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Tesla CEO Musk goes to trial on Monday for $ 2.6 billion. SolarCity Agreement

Elon Musk speaks at SolarCity’s Inside Energy Summit in New York.

Rashid Umar Abbasi | Reuters

Tesla CEO Elon Musk is expected in court on Monday and the stakes are high – if he loses, he may have to pay up to $ 2 billion from his significant personal fortune.

Musk will be the first witness in a lawsuit defending its role in Tesla̵

7;s $ 2.6 billion acquisition of SolarCity. Shareholders have sued Musk and members of the Tesla board, claiming the 2016 deal constituted a SolarCity rescue.

They also claim that it unfairly enriched the Musk family, who were among the largest shareholders, and that Musk and others did not disclose all relevant details and violated their fiduciary duties. Musk has insisted he was “fully recalled” from negotiations on the deal.

Last year, board members settled the case with Tesla shareholders for $ 60 million without admitting any wrongdoing. Musk, the second richest person in the world, was the only defendant who chose to take the fight to court.

There is no jury to be persuaded in this case. His fate will be decided by a judge in Delaware Chancery Court, Vice Chancellor Joseph Slights III.

Days in court

Musk has had its share of legal issues beyond SolarCity.

For example, in 2018, the SEC sued him for fraud, with Musk and Tesla settling and paying $ 20 million each. The allegations came after Musk tweeted about taking Tesla privately for $ 420 per tonne. Stock, a move that sent Tesla’s stock price soaring. Musk had to temporarily relinquish his presidency of Tesla as one of the terms of the settlement.

In a separate case, he came out victorious after cave expert Vernon Unsworth said Musk had defamed him when the Tesla director called him a “pedo guy” on Twitter. His lawyers argued that “pedo guy” was a hefty rhetoric and not meant as a statement of facts.

Tesla and Musk are facing many other lawsuits, including one over Musk’s unprecedented CEO compensation package, and a series of federal probes under the company’s own financial records.

In the SolarCity case, the judge will have to decide whether Musk was a conflicting controlling shareholder who met the “full fairness” standard in his handling of the SolarCity acquisition.

In other words, did Musk act in the best interests of Tesla shareholders? And did Musk tell the shareholders everything they deserved to know?

Known as a shareholder derivative act, this type of lawsuit is filed by investors on behalf of a company rather than individuals or funds themselves. If the plaintiffs win, the proceeds may go to Tesla and not to the stakeholders who have brought the case.

Business connections

According to an application to the Chancellery, Musk owned 22.1% of the Tesla common stock at the time of the transaction and 21.9% of SolarCity. SolarCity was a troubled asset that bleed cash in the capital-intensive market for solar cell systems in homes.

Vehicles are parked outside the solar panel factory Tesla Inc. in Buffalo, New York, USA, Wednesday, December 26, 2018.

Andrew Harrer | Bloomberg | Getty Images

Musk’s lawyers are expected to claim that the SolarCity agreement did not harm shareholders at all and that they voted overwhelmingly to approve the acquisition. After all, Tesla shares have risen from a closing price of $ 43.92 on June 21, 2016 – when Tesla announced they would bid on SolarCity – to a closing price of $ 656.95 on July 9, 2021 (Friday) after a five-for-one share split last year.

The company is also part of the S&P 500 now and reports profits regularly.

SolarCity was founded and run by Musk’s cousins, Lyndon and Peter Rive, but supported by Musk, who served as chairman of the board. Meanwhile, he was also the CEO of Tesla as well as the company’s chairman.

It was not his only potential conflict. SpaceX, Musk’s aviation venture, had invested $ 255 million in SolarCity bonds from March 2015 to March 2016. Four members of Tesla’s Board of Directors directly or indirectly owned SolarCity shares at the time the acquisition was being considered. And some Tesla board members also owned shares in SpaceX and were on the board.

How he beat it

For Musk and many of his followers, the acquisition of SolarCity in 2016 represented a natural combination of his companies and a way for Tesla to pursue its environmental mission with a wider range of products. Homeowners would be able to finance and install sun terrace from the same company that supplied their electric vehicle, home charging station and backup battery for energy storage.

Tesla had already launched an energy department by the end of 2015 with a home battery called Powerwall and other large batteries for use by businesses and utilities.

In June 2016, Musk said Tesla would bid $ 2.8 billion to buy SolarCity. “I do not think it creates additional financial risk for Tesla,” he said at the time, calling a merger “blindingly obvious.” But Tesla investors were skeptical as the stock price plunged more than 10% on the announcement.

In July 2016, Musk presented his vision of Tesla as a car innovator and titanium in renewable energy in his famous “Master Plan Part Deux”.

As CNBC previously reported, unsealed legal documents, including emails between Musk and SolarCity executives, would later reveal that he knew SolarCity was facing a “liquidity crisis” even as Tesla pursued the acquisition.

“Three things need to happen to change investor sentiment: SolarCity resolving its liquidity crisis, an LOI with Panasonic to tackle the risk of solar cell production and a joint product demo,” Musk wrote to SolarCity executives in September of that year. “Should be able to do all of them before the shareholder votes.”

In October 2018, Tesla and SolarCity jointly announced a combined sunroof and battery pack. Musk showed what looked like a solar panel, miniaturized and sleek enough to be confused with sophisticated roofing materials on the Hollywood set of Desperate Housewives.

By agreement

The hype event helped him turn investor sentiment. In November, the deal was approved by a vote of 85% of shareholders. But after it closed, Tesla’s SolarCity business would weaken.

Over the years, the company has repeatedly delayed mass production of its Solarglass roof tiles. The ones that Musk presented as a production-ready prototype in 2016 were actually a non-functional design prototype.

Walmart sued Tesla for fires on panels that the company had installed on top of their facilities. A former Tesla Energy employee filed a whistleblower complaint with federal agencies about the fire risk of Tesla’s sunroofs. And Panasonic left the Buffalo plant, which Tesla took over once it was clear that Tesla would not manufacture its sunroof tiles there.

While the solar tariff on Tesla has not taken off, the company’s energy storage products are in tears as the demand for cheaper electricity from renewable sources increases worldwide.

In the trial, which begins Monday in Wilmington, Delaware, Musk will be represented by attorneys with Ross Aronstam & Moritz (David E. Ross, Garrett B. Moritz and Benjamin Z. Grossberg). The trial is expected to run until July 23, 2021, unless the entities seek a settlement before it is completed.

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