Securities Regulation Daily No summary judgment for either side in Tesla merger litigation
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Wednesday, February 5, 2020

No summary judgment for either side in Tesla merger litigation

By Amy Leisinger, J.D.

While the defendants did establish the lack of triable issues on certain disclosures, questions remain regarding Elon Musk’s status a controlling shareholder and whether the merger vote was fully informed.

The Delaware Court of Chancery has refused to grant summary judgment in ongoing litigation regarding a Tesla acquisition. According to the court, several issues of material fact remain, including whether Elon Musk is a controlling shareholder of Tesla and had the ability to coerce the shareholder vote approving a merger with SolarCity Corporation. The court also noted that further inquiry is necessary with regard to whether the shareholder vote was fully informed and whether the majority of Tesla board was appropriately independent (In re Tesla Motors, Inc. Stockholder Litigation, February 4, 2020, Slights, J.).

Background. Tesla shareholders filed a class action suit alleging that the interconnectedness between Musk and other Tesla board members and SolarCity resulted in a breach of fiduciary duties to shareholders and ultimately coerced a shareholder vote in favor of the merger. According to the plaintiffs, Musk acted as a controlling shareholder despite his 22.1-percent stake in the company, and, as such, he exercised inherent control by virtue of his position as the "face" of Tesla. The complaint also alleged many board-level conflicts and that Musk’s behavior further suggested a controlling influence.

Summary judgment positions. In support of their motion for summary judgment, the defendants argued that, after discovery, the plaintiffs have not presented evidence to undermine Tesla’s shareholder ratification defense, as there is no evidence that Musk actually coerced the shareholder vote. Further, they contended that the vote was fully informed and that they made no material misstatements or omissions. The plaintiffs cannot prove that Musk coerced any disinterested shareholder to vote in favor of the merger, they stated.

According to the plaintiffs, however, they are entitled to summary judgment because the majority of the board was conflicted with regard to merger and the shareholder vote was not fully informed given that Tesla withheld information about SolarCity’s financial condition and Musk’s involvement in the merger negotiations.

Coercion. The court rejected that defendants’ contention that the notion of "inherent coercion" by a minority shareholder cannot extend beyond a motion to dismiss. A minority holder can be controlling through "a combination of potent voting power and management control such that the stockholder could be deemed to have effective control of the board without actually owning a majority of stock," the court stated. According to the court, the ability to control rather than actual exercise of control is determinative. The idea that conflicted controller transactions are inherently coercive is a fixture of Delaware law, and transactions involving conflicted controllers must be reviewed for entire fairness even when approved by a shareholder vote because such a vote is presumed to be coerced, the court stated. There are genuine issues of material fact as to whether Musk was a controlling shareholder, and the defendants’ motion for summary judgment based on shareholder ratification must be denied, the court found.

Fully informed. The court also noted the existence of genuine issues of material fact as to whether the merger vote was fully informed. Some of the disclosures regarding SolarCity’s financial condition and Musk’s role in negotiating the transaction were arguably materially misleading, the court stated. The plaintiffs provide evidence of multiple financial issues, the court found, but further inquiry is necessary. In addition, Tesla’s proxy statement said Musk was recused from voting on matters related to the potential acquisition of SolarCity, but there is a genuine issue regarding whether this is accurate. Materiality depends on whether Musk is a controller, which remains a triable issue, the court found.

The court did, however, grant the defendants summary judgment on the immateriality of potential issues surrounding the financial analysis of SolarCity. Given that the growth rate used to calculate SolarCity’s value was disclosed, failing to disclose related tax assumptions was immaterial as a matter of law, the court found.

The court also noted that questions remain surrounding the independence of board members other than Musk in light of the interconnection of companies and dual-fiduciary problems and also as to whether the merger may constitute waste. As such, the court denied summary judgment to both the plaintiffs and the defendants with the exception of the discrete claims challenging the valuation analysis and predicted financial impact.

The case is No. C.A. No. 12711-VCS.

Attorneys: Jay W. Eisenhofer (Grant & Eisenhofer P.A.) and Justin O. Reliford (Kessler Topaz Meltzer & Check, LLP) for the Plaintiffs. David E. Ross (Ross Aronstam & Moritz LLP) and Evan R. Chesler (Cravath, Swaine & Moore LLP) for Elon Musk.

Companies: Tesla Motors, Inc.; SolarCity Corporation

MainStory: TopStory CorporateGovernance CorpGovNews GCNNews DirectorsOfficers FiduciaryDuties MergersAcquisitions DelawareNews

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