A Delaware Chancery Court judge recently rendered a post-trial verdict in the In re Tesla Motors Stockholder Litigation in which he found in favor of co-founder and CEO of Tesla Motors, Elon Musk, on claims that Musk breached his fiduciary duties, was unjustly enriched, and created corporate waste in connection with Tesla’s 2016 acquisition of the SolarCity Corporation.
This high-profile, high-stakes lawsuit stemmed from alleged conflicts of interest created by Musk’s leadership and ownership of both companies during the 2016 acquisition. At the time of the merger, Musk was SolarCity’s largest stockholder and chaired its board of directors. At the same time, he owned 22% of Tesla stock and served as CEO and a director of Tesla. When the potential acquisition of SolarCity came up, Tesla’s board elected not to form a special committee of independent directors to negotiate the transaction. It did, however, condition approval of the acquisition on the “affirmative vote of a majority of the minority of Tesla’s disinterested stockholders” and recused Musk from certain Board discussions regarding the acquisition.
Despite these protections, the plaintiff shareholders alleged that Musk, as Tesla’s controlling shareholder, exerted his influence over Tesla’s board to approve the acquisition at an unfair price, following a highly flawed process, in order to bail out his (and other family members’) foundering investment in SolarCity. Plaintiffs named both Musk and members of Tesla’s board as defendants and sought damages as well as equitable remedies. Before trial, all defendants except Musk settled with plaintiffs, leaving only the claims against Musk proceeding to an 11-day trial over July and August 2021.
Following trial but before the Court issued its 132-page post-trial decision, the Delaware Supreme Court issued an important decision concerning derivative vs direct actions in overpayment/dilution suits, which caused the plaintiffs to drop their direct claims against Musk and proceeded only on a derivative basis. The Court’s opinion focused on the four remaining claims: Counts I and II which asserted derivative breach of the duty of loyalty claims against Musk in his capacities as Tesla’s controlling stockholder and as a member of the Tesla board by causing the company to acquire an insolvent SolarCity; Count III which asserted a claim of unjust enrichment against Musk in connection with the Tesla stock he received as a result of the acquisition; and Count VI which asserted that the acquisition of SolarCity constituted waste of corporate resources.
In analyzing the evidence supporting the breach of fiduciary duty claims, the Court clarified that the duty at issue was Musk’s duty of loyalty, not his duty of care. After clarifying the precise duty at issue, the Court turned its attention to determining whether the plaintiffs proffered sufficient evidence to prove a claim of breach of this duty. As the Court explained, the plaintiffs’ fiduciary duty claims would rise or fall on the issue of whether the transaction was entirely fair. If it was fair, then no breach of fiduciary duty claim could lie.
In that regard, the Court ultimately found that the transaction was entirely fair. Though the Court identified several instances throughout the process where Musk was permitted to participate in the deal process to an inappropriate degree, it ultimately concluded that the evidence of the board’s thorough due diligence efforts as well as the expert testimony on valuation deduced at trial supported a finding that the deal was fair and that Musk had not hijacked the process to rush the deal through. In fact, the Court noted how Musk had repeatedly urged the board to expedite the deal but the board had rebuffed his wishes and took its time evaluating the acquisition.
Although the Court ultimately determined that the deal was fair and that Musk did not breach his duty of loyalty, the Court did not approve of the manner in which Tesla’s board pursued the deal. In a sternly worded footnote, the Court explained:
There was a right way to structure the deal process within Tesla that likely would have obviated the need for litigation and judicial second guessing of fiduciary conduct. First and foremost, Elon should have stepped away from the Tesla Board’s consideration of the Acquisition entirely, providing targeted input only when asked to do so under clearly recorded protocols. The Tesla Board should have formed a special committee comprised of indisputably independent directors, even if that meant it was a committee of one. The decision to submit the Acquisition for approval by a majority of the minority of Tesla’s stockholders was laudable, and had the deal process otherwise been more compliant with the guidance provided by this court and our Supreme Court over many decades, it is likely there would be no basis to challenge the stockholder vote as uninformed. Of course, none of that happened.
The Court’s full opinion is available here.
Our Chicago breach of fiduciary duty and business litigation attorneys have defended and prosecuted breach of fiduciary duty, shareholder oppression, and business divorce lawsuits for more than three decades. In recognition of their stellar track record and experience, Super Lawyers named DuPage and Cook County business litigation and fiduciary duty attorneys Peter Lubin and Patrick Austermuehle a Super Lawyer and Rising Star respectively in the Categories of Business Litigation, Class Action, and Consumer Rights Litigation. We handle high-stakes breach of fiduciary duty lawsuits and emergency business litigation involving injunctions, TROS, and declaratory judgments in a variety of corporate disputes. If you’d like to discuss how the experienced Illinois breach of fiduciary duty attorneys at Lubin Austermuehle, P.C. can help, we would like to hear from you. To set up a consultation with one of our Chicago business attorneys and Chicago trial lawyers, please call us locally at 630-333-0333 or contact us online.