Elon Musk in court over SolarCity case

What misfortune for Elon Musk – Tesla CEO Elon Musk was heard by the Delaware Chancery Court, the court in charge of commercial disputes, on Monday, July 12. The case concerns Tesla’s acquisition of solar power startup SolarCity. Some of the electric vehicle manufacturer

‘s shareholders believe that Tesla acquired the company at an inordinate price.

SolarCity, a project that

is floundering

SolarCity was founded in 2006 by Elon Musk and his cousins, Peter and Lyndon Rive. The company installed solar panels on the roofs of customers who then paid SolarCity for the electricity produced. The company went public and listed on the NASDAQ technology index in 2012.

By 2016, SolarCity had racked up more than $3 billion in debt.

This is because the

company’s business is capital-intensive, meaning that its business requires regular investment in new equipment

. Déploiement de panneaux solaires par Tesla mesuré en gigawatt heure montrant de multiplication par 5 de la production d'énergie solaire entre 2017 et 2020Tesla’s deployment of solar panels measured in gigawatt hours – Source: Financial Times

At this point in its history, the company was on the verge of bankruptcy, as its debt level reached the maximum allowed by its creditors. In addition, analysts at Goldman Sachs wrote at the time that SolarCity was the “worst positioned” company in the solar startup segment.

That same year, Musk presented Tesla’s board with the proposed merger. Because of SolarCity’s high debt load, the company’s financial situation was not good when the deal was presented. However, it was approved by the board of directors and then presented to the shareholders, who adopted it with 90% of the votes cast.

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<img src=”//www.w3.org/2000/svg’%20viewBox=’0%200%200%200’%3E%3C/svg%3E” alt=”Automotive division revenueTesla’s automotive division versus energy division showing that more than 90% of Tesla’s revenue comes from the automotive business” />Revenu de la division automobile de Tesla par rapport à ceux issus de la division énergie montrant que plus de 90 % des revenus de Tesla sont issu de l'activité automobileTesla’s automotive division revenue versus energy division revenue – Source: Financial Times

So the deal happened in late 2016. SolarCity was acquired by Tesla in exchange for shares worth $2.6 billion at the time. In the aftermath, Tesla’s share price fell by nearly 10%, causing the company’s capitalization to drop by nearly $4 billion.

L’attribut alt de cette image est vide, son nom de fichier est CTA-SwissBorg-interets-ETH-Ethereum.png.

Elon Musk in Delaware Court

A group of Tesla shareholders, including some pension funds, allege

that

Elon Musk orchestrated the acquisition of SolarCity to bail out one of his grandiose projects, which was running out of financing options. Although Musk’s stake in Tesla is only 22 percent of the voting rights, the complaining shareholders say the force of his personality allowed him to dominate the board.

Randall Baron, the plaintiffs’ lawyer, was able to question Musk at length during Monday’s hearing. Baron asked Musk why SolarCity’s performance deviated significantly from the projections Tesla presented to shareholders in 2016. Musk blamed the decline in solar panel installation and market share on Tesla’s need to focus on developing its new electric car models.

“It was the most difficult three years of my entire career […] The company was in a desperate situation.

There were

many times when I thought we were out of the woods, but we weren’t. “

Elon Musk

The Tesla CEO also insisted that he had no role in negotiating the terms of the deal. He believes that he is not in a position to impose his will on Tesla because large institutional players (including Vanguard, BlackRock and Fidelity) are shareholders in the company and they don’t care about his will.

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<a href=”https://www.ft.com/__origami/service/image/v2/images/raw/https%3A%2F%2Fd6c748xw2pzm8.cloudfront.net%2Fprod%2F9d4223c0-e0d7-11eb-af2a-2d86f969b974-standard.png?dpr=1&fit=scale-down&quality=highest&source=next&width=700″ target=”_blank” rel=”noopener”>Cours de l'action Tesla de 2016 à 2020 montrant une forte appréciation du titre sur la période 2020-2021Tesla share price – Source: Financial Times

In parallel, some of Tesla’s directors have settled out of court with the plaintiffs. The $60 million settlement was made in 2020 by Tesla’s insurance, but board members denied any wrongdoing.

If the Delaware court finds that Musk exercised no control over the acquisition, then the case will be dismissed. However, if it does not, it will have to examine the terms of the deal. If the price paid by Tesla is deemed excessive, Elon Musk could be forced to repay Tesla up to $2.6 billion. Finally, Elon Musk has also received a reminder

from the

Securities and Exchange Commission (SEC) regarding his activity on social networks

.

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