In 2016, Elon Musk had two unprofitable businesses on his hands in Tesla and SolarCity Corp. His solution to improve their outlook: combine them into a single clean-energy business.
Five years later, Mr. Musk is being called to defend the propriety of that roughly $2.1 billion tie-up in a Delaware court. Plaintiffs, which include several pension funds that owned Tesla stock, have characterized the deal as a scheme to benefit himself and bail out a home-solar company on the verge of insolvency.
Mr. Musk, who is expected to take the stand in the nonjury trial as early as Monday, was chairman of both companies at the time. His attorneys have framed the acquisition as an opportunity to realize his long-held goal of creating a vertically integrated sustainable energy company.
A primary question in the case is whether Mr. Musk, who owned roughly 22% of Tesla at the time, controlled the transaction. Proving that claim is a challenge because Mr. Musk was a minority shareholder of Tesla and the company’s shareholders approved the acquisition. Lawyers for Mr. Musk say that SolarCity was worth more than Tesla paid for it and the electric vehicle-maker’s board members, who included Mr. Musk’s brother, Kimbal Musk, acted independently.
Other issues before the judge include whether Tesla board members were conflicted and whether vital information about the deal was withheld from shareholders.
If Mr. Musk loses, he could be asked to make Tesla Inc. whole. That payment could equal the value of the SolarCity transaction if the presiding judge finds that the solar firm wasn’t worth anything when Tesla agreed to buy it.
The trial in Delaware Chancery Court has been delayed for more than a year because of the coronavirus pandemic. Mr. Musk is the lone board member being sued. Tesla’s other board members at the time of the SolarCity tie-up agreed to settle last year for a combined $60 million, paid by insurance. The board members, some of whom had interests in both Tesla and SolarCity, denied wrongdoing.
Mr. Musk has built a reputation as an unusual and sometimes combative chief executive. He has already flashed some of that in the case, making for a confrontational witness in a 2019 deposition, repeatedly goading plaintiff’s attorney Randall Baron, whom he called “reprehensible” for “attacking sustainable energy.”
“SolarCity I think would have done just fine by itself and Tesla would have done fine by itself, but in the long-term, they are better together. And that is what the future will show,” Mr. Musk said in the deposition.
Mr. Musk brought the proposed deal to Tesla’s board in early 2016, court records show. The plaintiffs describe SolarCity as having been in severe financial distress leading up to the deal, at risk of tripping a debt covenant and without other fundraising options. Shareholders weren’t fully informed of the company’s condition, they say.
Founded in 2006 by Mr. Musk’s cousins, SolarCity generated net losses of $769 million and $375 million in 2015 and 2014, respectively.
Attorneys for Mr. Musk say SolarCity was solvent and could have pursued other fundraising options .