However, the court ruled that the $2.6 billion takeover of troubled solar energy provider SolarCity was fair to Tesla and its shareholders.
But as with all good proverbs, there are lessons to be learned from the decision.
Financial justice is still the North Star
With Musk on both sides of a deal that also benefited his relatives, and with objective reasons to doubt that a majority of Tesla’s board members could exercise independent business judgment, the court sharply criticized Tesla’s decision — unjustified at trial — not to delegate negotiation and approval of the deal to a special committee of independent directors.
Assuming Musk was the controlling stockholder in connection with the transaction, this mandate would have allowed the invoking business rule rule — and possible early separation. This would have saved Tesla, its directors, shareholders, and other stakeholders the time, cost, and distraction of the half-decade-long litigation saga attacking the goodwill of the company’s visionary founder.
The feasibility of a special commission seemed clear given that, as described below, the court found that Tesla’s board of directors was generally well-motivated and able to pursue Tesla’s best interests.
However, the decision makes clear that the respondent may meet the full fairness standard of review even in circumstances involving a “far from perfect” process.
While the court considers both fair dealing and fair price, notwithstanding the flaws of the procedures, the court may uphold a financially fair transaction and therefore no harm will result. This means that the finding that the transaction is financially fair often leads the court to conclude that potential flaws in the process did not prevent the board of directors from negotiating a fair deal.
As the court concluded, this deal “has drawbacks and redeeming characteristics. However, what is central to this case is that Musk proved that the price Tesla paid for the SolarCity was fair — and the obviously fair price is what ultimately holds today.”
Market indicators support financial equity
In this ruling, the court followed Delaware’s recent decisions that valuations derived from a sufficiently reliable trading market are preferable to expert analyzes formed in the crucible of litigation. The court followed this precedent in rejecting the plaintiffs’ “all-in” bet that the court would find SolarCity insolvent and worthless.
SolarCity was experiencing a liquidity crunch from its business model, which prioritized product development, gaining market share, and achieving scale — with debt financing — in the long game to become the market leader in an important industry. But that information was known to investors, who still valued SolarCity shares at about $2.6 billion of market value before the deal.
Furthermore, contemporary documents have shown that Tesla expects higher synergies than the market premium it was willing to pay. In light of the evidence that SolarCity was a valuable, if cash-strapped company, the court found the plaintiffs’ filing of damages “stunning in the face”.
And so the court found that Tesla “paid a fair price – SolarCity was, at least, worth what Tesla paid for, and the acquisition would otherwise have been very beneficial to Tesla.”
Independence in the facts of reality
Based on two weeks of trial, the court also concluded that, regardless of the objective conflict of interest, Tesla managers – other than Musk – were in fact well-motivated and pursued Tesla’s best interests. Although Musk was “inexplicably given the opportunity to try to influence” the board’s operation, he did not control it.
In fact, other managers rejected his proposals throughout the acquisition process. In response, “Mask didn’t back down from them—there were no threats, fits, or fights.” The process was also led by a recognized independent board chairperson.
Ultimately, the court concluded, “under the supervision and influence of an ‘disinterested decision-maker’,” it was ‘convinced that Tesla’s trustees put the interests of Tesla shareholders before their own. The court also said that each “dissenting director could be said to have credibly testified (and explained in detail how) he made his decision in accordance with his duty of loyalty.”
This was despite the “facts that reveal the recognized scenarios where Ability for the existence of conflict. (emphasis in the original).
Also significant was the fact that Tesla hired an independent financial advisor for the transaction who, beyond Musk’s influence, analyzed other potential acquisition opportunities in the same industry, whose analysis supported that the acquisition price was in the range or below of, what it would be fair to pay.
After establishing the facts, moving forward is upon one’s own
The court’s decision that the acquisition of SolarCity was fair, and therefore does not reflect any breach of fiduciary duty, was in fact a specific decision.
In a less specific case, the court may rule differently. However, in this case, litigation efforts culminated in the record of evidence causing the court to issue a favorable ruling, pending any requests for reconsideration or appeal.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or the publisher of Bloomberg Law and Bloomberg Tax or their owners.
Write to us: Author’s Guide
Louis H. Lazarus He is a partner at Morris James LLP in Wilmington, Del. , focuses on corporate governance and commercial matters in Delaware Chancery Court.
K. Tyler O’Connell A partner in Morris James LLP and represents companies, members of management, and investors in commercial disputes before the Delaware courts.