As I have noted before, Elon Musk is a reliable source of interesting blog fodder. His hyperkinetic fracases are so numerous that at times it is easy to lose track of the many controversies in which he is involved. Amidst all of the hoopla about his current bid to acquire Twitter, it was easy to overlook the fact that he remained mired in ongoing litigation relating Tesla’s 2016 acquisition of SolarCity. As the heart of the dispute was the fact that Musk served both as Chairman of SolarCity and as an executive of and as the largest shareholder of Tesla at the time.
The dispute went to a ten-day bench trial in 2021, and on April 27, 2022, Delaware Vice Chancellor Joseph R. Slights III issued a lengthy opinion ruling in Musk’s favor on all issues. A copy of the opinion can be found here. As discussed below, the sprawling, 132-page opinion contains a number of interesting observations and insights and also has important implications.
Because Musk’s brother Kimball also serves on Tesla’s board of directors, the Vice Chancellor referred to Musk in his opinion as Elon, to avoid confusion about which of the Musk brothers he was referring to, and I will do so in this post as well. Like Vice Chancellor Slights, I mean no disrespect by using Elon’s first name nor do I wish to suggest an uninvited familiarity.
Elon is Tesla’s co-founder and its largest shareholder, holding approximately 22% of its stock. He also served as Tesla’s CEO and Chairman at relevant times. At the same time, Elon served as SolarCity’s Chairman and was also SolarCity’s largest shareholder, owning about 21% of its stock.
In February 2016, SolarCity was encountering financial issues. Elon proposed that Tesla acquire SolarCity. Notwithstanding “Elon’s strong endorsement,” the Tesla board rejected that proposal.
In late May 2016, Elon revitalized the proposal that Tesla acquire SolarCity. After some preliminary efforts, including hiring an independent financial advisor, Tesla made a preliminary non-binding proposal to acquire SolarCity, subject to due diligence, for stated cash per share range. The proposal was also subject to approval of the majority of disinterested shareholders of both companies. In July 2016, following due diligence, Tesla revised its proposed acquisition price for an amount below the initial range. SolarCity accepted the proposed offer, and the acquisition was approved by the majority of both SolarCity and Tesla shareholders. Over 80% of the disinterested minority Tesla shares voted in favor of the proposal.
After the acquisition closed, various plaintiff shareholders filed a breach of fiduciary duty action against the Tesla board. The defendants named included Elon. The case ultimately went forward exclusively as a derivative action. All of the board defendants other than Elon reached a settlement with the shareholder plaintiffs, in which the defendants agreed to settle the claims against them for $60 million (all of which was funded by D&O Insurance). The case went forward solely as to Elon.
As Vice Chancellor Slights summarized in his post-trial opinion, the plaintiffs alleged that Elon “caused Telsa’s servile Board to approve the Acquisition of an involvent SolarCity at a patently unfair price,” following a “flawed process, in order to bail out his and other family members’) foundering investment in SolarCity.” This, the plaintiffs contend, was a “clear breach of Elon’s fiduciary duty of loyalty.”
The plaintiffs’ claims went before Vice Chancellor Slights in a ten-day bench trial, spread across several weeks in July and August 2021. Vice Chancellor Slights issued his opinion after post-trial briefing and argument.
The April 27, 2022 Opinion
In his April 27, 2022 post-trial Opinion, Vice Chancellor Slights ruled in Elon’s favor on all issues. His rulings in the opinion are based on his “finding” that “Elon has proven the Acquisition was entirely fair, and, therefore he did not breach his fiduciary duties.” The evidence at trial, Vice Chancellor Slights said, “proved” that the Acquisition process, “like most worldly things,” had “both flaws and redeeming qualities.” The “linchpin” of the case is that “Elon proved that the price Tesla paid for SolarCity was fair – and a patently fair price ultimately carries the day.”
In reaching his conclusions, Vice Chancellor Slights noted that the parties’ dispute raised “a wide range of interesting and arguably unsettled legal issues.” While the Vice Chancellor identified a number of these legal issues, he also observed that “there is no point to be served by pondering these questions further here, and there is certainly no reason to answer them.” Instead, he said that “given the clarity provided by compelling trial evidence, there is no need to take on the challenge” of addressing all of these various issues.
In explaining why he felt he did not need to reach these issues he said that “even assuming (without deciding) that Elon was Tesla’s controlling stockholder, the Tesla Board was conflicted, and the vote of the majority [of] Tesla’s minority shareholders approving the Acquisition did not trigger business judgment review, such that entire fairness is the standard of review, the persuasive evidence reveals that the Acquisition was entirely fair.”
Vice Chancellor Slights went on to note the Tesla board’s process to negotiate and recommend the Acquisition was “far from perfect,” and Elon was “more involved in the process than a conflicted fiduciary should be.” The conflicts among other Tesla board members “were not completely neutralized.”
However, the Tesla Board “meaningfully vetted the Acquisition, and Elon did not stand in the way.” Vice Chancellor Slights added that though Elon’s presence throughout the process was “problematic” and at times he “simply could not help but voice his opinion,” the “preponderance of evidence reveals that Elon’s influence did not degrade the entire fairness of the Acquisition.”
With respect to Elon’s involvement, Vice Chancellor Slights noted that though Elon “undoubtedly” was involved in the deal process “in ways he should not have been,” the Tesla board “ensured themselves that the process led to a fair price.” He noted further that Elon “did not push back against them – there were no threat, fits or fights.” Though Elon was “involved,” he “did not impede the Tesla Board’s pursuit of a fair price.”
Which leads to Vice Chancellor Slight’s most important conclusion, which is that “the preponderance of the evidence reveals that Tesla paid a fair price – SolarCity was, at a minimum, worth what Tesla paid for it, and the Acquisition was otherwise highly beneficial to Tesla.” The Acquisition was, Vice Chancellor Slights found, “a vital step forward” in the company’s long-term plan to become the “first-of-its kind, vertically integrated clean energy company.”
In that regard, Vice Chancellor Slights clearly was affected by Tesla’s post-acquisition success and prosperity, as well as the “astronomic rise” in Tesla’s share price. There can be, Vice Chancellor Slights said, “no doubt that the combination with SolarCity has allowed Tesla to become what it has for years told the market and its stockholders it strives to be – an agent of chance that will ‘accelerate the world’s transition to sustainable energy’ by helping to expedite the move from a mine-and-burn hydrocarbon economy towards a solar electric economy.”
For the sake of brevity, I condensed the specifics of Vice Chancellor Slights analysis and opinion in my description above, but for anyone interested in how big deals get done, and how a larger than life personality like that of Elon Musk can both create opportunities and stir up chaos, the Vice Chancellor’s opinion should be mandatory reading. Indeed, as much as any judicial opinion can ever be said to be fascinating, Vice Chancellor Slights’ opinion truly does make for interesting reading.
At the center of the events and therefore at the center of Vice Chancellor Slights’ opinion is Elon Musk. Indeed, in describing what he called the deal’s “process flaws,” the Vice Chancellor states that the process flaws “principally” flowed from “Elon’s apparent inability to acknowledge his clear conflict of interest and separate himself from Tesla’s consideration of the Acquisition.”
Even though in the end Vice Chancellor Slights concluded that the deal that was completed was fair, he felt compelled to point out how Tesla and Elon could have avoided a great deal of trouble; he says, “I cannot help but observe that Elon (and the rest of the Tesla Board members) likely could have avoided this expensive and time-consuming litigation had they just adopted more objectively evident procedural protections.”
After observing the incentives that Delaware laws to corporate boards to provide stockholder protections “substantially equivalent to arm’s length bargaining,” he noted further that the fact that Elon and the Tesla Board failed to follow this clear guidance and yet prevailed here should not minimize or dilute the implications of the entire fairness standard of review.” The board’s choices “subjected Elon’s conduct to post-trial judicial second-guessing.” In other words, “if Chancery opinions are parables, let this be a parable of unnecessary peril, despite the outcome.”
This deal passed muster not because of Elon’s conduct, but despite Elon’s conduct. He, and apparently the board, created a context of “unnecessary peril.” If Chancery opinions are, then, parables, the lesson of this parable is that Elon’s interference and inability to stay out of the kitchen during the deal created highly perilous conditions for himself and the board.
There are clearly lessons from this parable for the boards of other companies, particular those companies (of which there unfortunately are many these days) with senior leadership who think that Musk’s damn-the-torpedoes approach is the right way to do business. The message is that, notwithstanding the outcome of this case, companies would be well advised to put the indicated procedural protections in place and to take active steps to avoid interference and other activities that could put the companies in “unnecessary peril.”
And if D&O claims are parables, why then it looks as if there are going to be many upcoming chapters in the Book of Elon. Stay tuned for the next of the many upcoming episodes in the never-ending saga of the Perils of Elon.
One final note. In discussing the many interesting and challenging legal issues that the parties had raised, Vice Chancellor Slights observed that the parties’ claims and defenses “present provocative questions that could be debated at even the most fashionable corporate law conferences.” I confess that I find myself dumbfounded by this comment. I have spent a significant part of my career, especially in recent years, attending and participating in corporate law conferences. Over many years and through many events, I have yet to attend a conference that could even remotely have been described as “fashionable.” Somehow I managed to miss all of the “fashionable” corporate law conferences. It makes me feel like I have failed in some deep and inscrutable way.
Special thanks to a loyal reader for alerting me to the Vice Chancellor Slights’ opinion.