WILMINGTON, Del.— Tesla Inc. TSLA 4.38% Chief Executive Elon Musk was in court Monday to defend the company’s purchase of SolarCity Corp., telling a judge that he didn’t act improperly during the negotiating process and doesn’t even enjoy running the electric-vehicle maker.
The case dates to 2016, when Mr. Musk was chairman of both the then-unprofitable companies. His solution to improve their outlook: Combine them in a roughly $2.1 billion tie-up to establish a single clean-energy business. 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 was the opening witness called in Delaware Chancery Court in a nonjury trial that is expected to run about two weeks. The attorneys for Mr. Musk 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 have said 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.
Despite the absence of a jury, the billionaire CEO, who has a record of sometimes blunt and surprising statements, flashed some of that in this case. He said during the trial he didn’t enjoy being the boss of Tesla. “I rather hate it and I would much prefer to spend my time on design and engineering, which is what intrinsically I like doing,” he said.
Mr. Musk made the comment after opposing counsel tried to show how his “force of will” and faith in his view of Tesla’s future illustrated his ability to control the SolarCity transaction.
Other issues before the judge include whether Tesla board members, some of whom also were SolarCity shareholders personally or through investment funds they managed, were conflicted and whether vital information about the deal was withheld from shareholders. Mr. Musk said Monday that an independent director handled the negotiation and that Tesla’s directors even overruled his proposal that Tesla provide temporary financing to SolarCity before the deal went through.
Members of the media on Monday gathered outside the justice center in Wilmington, Del., where Elon Musk testified in a nonjury trial.
Photo: Matt Rourke/Associated Press
Mr. Musk spoke in a calm and sometimes quiet tone as he answered his lawyer’s questions. He became more energetic when he fielded questions from Randall Baron, a lawyer for the plaintiffs, who pressed him on whether he dominated Tesla, handpicked its board members, and made decisions without directors’ involvement.
Mr. Musk flashed some of his sometimes combative nature in the case, making for a confrontational witness in a 2019 deposition, repeatedly goading Mr. Baron, whom he called “reprehensible” for “attacking sustainable energy.”
To explain the behavior, Mr. Musk told the court he didn’t respect Mr. Baron because the lawyer had once worked at a law firm whose partners became engulfed in an ethics scandal. “I think you are a bad human being,” Mr. Musk said to Mr. Baron.
Mr. Baron also questioned Mr. Musk, asking why SolarCity’s performance varied significantly from the projections that Tesla gave to shareholders in 2016. Mr. Musk blamed the decline in solar-panel installation and market share to Tesla’s pressing need to focus on developing its Model 3 car in 2017 and 2018. Tesla at the time was struggling to bring the car to market.
“Those were the three hardest years of my entire career,” he said, later calling the period excruciating. “The company was in dire straits. Many of the times I thought we were out of the woods, we were not.”
More recently, Mr. Musk said, the coronavirus pandemic impacted Tesla’s ability to get permits for residential solar installations.
If Mr. Musk loses, he could be asked to make Tesla 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 has been delayed for more than a year because of the 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.
“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.
Mr. Baron pressed that point Monday with Mr. Musk, asking about internal emails and meetings that discussed efforts to save money by delaying payments to vendors and other moves. The attorney also asked whether he was aware that Lazard Ltd. bankers had tried to raise money for SolarCity in 2016 and found most of the private investors they surveyed to be unreceptive.
Mr. Musk parried many questions, saying that Tesla also occasionally took such steps to conserve cash. He said SolarCity could have raised money from private investors if it had more time to do so, and ultimately could have sold stock to public investors.
If chancery court Vice Chancellor Joseph Slights III, the presiding judge, finds Mr. Musk didn’t control the deal, the case is likely over for the plaintiffs, said Lawrence Hamermesh, executive director of the Institute for Law and Economics at the University of Pennsylvania’s Carey Law School.
Case law in Delaware generally defers to the business judgment of independent and properly motivated directors. On the other hand, if the evidence points to control, the court would assess whether the deal process and price were fair and, if not, whether Mr. Musk should be ordered to pay money back to Tesla, Mr. Hamermesh said.
For Mr. Musk, who now ranks among the world’s wealthiest people, the optics of a loss likely would be more meaningful than any court-ordered financial judgment, said Seth Goldstein, an analyst for Morningstar Research Services LLC.
“You could see the board become extra diligent with regard to acquisitions that aren’t in Tesla’s current, existing industries,” Mr. Goldstein said.
Tesla investors also have enjoyed a change in fortunes since the takeover first surfaced. The vehicle maker posted its first full-year of profit in 2020. The stock, which traded at around $44 when Tesla proposed buying SolarCity, now trades at around $676.
Mr. Musk is no stranger to court appearances. In 2019, he was called to the stand in a case in which a British cave explorer accused him of defamation. The jury found him not guilty.
The prior year, the Securities and Exchange Commission sued Mr. Musk and Tesla over claims that he misled investors through his tweets. Mr. Musk and Tesla settled the lawsuit by each paying $20 million, and Mr. Musk agreed to have certain of his tweets reviewed by Tesla’s lawyers before publishing them.
Write to Dave Michaels at [email protected] and Rebecca Elliott at [email protected]
Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
