Written by Norman Isaac Mwambazi

Elon Musk defends Tesla’s $2.6B acquisition of SolarCity in a shareholder lawsuit

After being postponed in March last year due to the coronavirus pandemic, Tesla Inc. (ticker: TSLA) Chief Executive Officer (CEO) …

After being postponed in March last year due to the coronavirus pandemic, Tesla Inc. (ticker: TSLA) Chief Executive Officer (CEO) Elon Musk yesterday, Monday, July 13, 2021, testified before the Vice-Chancellor of the Delaware Court of Chancery, Joseph Slights.

In the suit that Tesla shareholders filed, Elon is accused of influencing the automaker’s decision of acquiring SolarCity Corporation in 2016, a company that sold and installed solar energy generation systems and other related products and services to residential, commercial and industrial customers. The deal was worth $2.6 billion.

Shareholders who sued Musk and his fellow Tesla board members allege the 2016 acquisition deal turned out to be a bailout for SolarCity since the company was struggling at the time. Late last year, Tesla board members that were part of the suit settled for $60 million; Musk refused to adhere to the settlement and decided to take the fight to court.

In his testimony yesterday, Musk defended his role in Tesla’s acquisition of SolarCity nearly five years ago, arguing he didn’t have any undue pressure on the deal. This is expected to be a two-week trial.

In the few months preceding the acquisition of SolarCity, Musk referred to the deal as a “no brainer”, hoping that it would bring together two companies that would interdepend on each other. Tesla makes electric vehicles, and SolarCity manufactures solar panels that can recharge these vehicles. To Musk’s, and shareholder’s disappointment, this has not worked out according to plan, and this must have fuelled the suit since SolarCity has not been profitable for Tesla since the acquisition.

If Musk loses, he could pay up to $2.6 billion- the amount spent on the acquisition, although he likely wouldn’t feel the pinch since he is worth more than $163 billion. It is worth noting that if shareholders win, the money paid by Musk would not directly go to them, but rather to Tesla as a whole since investors filed the suit on behalf of a corporation and not individuals or funds.

The trial attempts to answer whether the Tesla CEO acted in the Tesla shareholder’s best interests or whether he made and encouraged these decisions to benefit himself, his family, and other companies he was involved in besides Tesla.

In his testimony, Musk refuted the claims made by shareholders that the acquisition of SolarCity amounted to a bailout. He said that he did not receive anything financially from the deal since it was a stock-for-stock transaction, and he owned almost the same percentage of both companies’ stock.

At the time of SolarCity’s acquisition in 2016, Musk was its chairman and its largest stakeholder. The company was also founded by Musk and his two cousins Peter Rive (CTO) and Lyndon Rive (CEO). Because of this closeness to the management of SolarCity, shareholders base their belief that there must have been a conflict of interest in the company’s acquisition.

Shareholders allege that Tesla directors breached their fiduciary duties when they acquiesced to Musk’s wishes to green light and bought the struggling company.

However, in his testimony before the court yesterday, Musk denied ever pressurising fellow board members to support the acquisition; neither did he use his position and influence to control the appointment of board members, their removal or compensation.

The Managing Director and Senior Equity Research Analyst at Wedbush Securities, Dan Ives, labelled the deal as one of Musk’s lowlights in a pool of all his bright achievements, primarily due to SolarCity’s failure to turn a profit since it was acquired. Ives covers the technology sector at Wall Street for Wedbush. 

“It basically was putting good money after bad. For all the successes and all of the unimaginable heights Musk has achieved, this is one of the lowlights. I just think Musk and Tesla underestimated the challenges and the hurdles that the business brings,” Ives said, as quoted by Market Watch. Ives added that most investors do not necessarily place any value on Tesla’s solar business.

According to Tesla’s annual report last year, its energy generation and storage business generated $1.9 billion in revenue in 2020. This was 24% more than it raked in from the same business last year, but most of it came from selling battery storage units. Although Tesla doesn’t clearly say whether the business made a profit, the finances made it clear that it was outperformed by the energy generation and storage business.

Tesla stock

At the time of writing this, Tesla stock is down 1.05%, currently trading at $678.50 a share. Whether this is connected to Musk’s ongoing trial or it is just on a downward trend after its death cross signal is yet to be ascertained.

On the other positive hand of Tesla stock that could be of interest to Tesla investors, Goldman Sachs (ticker: GS) analysts have lifted their Earnings Per Share (EPS) estimates for the automaker less than two weeks to the company’s Q2 FY2021 earnings report set to be released on July 26.

Goldman Sachs has raised Tesla’s EPS for three fiscal years; 2021, 2022, 2023, due to the higher pricing of its Electric Vehicles (EVs) this year and the expected production and selling of more units in the 2022/2023 fiscal years, especially for the Tesla Model Y.

In addition to making the Tesla Model Y available on the European market, Tesla also released a lower-cost version of the car for its China market.

Over the weekend, Tesla began releasing a software update that would allow its cars to have self-drive capabilities, especially for Tesla owners who want to use the feature for driving on local streets. The news of Tesla’s Full Self-Driving beta version 9 was first reported by tech website The Verge.

Goldman Sachs analysts Mark Delaney noted that all positive changes at Tesla are partly attributed to a lower revenue estimate from regulatory credits. The new Tesla non-Generally Accepted Accounting (GAAP) EPS expectations for Q2 FY2021 is now 0.94 cents, up from 84 cents.