In re Tesla Motors, Inc. S’holder Litig., C.A. No. 12711-VCS (Del. Ch. Apr. 27, 2022) (Slights, V.C.)
In this post-trial opinion, the Court of Chancery ruled that Tesla’s 2016 acquisition of SolarCity was entirely fair, resulting in a verdict on all claims in favor of the sole remaining defendant, Tesla’s co-founder, CEO, and former Chairman, Elon Musk.
At the time of the acquisition, Musk owned approximately 22% of Tesla’s common stock. He was also SolarCity’s Board Chairman and its largest stockholder. Tesla had partnered with SolarCity on various projects in pursuit of Tesla’s stated mission to “accelerate the world’s transition to sustainable energy.” At trial, the Court found that SolarCity experienced liquidity issues and carried a significant amount of debt, and that certain macroeconomic factors were causing stock prices of solar companies, including SolarCity, to trade at historic lows. Despite these issues, at the time of the acquisition, SolarCity was considered the market leader among solar energy companies. To deal with its liquidity issues, SolarCity explored strategic alternatives, which prompted Musk to approach the Tesla Board to discuss Tesla acquiring Solar City in February 2016. The Board rejected this initial overture, recognizing the deal’s potential benefits to Tesla but concluding the company needed to focus on other issues at that time. Musk again raised the prospect of Tesla acquiring SolarCity in May 2016, at which time the Board determined that the timing was right for the acquisition. The Tesla Board did not form a special committee to negotiate the transaction, but it did condition any deal on a vote of the majority of Tesla’s disinterested stockholders. Tesla and SolarCity executed a merger agreement on July 31, 2016, and Tesla’s stockholders overwhelmingly voted to approve the acquisition at a special stockholder meeting in November 2016.
Shortly thereafter, several Tesla stockholders sued Tesla’s directors claiming Tesla had overpaid to bail out SolarCity, benefiting Musk. Before trial, all director defendants settled except Musk. In July 2021, the Court held a 10-day trial.
While acknowledging competing arguments and certain unsettled legal issues on the matter, for efficiency’s sake, the Court assumed that entire fairness would apply, either because Musk was Tesla’s controlling stockholder or because a majority of the Tesla Board was not disinterested or independent. In applying that standard of review, the Court reiterated prior guidance that, while the fair dealing and fair price elements of the entire fairness analysis may be examined separately, the test is not bifurcated. As such, evidence of fair dealing, or a lack thereof, has significant probative value to determine the fairness of the price obtained, but “[t]he paramount consideration  is whether the price was a fair one.”
Under this framework, the Court first reviewed the evidence regarding the Board’s deal process. The Court concluded that the negotiation process was “far from perfect,” and Musk “was more involved in the process than a conflicted fiduciary should be.” Nonetheless, the Court held that the Tesla Board implemented a fair process that emulated arm’s-length negotiations. In reaching this conclusion, the Court noted that the Board selected experienced advisors, and used those advisors to extensively and meaningfully vet the acquisition (despite Musk’s expressed desire to expedite the acquisition), insisted on a walkaway right in case SolarCity breached any debt covenant, “used the fruits of due diligence” to negotiate for a lower price, only pursued the deal when it was in the interests of Tesla, and also conditioned the approval of the deal on the approval of a majority of disinterested stockholders. Therefore, the Court concluded that, despite his conflict and involvement, Musk “did not stand in [the Board’s] way” or “impede” the Board’s work in such a way to “infect” the price it paid.
As to price, the Court concluded that the preponderance of the evidence showed that Tesla paid “a price that is within a range that reasonable men and women with access to relevant information might [have paid]” to purchase SolarCity. To determine that range, the Court reviewed various methodologies offered by the parties’ experts, market evidence (including the pre-acquisition SolarCity stock price), the fairness opinion rendered by Tesla’s financial advisor, projected synergies from the deal, and cashflows from the bonds that SolarCity already issued and would receive over time. The Court also considered the approval by Tesla’s stockholders an indication that the deal reflected a fair price. Weighing the evidence, the Court rejected plaintiffs’ claim that SolarCity was insolvent (and therefore that any price paid was unfair), and concluded that SolarCity was, at a minimum, worth what Tesla paid for it, and that the acquisition otherwise was highly beneficial to Tesla. Stated differently, the Court held that the price paid by Tesla was entirely fair “in the truest sense of the word,” and therefore Musk could not have breached any of his fiduciary duties owed to Tesla or its stockholders.
Addressing the remaining claims, the Court held that, because the acquisition was entirely fair, the plaintiffs failed to prove any underlying impoverishment justifying an unjust enrichment claim or bad faith supporting a claim of waste. Finally, the Court declined to award Musk his costs as a prevailing party, because “[he] likely could have avoided the need for judicial review of his conduct as a Tesla fiduciary had he simply followed the ground rules of good corporate governance in conflict transactions,” including allowing a special committee comprised of indisputably independent directors negotiate the deal.