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In re Tesla Motors, Inc. Stockholder Litigation | 2018 WL 1560293 (2018)

How can a corporation’s minority shareholder be considered a controlling shareholder? A Delaware chancellor considered that question in In re Tesla Motors Stockholder Litigation.

Tesla Motors builds and sells electric vehicles and energy storage devices. Elon Musk invested early on and became chair of Tesla’s board in two thousand four. Three years later, Musk forced out founder and C E O Martin Eberhard and became C E O himself. By twenty sixteen, Elon Musk was Tesla’s largest shareholder, with about twenty two percent of Tesla’s stock. Musk was also Tesla’s chief product architect, playing a key role in designing all Tesla’s products. Tesla’s Securities and Exchange Commission filings admitted that Musk wasn’t an independent director.

Musk was also a cofounder and the largest shareholder in SolarCity Corporation, a solar energy system lessor and installer. Musk owned nearly twenty two percent of SolarCity and was chairman of its board. A majority of Tesla board members owned SolarCity shares.

SolarCity continually struggled, and by February twenty sixteen, it had become illiquid and likely to default on its debt that year or the next.

Musk then suggested that Tesla acquire SolarCity. The Tesla board rejected the idea. Musk raised the issue again in March and again in May. This time, the board authorized evaluation of a possible acquisition. But despite some board members’ conflicts of interest, it didn’t form a special committee to consider it.

In a June board meeting, Musk mentioned their prior SolarCity discussions. Despite Tesla’s financial advisors' warning, the board authorized an offer for SolarCity. Musk advocated for the acquisition to Tesla shareholders, investors, and industry analysts.

Tesla board meetings in July addressed SolarCity’s debt situation and generally poor outlook. But Tesla and SolarCity announced the merger on August first.

Tesla’s shareholders approved the acquisition in a vote from which Musk was excluded. Fifty eight percent of the shares voted in favor. The acquisition was finalized in November, and it immediately doubled Tesla’s debt load. Musk’s SolarCity holdings were converted into Tesla shares worth over five hundred million dollars.

Tesla shareholders sued in Delaware Chancery Court, alleging that Musk used his control to orchestrate board approval for a transaction that bailed out SolarCity, spreading out losses that Musk would’ve suffered across all of Tesla’s shareholders. Musk moved to dismiss, arguing that as owner of only twenty two percent of Tesla’s shares, he couldn’t be a controlling stockholder.

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