Debt, Solar Shingles and Desperate Housewives – Why are some Tesla shareholders suing Elon Musk?

Whether you believe the hype or not, Tesla is a big business.

Listed on NASDAQ and a member of the S&P 500, the electric car maker who heads Elon Musk is currently valued at more than $ 620 billion after its share price rose from around $ 133 per share in February 2020. at around $ 650 at the time of writing.

While its chief executive Musk owns around 20% of the company at last count, 43% of its shares are held by institutional investors, including banks, pension fund managers and hedge funds.

It is safe to say that there are many fortunes linked to the health of the California automaker and its leader.

So when a group of Tesla shareholders sue its chief executive alleging that he breached his obligations as the majority shareholder of Tesla by claiming to have made a deal to buy one of his other less successful companies , it is important.

This week in the US state of Delaware, Musk faced tough questions about his role in Tesla’s 2016 acquisition of SolarCity for $ 2.6 billion.

If he loses, he could be forced to pay more than $ 2 billion to the plaintiffs, a group of union pension funds and asset managers. The court could also order Musk to refund the money directly to Tesla.

Whatever happens, it will likely be a drop in the ocean for Musk, who was recently named the richest man in the world by Bloomberg. But the lawsuit may reveal interesting details about Tesla’s inner workings and could be a black eye on its founder’s reputation if it goes the wrong way for him.

What was SolarCity?

SolarCity, founded by Musk’s cousins ​​Peter and Lyndon Rive, with seed money from the boss of Tesla, started out as a sort of solar panel rental company.

Its business model allowed customers to rent normally expensive solar panels for a period of time without having to pay for the installation.

They would then receive a monthly bill from SolarCity – where Musk was the largest shareholder and chairman – for the electricity produced by the panels.

Eventually, the company went into manufacturing the panels itself. But his rental model required him to borrow heavily to finance the installation process and the system itself.

With revenue gradually coming from customers, month by month over the often long life of the lease, SolarCity’s debt has swelled over the years to reach around $ 3.25 billion in the summer of 2016, as flows cash seems to have been an eternal problem.

The product itself was also hampered by bad publicity.

In 2019, three years after Tesla agreed to buy SolarCity, the company was sued by U.S. retail giant Walmart, alleging its panels had caught fire causing millions of dollars in damage since 2012.

Walmart accused SolarCity of having “a reckless business model that required it to install solar panel systems at random and as quickly as possible in order to generate a profit.”

This lawsuit was dropped last year after an out-of-court settlement.

Its biggest public relations disaster began in 2016 when the company attempted to launch a new product, solar roofing shingles, a more aesthetic alternative to bulky panels.

Musk – who was synonymous with the SolarCity brand in the public mind at this point – promoted the product during a demonstration. on the set of Desperate Housewives in 2016, equipping some of the homes in Wisteria Lane with the product.

But it’s been in development hell since then and still hasn’t been released to the public. Musk, to put it mildly earlier this year, admitted that he made “big mistakes” with the idea of ​​the solar roof.

Why did Tesla buy it?

Well, that’s the question, isn’t it? Why did Musk urge a publicly traded company to take over a struggling, heavily leveraged, cash-poor transaction like SolarCity?

After all, the company faced significant debt repayment deadlines over the next few years and experienced a cash shortage in 2015, just a year before Tesla shareholders voted in favor of the deal. .

But Musk, who was chairman of both companies at the time, said the deal made sense.

The acquisition was part of his “Master Plan: Part Two” to transform Tesla into a dominant player in electric cars and green energy.

He maintains that “the acquisition of SolarCity has been critical to Tesla’s success as a fully integrated clean energy company.”

He resolutely denies that the purchase was “a rescue” of the ailing company, which is the central allegation of the lawsuit, or that he benefited financially from the transaction.

The plaintiffs argue that Musk failed in his duty as a controlling shareholder in Tesla because his role as chairman of both companies at the time “poisoned” the ability of Tesla’s board of directors to assess the deal.

What happened in court this week?

Musk began his two days of testimony in a typically combative, headline-hungry style.

When questioned by the plaintiff’s lawyer, he bristled at any suggestion he had heavily armed Tesla’s board of directors – whose members include his brother Kimball Musk – or its shareholders in the acquisition.

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“I think you are a bad human being,” Tesla founder told Randall Baron, a shareholder lawyer.

“I have great respect for the court,” Musk added later, “but not for you, sir.”

Sometimes he seemed to contradict himself. Musk disagreed that there was “significant evidence” that SolarCity was in serious financial distress and yet he was warned of the cash shortage in an email from the CEO of the company to Musk from July 2016, which was read in court.

At one point, he said he never wanted to be Tesla’s CEO, “but I had to or he would die.”

This is probably not a good point to make when trying to convince a judge that you are not exerting an inordinate degree of influence on the board of directors of a company, like Bloomberg. Matt Levine pointed out.

“If you’ve got a wealthy, impulsive CEO who’s also the only person who could possibly run the business, you’ve got to let him do what he wants,” Levine wrote this week.

“Much like a question of fiduciary responsibility to shareholders, I mean directors should rather approve of a terrible, conflicting deal they hate if the alternative is to disappoint Musk and possibly lose him.”

The trial continues next week.

– Additional reports by PA

Julio V. Miller

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