Flying too close to the sun: Musk on trial for SolarCity acquisition

August 5, 2021

3 min read

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What's going on here?

In a trial that commenced on 14 July 2021, Elon Musk defended Tesla’s acquisition of SolarCity, internally dubbed as “Project Icarus”, following accusations that Musk pressured board members to acquire the company.

What does this mean?

In 2016, Tesla acquired SolarCity, a solar energy start-up (initially founded by Musk), for $2.6bn. 

It is claimed in the ongoing trial, which represents a shareholder derivative action, that Musk put pressure on Tesla board members to approve the transaction at a time when SolarCity was not performing well financially, allegedly as a means to bail out the company. 

Last year, the shareholders sued Tesla’s board for breaching their fiduciary duties (a legal or ethical relationship of confidence between parties or on behalf of an entity) in approving the SolarCity deal. The board agreed to settle for a total of $60m, but did not accept any wrongdoing. 

In this trial, the suing shareholders are seeking that Musk personally repays the $2.6bn to Tesla for a breach of his fiduciary duties as the (alleged) controlling shareholder. If successful, the judgement will be one of the largest given out against an individual.

The law in Delaware (where Tesla is incorporated) states that it is the boards of directors that control companies. This gives such board members discretion whether or not to approve any moves put forward by CEOs such as Musk.

At the time of the deal, Musk’s Tesla shareholding was at 22%, however, those suing highlight that the sheer weight of Musk’s celebrity-status image as Tesla’s foreman was enough to overshadow the board and put him in a position of controlling shareholder. Evidence cited included the mentioning of weekly meetings held by Musk during which he attempted to speed up the due diligence process as well as the fact that Musk hired lawyers to help get the deal approved. 

Musk, who spent almost eight hours testifying, argued firstly that it was shareholders largely unaffiliated with Tesla (principally institutional investors) who voted fairly to approve the transaction, and secondly that the deal presented a natural and planned move for Tesla towards sustainable energy.  

The trial is due to last two weeks, with a judgment not expected for some months. 

What's the big picture effect?

A win for Musk will be a further example of his ability to evade accountability, just as he did in 2018 when accused of defamation by a British diver, adding to the ever-growing list of examples of Big Tech companies and CEOs escaping liability. Whilst a loss would harm Musk’s reputation, it would have little impact on his wealth, with his net worth estimated to be $163bn.

Musk’s attempts to distance himself from Tesla during the trial may backfire. In an attempt to show he is not the controlling shareholder, Musk made statements such as that he “hates” running Tesla and would “rather spend [his] time on design and engineering”. However, the impact of these claims was reduced where Musk highlighted that Tesla would “die without him”. 

Whatever the outcome of the trial, the suit will act as a benchmark should similar cases come to court. A ruling in the suing shareholders’ favour will shape how corporate lawyers deal with celebrity-like CEOs such as Musk in the tech sector. Given the celebrity-like status of many Big Tech CEOs, this is not an unlikely event.

Report written by Edie Essex Barrett

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