Remember SolarCity? Back in 2016, Tesla made the controversial purchase of the solar panel manufacturing company for $2.6 billion. The acquisition was controversial since Tesla CEO Elon Musk had previously sat on the board, and the founders were his cousins, so many viewed the purchase as a conflict of interest. Well, it sounds like some angry Tesla investors are taking legal action regarding the matter. I cannot say that I am surprised to hear that Tesla and its acquisition of SolarCity is finally facing a lawsuit.
When the purchase of SolarCity finally came through back in 2016, it was lauded as an opportunity for the electric car manufacturer to create the “world’s only vertically integrated sustainable energy company”. Owning an in-house supply chain would expand its use of clean energy and increase the value of both Tesla and SolarCity’s business interests at the same time.
There were a couple of problems, though, and ones that some shareholders were painfully aware of at the time: SolarCity was in debt, Musk was the largest shareholder of SolarCity, and the founders are his cousins. This seemed to cause all sorts of conflicts of interest, but for some reason, the sale still went through.
Tesla and the SolarCity Lawsuit
The suit was originally filed with the Delaware Court of Chancery back in 2017, but only recently have documents from the litigation been unsealed for the public. The suit accuses Musk of using his influence as both a director and controlling stockholder to convince Tesla’s board of directors to invest in SolarCity using faulty data and without sufficient due diligence to protect Tesla shareholders.
During a SolarCity board meeting in October of 2015, Musk was told that the company needed to raise up to $300 million and that it also needed to slash its solar installation forecast for the remainder of the year. In February of 2016, SolarCity’s management informed the board that it predicted its cash balances would drop below the amount required for a key line of credit. This, in turn, would trigger defaults on other debts, essentially hurtling the company towards bankruptcy.
“Almost immediately after the acquisition closed, SolarCity’s auditors [Ernst & Young] confirmed that SolarCity was, in fact, insolvent,” stated attorneys for the investors.
Not only did Musk knowingly encourage Tesla’s board to invest in a sinking ship, but he also sank a lot of money into that ship before Tesla handed over $2.6 billion to purchase it. Before Tesla really became involved in this debacle, Musk already owned 22 percent of SolarCity’s stock. When SolarCity issued $113 million in convertible notes in November of 2016, Musk personally purchased $10 million worth of them. He then caused SpaceX, another of his companies, to purchase $255 million in SolarCity bonds between March of 2015 and March of 2016.
Musk is SpaceX’s chairman, CEO, CTO, and majority stockholder. SolarCity is the only public company that SpaceX has ever invested in.
The Family Connection
According to the suit, Musk proposed the acquisition of SolarCity during an emergency meeting of Tesla’s board just after a Lake Tahoe family vacation with his cousin, SolarCity Chief Executive and founder Lyndon Rive. Would Musk have made such a questionable decision were it not for the fact that he was related to SolarCity’s founders? It does not seem all that likely, because Musk is an intelligent, albeit eccentric man. But this has turned into a rather expensive familial bailout.
Tesla stock has fallen more than 5 percent since this fiasco had gone public on Tuesday morning.