On Monday, Elon Musk will take a stand to defend Tesla’s $ 2.5 billion acquisition of SolarCity in 2016 against a shareholder lawsuit alleging the deal was fraught with conflicts of interest.
In the run-up to the acquisition of Tesla Inc. of 2016 from a company called SolarCity, Elon Musk hailed the deal as an “obviousness,” a purchase that would combine the leading electric vehicle manufacturer with a solar panel manufacturer that can recharge electric vehicles.
It didn’t work exactly that way.
On Monday in Delaware chancellery court, Tesla CEO will testify about the $ 2.5 billion deal in a shareholder lawsuit alleging that the acquisition of Tesla was full of conflicts of interest, overlooked the fundamental weaknesses of SolarCity and not surprisingly did not produce the benefits Musk had promised.
Questioned under oath, Musk plans to defend the purchase as a justifiable acquisition.
At the time of the total share purchase, Musk was the main interest of SolarCity and its chairman. Seven shareholder lawsuits, consolidated into one, alleged that Tesla executives breached their fiduciary duties by fulfilling Musk’s wishes and agreeing to buy the struggling company. In what the plaintiffs call a clear conflict of interest, SolarCity had been founded by Musk and two of his cousins, Lyndon and Peter Rive.
Last August, a judge approved a $ 60 million settlement that resolved claims against all Tesla board executives except Musk, without admitting any wrongdoing. This left Musk, who refused to settle, as the only remaining defendant. The trial, which began on Monday, was scheduled for March last year, but was postponed due to the COVID-19 pandemic.
Daniel Ives, an analyst at Wedbush Securities, described the acquisition as a “clear black eye” for Musk and Tesla, in large part because SolarCity has not made a profit.
“It was basically putting good money after bad money,” Ives said. “For all the successes and all the unimaginable heights that Musk has achieved, this is one of the low points.”
Most investors, Ives said, give no value to the company’s solar business.
“I just think Musk and Tesla underestimated the challenges and obstacles that the business entails,” he said.
That said, Ives said he thought Tesla’s energy business could still be “modestly successful.”
Tesla, which has dissolved its media relations department, did not respond Friday to a message asking for comments on the lawsuit. In its 2020 annual report, the company argued that the lawsuit had no merit and that Tesla would defend itself strongly.
“We cannot estimate the possible loss or the range of losses, if any, associated with these claims,” the company report said.
Tesla’s power generation and storage business generated revenue of $ 1.9 billion last year, 24 percent more than the previous year. Much of that revenue came from the sale of battery storage units. Tesla does not specify whether the business made a profit and also has debts and expenses.
The lawsuit filed by the plaintiffs argues that Musk pushed the decision to acquire SolarCity despite its clear conflict of interest.
Musk has a history of fighting government agencies and lawsuits. He was forced to pay a $ 20 million fine to the Securities and Exchange Commission for making statements on Twitter about having the money to deprive the company when he did not. But he won a defamation lawsuit filed by a British diver involved in rescuing a Thai football team that was trapped in a flooded cave. Musk had called the man a “fart boy” on Twitter.
Even if the lawsuit ends with Musk having to personally pay for the entire SolarCity deal, $ 2.5 billion won’t hurt the third richest person in the world much. Forbes magazine has estimated that Musk is worth about $ 163 billion.
Ives suggested that while this payment would not seriously affect Musk’s wealth, it would damage his reputation for choosing acquisitions.
Musk is fighting the lawsuit after others have settled “because that’s what Musk does,” Ives said. “I think Elon thinks that was the right deal and he still does.”