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Debt, solar shingles and Desperate Housewives — Why are some Tesla shareholders suing Elon Musk?

The Tesla chief could be forced to pay $2 billion if he loses the court case.

Musk arriving to court in Delaware this week
Musk arriving to court in Delaware this week
Image: Saquan Stimpson

WHETHER YOU BELIEVE the hype or not, Tesla is an important company.

Listed on the NASDAQ and a member of the S&P 500, the Elon Musk-fronted electric car-maker is currently valued at over $620 billion after its share price ballooned from about $133 per share in February 2020 to around $650 at the time of writing.

While its chief executive Musk owns about 20% of the company at last count, 43% of its shares are held by institutional investors including banks, pension fund managers and hedge funds.

It’s safe to say that many fortunes are wrapped up with the health of the Californian automaker and its frontman.

So when a group of Tesla shareholders sue its chief executive alleging that he breached his duties as a controlling shareholder in Tesla by allegedly ramming through a deal to buy one of his other, less successful companies, it’s important stuff.

This week in the US state of Delaware, Musk faced down some difficult questions about his role in Tesla’s 2016 acquisition of SolarCity for $2.6 billion.

If he loses, he could be forced to fork over $2 billion to the plaintiffs, a group of union pension funds and asset managers. The court might also order Musk to pay the money back to Tesla directly.

Whatever happens, that’s likely to be a drop in the ocean for Musk, who was recently named the world’s richest man by Bloomberg. But the trial may reveal some interesting details about the inner workings of Tesla and could be a black eye for the reputation of its founder if it goes the wrong way for him.

What was SolarCity?

SolarCity, founded by Musk’s cousins Peter and Lyndon Rive with seed money from the Tesla boss, started as a sort of leasing company for solar panels.

Its business model allowed customers to rent normally pricey solar panels for a certain amount of time with no money down for installation.

They would then be sent a monthly bill by SolarCity — where Musk was the largest single shareholder and served as chairman — for the electricity generated by the panels.

Eventually, the company got into manufacturing the panels itself. But its leasing model meant that it had to borrow heavily to fund the installation process and the system itself.

With revenues trickling in gradually from customers, month by month over the often long lifetime of the lease, SolarCity’s debt pile ballooned over the years to around $3.25 billion by the summer of 2016 while cash flow seems to have been a perennial issue.

The product itself was also bedevilled by bad publicity.

In 2019, three years after Tesla agreed to buy SolarCity, the company was sued by US retail giant Walmart, alleging that its panels caught fire causing millions of dollars of damage since 2012.

Walmart accused SolarCity of having”an ill-considered business model that required it to install solar panel systems haphazardly and as quickly as possible in order to turn a profit”.

That lawsuit was dropped last year after an out-of-court settlement.

Its biggest PR disaster started in 2016 when the company tried to launch a new product, solar roofing shingles, a more aesthetically pleasing alternative to clunky panels.

Musk — who was synonymous with SolarCity brand in the public’s mind at this stage — famously promoted the product in a demonstration on the set of Desperate Housewives in 2016, kitting out of some of the houses on Wisteria Lane with the product. 

But it’s been in development hell since then and still hasn’t been released to the wider public. Musk, putting it mildly earlier this year, admitted he had made “significant mistakes” with the solar roof idea.

Why did Tesla buy it?

Well, that’s the question, isn’t it? Why did Musk urge a publicly-listed company to take over a struggling, heavily indebted, cash-poor operation like SolarCity?

After all the company was facing significant debt repayment deadlines over the next few years and had experienced a cash crunch in 2015, just a year before Tesla shareholders voted through the deal.

But Musk, who was chairman of both companies at the time, says the deal made sense.

The acquisition was part of his “Master plan: Part deux” to transform Tesla into a dominant player in both electric cars and green energy.

He maintains that “the SolarCity acquisition was critical to Tesla’s success as a fully integrated clean-energy company”.

He resolutely denies that the purchase was “a bailout” of the struggling company, which is the allegation at the heart of the lawsuit or that he financial benefitted from the transaction.

The plaintiffs argue that Musk breached his duty as controlling shareholder of Tesla because his role as chairman of both companies at the time “poisoned” the Tesla board’s ability to evaluate the deal.

What happened in court this week?

Musk began his two days of testimony in typically combative, headline-hungry style.

Under questioning from the plaintiff’s lawyer, he bristled at any suggestion that he had strong-armed the Tesla board — members of which include his brother Kimball Musk — or its shareholders into the acquisition.

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“I think you are a bad human being,” the Tesla founder told Randall Baron, a lawyer for shareholders.

“I have great respect for the court,” Musk later added, “but not for you, sir.”

At times, he seemed to contradict himself. Musk disagreed that there was “significant evidence” that SolarCity was in severe financial distress and yet he was warned about the cash crunch in an email from the company’s chief executive to Musk from July 2016, which was read out in court.

At one point, he said never wanted to be the chief executive of Tesla, “but I had to or it would die”.

That’s probably not a great argument to make when you’re trying to convince a judge that you don’t wield an outsized degree of influence over a company’s board, as Bloomberg’s Matt Levine pointed out.

“If you’ve got a wealthy impulsive CEO who is also the only person who could possibly lead the company, you have to let him do whatever he wants,” Levine wrote this week.

“Just as a matter of fiduciary responsibility to shareholders, I mean, the directors should prefer approving a terrible conflicted deal that they hate if the alternative is disappointing Musk and possibly losing him.”

The trial continues next week.

— Additional reporting by PA 

 

 

 

 

 

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