In Re Tesla Motors, Inc. Stockholder Litigation

2018 WL 1560293 (2018)

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Nature of the Case

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Facts

Plaintiffs (P) are Tesla stockholders. The nominal Defendant Tesla, a public Delaware corporation. Tesla's Board comprises seven members: D, Brad W. Buss, Robyn M. Denholm, Ira Ehrenpreis, Antonio J. Gracias, Stephen T. Jurvetson, and Kimbal Musk (Kimbal). SolarCity was a public corporation headquartered in San Mateo, California that was founded by Musk and his cousins, Peter and Lyndon Rive. It was a solar energy system installer. Its board included D, Gracias, Lyndon, Peter, Nancy Pfund, and John H.N. Fisher. Lyndon served as SolarCity's CEO and Peter as its Chief Technology Officer (CTO). D is Tesla's largest stockholder owning approximately 22.1% of Tesla's common stock. D is Chairman of the Tesla Board, Tesla's CEO, and Chief Product Architect. Tesla has acknowledged in its Securities and Exchange Commission filings that D is not an independent director. In its SEC filings, Tesla states that it is 'highly dependent on the services of D.' Tesla acknowledges that if it were to lose D's services, there would be significant losses which might result in the company going out of business. D has stated publicly that if he had not assumed the role of CEO 'the company wasn't going to make it.' D repeatedly referred to Tesla as 'my company.' D also claimed publicly, that Tesla, SolarCity, and SpaceX formed a pyramid with him atop, which would crumble if one element faltered. D served as the Chairman of the SolarCity Board and was its largest stockholder, holding approximately 21.9% of the common stock. D's SolarCity holdings were converted to over $500 million of Tesla shares. Ps sued to stop the SolarCity transaction. It sued D and other directors at Tesla, and SolarCity. Ps claimed that D reached fiduciary duties as Tesla’s controlling shareholder. Ps claimed that D influenced Tesla board members in that almost all had conflicts of interests and owed loyalty and a good cash flow to D. D removed executives from Tesla at the drop of a hat when they disagreed with him on anything. D also bailed out Tesla with his own money. D moved to dismiss the claim in that he could not be a controlling shareholder with only 22.1% of Tesla’s stock. During the three years immediately preceding Tesla's June 2016 offer to acquire SolarCity, SolarCity's debt increased thirteen-fold, totaling $3.56 billion as of June 2016. SolarCity was in the midst of a liquidity crisis its credit facility contained a covenant requiring it to maintain a minimum cash balance of $116 million which it could not maintain. SolarCity also faced the prospect of defaulting on its non-recourse debt, which, in turn, could trigger a cross-default under its revolving line of credit. About $1.23 billion of SolarCity's debt was scheduled to become due by the end of 2017. SolarCity was for all intents and purposes bankrupt. D presented the purchase of SolarCity to Tesla’s Board. The Board authorized D and management to (a) assess a potential acquisition of a solar energy company; (b) engage an independent financial advisor on behalf of the Tesla Board and the Company; and (c) instruct the law firm Wachtell, Lipton, Rosen & Katz to undertake a review of a potential acquisition by Tesla. D and Gracias, both directors of Tesla and SolarCity, recused themselves from the June 2016 Special Meeting while the remaining members of the Board voted to approve the offer for SolarCity. Both remained for the entirety of the meeting while the potential acquisition of SolarCity was discussed, and D led most of those discussions. The proposed purchase price reflected a 21% to 30% premium to SolarCity's closing price on June 20, 2016. The Tesla Board was warned that SolarCity had $3.164 billion in outstanding debt as of March 31, 2016, and that significant debt would mature in a three-to-five-year window. With a credit default looming, SolarCity offered its Solar Bonds to the market. As noted, D, Lyndon, and Peter answered the call by acquiring $100 million of the bonds between the three of them. SolarCity was also required to invest $5 billion over ten years in total capital and operational expenditures in New York State and was obligated to employ 5,000 people within ten years of a new factory financed with public funds. If SolarCity failed to meet certain targets, it would be liable to New York for $41.2 million per year for each year it failed to meet any of the milestones. Tesla would acquire SolarCity in an all-stock deal. The Complaint alleges the Acquisition was a bailout of SolarCity that benefited six of the seven members of the Tesla Board and/or their family members, businesses, and business partners. Tesla stockholders voted to approve the Acquisition. The Merger Agreement excluded from the vote certain Tesla stockholders (and their affiliates) who were also directors or executive officers of SolarCity, including Musk, Gracias and Jeffrey Straubel, Kimbal, Jurvetson, Ehrenpreis, Buss, Tesla executive officers and any other Tesla stockholders who also owned stock in SolarCity were not excluded from the vote tally. And with the stroke of a pen, Tesla's debt load nearly doubled.