash.com