Newly available court documents revealed why several major Tesla shareholders raised their collective voice against the company’s acquisition of SolarCity in 2016.
The matter has been sub-judice for over three years, and it is only now that the full version of the erstwhile heavily-retracted opening brief has been made available in the public domain — courtesy, PlainSite, a legal transparency advocacy group.
The lawsuit, which was initially filed in 2016, alleges that proper procedures were not followed during Tesla’s acquisition of SolarCity.
Musk and Tesla Board Hid Key Financial Details
The lawsuit accuses the Tesla CEO and the company’s board of directors of several wrongdoings. These include attempts to hide possible conflict of interests, as well as misleading investors by not disclosing about the financial mess SolarCity was in when the deal was inked.
The conflict of interest is more apparent in the case of Musk, who at the time, was the chairman of SolarCity.
Details were scarce until now, and the common perception was that SolarCity was bogged down by a heavy debt load. However, as it turns out, the situation for the solar panel manufacturer was a lot grimmer as the company was on the verge of being insolvent at the time.
Simply put, SolarCity was facing a possible bankruptcy when Tesla shareholders voted to acquire it by spending $2.6 billion from the company’s funds, and in the process, taking on all its debts.
Under those circumstances, the investment was just too significant a risk for the company to march ahead with the acquisition without taking all shareholders on-board, the lawsuit points out.
The aggrieved shareholders filed the lawsuit in the Delaware Court of Chancery, which has over the years heard numerous litigations involving complicated corporate merger disputes.
Musk’s Role in the Dodgy Deal
Just to put the seriousness of the allegations against Musk into perspective, he was Tesla’s largest shareholder with nearly 22% stake at the time of the signing of the deal. Additionally, he was also serving as the EV maker’s CEO and Chairman.
During the same period, Musk also had the distinction of being the largest shareholder in SolarCity, aside from serving the company as its chairman. The lawsuit further points out that following the acquisition, Musk’s converted his investment in Solar City into Tesla stocks worth approximately $500 million.
Elon Musk, however, was not the only influential voice in Tesla to have a conflict of interests in the SolarCity Deal. The newly unsealed court documents suggest that the majority of the company’s board members had financial interests in SolarCity as well, which is why they wanted it to escape bankruptcy.
Antonio Gracias, for example, was as an early investor in both Tesla and SolarCity, and he served the boards of both companies. Ira Ehrenpreis, another Tesla board member, faces similar allegations.
Meanwhile, SolarCity co-founders Lyndon and Peter Rive happen to be first cousins of Elon Musk and his brother Kimbal Musk, who himself serves on Tesla’s board.
The court documents highlight that barring the Musk brothers, all other Tesla board members with an apparent conflict of interests partook in the vote that eventually cleared the way for the controversial deal.
Do you think the negative press resulting from these newly unsealed court documents could leave a lingering impact on the shares of Tesla and SpaceX? Share your thoughts in the comments below.
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