Tesla's Musk Risks Losing Billions of Dollars if He Fails to Win SolarCity Case

During his long career as a successful entrepreneur, billionaire Elon Musk has both ridiculed and defied his skeptics, in the process becoming one of the world's richest persons. He was a founder of payments giant PayPal Holdings (PYPL), rocket maker SpaceX, and Tesla (TSLA), the world's largest automaker by market value.

But the outspoken Musk, who is accustomed to winning most of the time, personally risks losing billions of dollars stemming from a lawsuit over Tesla's acquisition of SolarCity in 2016.

The case, which includes allegations of conflict of interest and questionable business judgement, was heard this week before a judge in a nonjury trial in Delaware Chancery court. Musk testified at length on Monday and Tuesday. His testimony precedes that of other board directors and it could take months before a final ruling is issued by the presiding judge. A loss by Musk could cost him more than $2 billion, which would make it one of the largest judgments ever against a corporate executive.

The trial turned out to be part entertainment as the Tesla CEO used colorful language to defend himself and lash out at critics.

Plaintiffs in the case, which include several pension funds, have charged Musk with misleading investors about the deal. They argue that the deal, valued as much as $2.6 billion, was not in the best interests of Tesla’s shareholders. Instead, they say it amounted to a bailout for SolarCity, which had been losing money and struggling competitively when it was acquired. After the deal, Tesla assumed billions of dollars in SolarCity debt.

Musk says that the acquisition was the next step of a master plan that he wrote in 2006 to create a vertically integrated sustainable energy company. During calls with analysts, he called the goal of Tesla’s acquisition “blindingly obvious.”

While Musk has refused to settle, directors of the electric carmaker already agreed to a $60 million settlement with shareholders last August.

No Financial Gains

At a Delaware court this week, Musk argued that he did not make any financial gains from the SolarCity transaction. “Since it was a stock-for-stock transaction and I owned almost exactly the same amount of both there was no financial gain,” he said. He was estimated to have held 21 percent and 22 percent in SolarCity and Tesla respectively in January 2016. He also said that he did not pressure board members to approve the deal.

Musk also took a swipe at the prosecutor of the case. “I think you are a bad human being,” Musk told attorney Randy Baron, adding that he had “great respect” for the court but not for him.

An Acquisition That Raised Red Flags

While it was the biggest name among solar panel installation companies during its early years, SolarCity’s business model suffered after solar panel prices crashed. According to some accounts, the company was close to insolvent by the time Tesla swooped in with its offer.

Tesla's 2016 acquisition raised several red flags, according to critics. For starters, they say the deal did not appear to be vetted by an independent committee or counsel. Instead, board members common to both companies simply recused themselves.

There were multiple conflicts of interest as well. SolarCity Chief Executive Officer Lyndon Rive, who is Musk’s cousin, had shared “important/disturbing” issues about the company’s business and financial viability with the company’s board members. Musk was a board member prior to the acquisition as was Kimbal Musk, his brother.

In the days leading up to the acquisition, Tesla amended its bylaws to ensure that all shareholder litigation was filed in Delaware. Delaware only requires approval, and not analysis or audit by an independent committee, from disinterested directors or board members of both companies for an acquisition.

SolarCity has not contributed much to Tesla's bottom line since the acquisition. It had losses of $820.4 million in 2016, the last year that its revenues were reported. Tesla has diversified its energy offerings beyond solar panels to include battery storage. Meanwhile, rival solar panel manufacturers such as Sunrun Inc. (RUN), have taken SolarCity's place in the industry. Tesla’s energy business reported large losses in the first quarter of FY 2021, its latest.

Musk told the court this week that he remains optimistic about the solar business's future within Tesla. He argued that SolarCity's business suffered after the acquisition because he shifted employees and resources to meet crucial electric car production deadlines at Tesla. He also said the pandemic complicated SolarCity's revival. Once pandemic restrictions are fully lifted, Musk says the solar business will take off.