Today I want to talk about the lawsuit between Elon and Tesla shareholders over the Solar City acquisition.
First off, let’s talk about Solar City.
Solar City was founded in 2006 by Peter and Lyndon Rive, both cousins of Elon Musk. They focused heavily on door-to-door sales of leased systems. Under this model customers paid nothing upfront but agreed to purchase power generated from said panels for 20 years; and often received a discount relative to their previous power price.
The model became so successful that at one point Solar City was the largest residential Solar installer in America. So in 2016, Tesla announced that it would be acquiring Solar City in a $2.6B all stock acquisition.
But there was one main problem, the company didn’t make any money and had lots of debt. For example, the company lost $820M in 2016, $769M in 2015, and $375M in 2014. And at the time of the acquisition Solar City had over $1.4B in long term debt.
So off the bat, Tesla is paying billions of dollars to acquire another company that loses massive amounts of money, and is saddled with debt.
Now According to a filing with the chancery court, at the time of the acquisition Musk owned 22.1% of Tesla and 21.9% of Solar City. Shareholders allege the deal was a bailout for Solar City that greatly benefited both Elon and his family. For example, one of Solar City’s board member’s was Elon’s brother Kimbal Musk.
In addition to the insider dealing, Tesla has repeatedly delayed mass manufacturing’s of their Solar Roof tiles that Tesla dubbed the future of solar panels. That being said, the Powerwall was doing relatively well, and in May the company tweeted out that have surpassed 200k powerwalls installs globally.
Elon’s past legal troubles:
- In 2018, the SEC sued him for fraud when he tweeted about taking Tesla private for $420 per share and sent TSLA’s stock price soaring. Musk and Tesla settled for $20M each.
- He won a lawsuit ruling after calling caving expert Vernon Unsworth a “pedo guy”
- And there are other lawsuits including one over his compensation package.
- Its interesting to note, in January of 2020, a judge approved a $60 million settlement between the directors, which was paid by Tesla’s insurance that resolved the issue with all directors, except for of course Elon.
Another issue is that other Tesla board members, some of whom also were indirectly or directly SolarCity shareholders, were conflicted that some of this information was withheld from shareholders. For example, one of Solar City’s board member’s was Elon’s brother Kimbal Musk.
Part of Musk’s argument is that an independent director handled the negotiation. Also, at one point before the deal closed, Tesla’s directors overruled a proposal from Elom to provide temporary financing to SolarCity.
Some of the highlights coming out of the court room so far include:
- Musk telling lawyer Randall Baron, “I think you are a bad human being,” and in the past he has called Mr. Baron a “shameful person” who has “no conscience” and is a “blight on the economy”
- The plantiffs lawyers asking why Solar City’s performance varied from the projections Tesla gave to shareholders at the time of the acquisition.
And here is where Elon doubles down:
“I don’t think SolarCity was financially troubled… In order to have a compelling product, you really needed to have a tightly integrated solar and battery solution. And we could not create a well integrated product if SolarCity was a separate company.”
Elon continued by disagreeing there was significant evidence the company was seriously struggling with its cash management. He downplayed the impacts of the company’s cash balance issues, noting Amazon had negative cash flow for many years.
Interestingly an email has emerged between Elon and the CEO of Solar City, Lyndon Rive, also his cousin, from July 9th, 2016, with quotes like “I am really sorry that there is a surprise we are running super low on cash,” “I mentioned that we need to raise capital but you told me no and that you have me covered,” and “I am really afraid of the domino effect if we don’t get the capital. You said, lets get this done in May”
Elon also said in court, “SolarCity I think would have done just fine by itself and Tesla would have done fine by itself, but in the long-term, they are better together. And that is what the future will show.”
So if he lost the suit, its expected he’ll have to pay around $2.0 billion in settlements as a result. Elon is one of the richest people on the planet with a net worth around $160B. It would equal to less than 1.5% of his overall net worth.
And of course a Tesla video wouln’t be complete without a shout out to the great Ross Gerber who says on Twitter:
Of course, the biggest argument in favour of Elon is the price performance of Tesla shares after the acquisitions, which have gone from $46 to today around $685 – which is approximately a 15 bagger.
Let us know in the comments what you think.
Information for this briefing was found via Bloomberg, Edgar, Refinitiv, and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
SmallCapSteve started blogging in the Winter of 2009. During that time, he was able to spot many take over candidates and pick a variety of stocks that generated returns in excess of 200%. Today he consults with microcap companies helping them with capital markets strategy and focuses on industries including cannabis, tech, and junior mining.