SAN FRANCISCO — Elon Musk did not breach his fiduciary duty to Tesla when the company acquired solar power firm SolarCity, a Delaware Chancery Court judge ruled on Wednesday.
“[My] verdict is for the defense on all claims,” the judge, Joseph R. Slights III, wrote in his opinion.
Tesla acquired SolarCity for $2.6 billion in 2016. Musk at the time owned a large portion of SolarCity, which was run by two of his cousins. Tesla shareholders alleged Musk was acting in his own interest with the purchase, rather than that of the electric vehicle company, now the world’s most valuable carmaker. Shareholders had argued that the acquisition of SolarCity amounted to a bailout of a struggling company in which family members were involved.
In his opinion, Slights summarized the plaintiffs’ view: that Musk made Tesla’s “servile” board greenlight the acquisition of an “insolvent” SolarCity to bail out an investment by him and family members that was not panning out.
“This, say the plaintiffs, was a clear breach of Elon’s fiduciary duty of loyalty,” Slights wrote.
Musk himself had taken the stand in the SolarCity suit last summer, defending Tesla’s decision to buy the solar firm when he put the deal in terms of the planet’s future. He also attacked a plaintiffs’ attorney as a “bad human being.”
The suit also concerned Musk’s alleged control of the board. Musk, the plaintiffs argued, exerted dominance over the board as he sought to see the deal through.
Slights disagreed, however, pointing to instances where he found the board rebuffed Musk.
“Elon was undoubtedly involved in the deal process in ways he should not have been, but fortunately, the Tesla Board ensured nevertheless that the process led to a fair price,” the judge wrote.
Musk did not immediately respond to a request for comment.
Randall Baron, attorney for the plaintiffs, said, “The court recognized important conflicts and flaws in the deal approval process. We are carefully reviewing the court’s decision and are considering appropriate next steps in consultation with our clients.”
The decision adds to a string of legal victories for Musk in high-profile litigation that posed risks to both him and Tesla. Musk was not held liable, for example, in the 2018 defamation suit involving a Thai cave rescue diver he had called a “pedo guy.” And though he gave up his Tesla chairmanship after a 2018 tweet that he had “Funding secured” to take Tesla private at $420 a share, Musk retained his control of the company and later emerged the world’s richest person.
The latest threat to Tesla is Musk’s $44 billion deal this week to take over social media firm Twitter. He is using billions of dollars worth of his Tesla stake as collateral to pay for Twitter, a move that sent Tesla’s stock tumbling by more than $100 billion on Tuesday.
In the SolarCity trial, Musk could have had to pay back as much as $2 billion to Tesla.
Beyond that potential penalty, the suit was also a referendum on Musk’s brash leadership style — where he aggressively pursued his interests sometimes independent of established processes.
“If he was found liable for the monetary damages, that would be a harm to Tesla,” said Alexander Manglinong, an associate attorney focused on business litigation at the firm Stubbs Alderton & Markiles. “In turn, him causing that would just be another reason to add to that list of why the Board of Directors might want to reconsider who would be CEO.”
Slights nodded to Musk’s unusual level of involvement in the deal in his opinion Wednesday.
“The process employed by the Tesla Board to negotiate and ultimately recommend the Acquisition was far from perfect. Elon was more involved in the process than a conflicted fiduciary should be,” he wrote. “With that said, the Tesla Board meaningfully vetted the Acquisition, and Elon did not stand in its way.”
Slights also said Tesla paid a fair price for SolarCity in the deal.
“SolarCity was, at a minimum, worth what Tesla paid for it,” he wrote, “and the Acquisition otherwise was highly beneficial to Tesla.”
In recent years, the SolarCity investment has been dismissed a blunder by Tesla; some have heaped blame on Musk over the litigation Tesla has faced due to the subsidiary’s shortcomings in ushering in Tesla’s clean energy goals. Walmart in 2019 filed suit against Tesla over a string of seven solar panel fires at stores around the country, an example of the type of litigation Tesla faced in the aftermath of the purchase. Tesla and Walmart settled in the matter, CNBC reported.
In his opinion, Slights addressed the plaintiffs’ arguments that Tesla and SolarCity had not integrated. Examples included Tesla’s termination of thousands of solar-focused workers, and the decrease in deployments of solar components after Musk “repurposed” SolarCity employees to work on the rollout of the Model 3, Tesla’s mass market-aimed sedan.
Those examples were true, he said, but “the fact that SolarCity has yet to be fully integrated into Tesla does not diminish the substantial synergies already achieved, to say nothing of the massive potential for synergies yet to be achieved.”