Tesla Investors Can Move Ahead With SolarCity Deal Lawsuit

(Bloomberg) -- Tesla Inc. investors can press forward with claims that billionaire founder Elon Musk duped them into backing his $2.6 billion buyout of a solar-energy firm founded by his cousins, another setback in a rough week for the automaker.

Tesla shareholders challenging the acquisition of SolarCity Corp. produced enough evidence showing the deal may have been flawed by conflicts among Musk and other company directors, a Delaware judge ruled Wednesday. More than 85 percent of the company's stockholders voted to back the acquistion.

Musk's electric-car maker is facing a crisis in the wake of a fatal crash involving one of its Model X cars in California earlier this month. Tesla's shares have fallen on all but five days this month and the company lost its perch to General Motors Co. as the most valuable automaker. The stock declined 7.7 percent Wednesday to $257.78.

The crash, which is under investigation, adds to Musk's challenges including concerns that the company won't reach its production targets for the all-important Model 3 sedan. Tesla didn't say whether the vehicle's Autopilot system was engaged during the accident.

Tesla said it didn't agree with the judge's decision in the investor suit and will be taking appropriate next steps. The company insists the allegations in the complaint are false.

Pension funds that opposed the 2016 SolarCity buyout accused Musk, who owns a 22 percent stake in Tesla, of using his outsize influence and reputation to manipulate the shareholder vote over the buyout.

Critics of the deal called it a bailout for SolarCity and said it raised questions about the Musk-led company's corporate governance. Tesla added two new independent directors last year after investors complained its board was too closely tied to the chief executive officer.

The company's lawyers argued Musk can't be tagged as Tesla's controller given he owns a minority share and that he didn't coerce or trick investors into backing the SolarCity acquisition.

Musk's aura of being Tesla's “visionary” founder, CEO and board chairman, coupled with his ties to other directors, allowed him to exert enough influence over the SolarCity shareholder vote that it raised questions about its propriety, Slights concluded.

Tesla investors gathered information that raises a “reasonable inference that Musk exercised his influence as a controlling stockholder” in connection with SolarCity deal, Delaware Chancery Court Judge Joseph Slights wrote.

The investors also showed that conflicts “diminished the board's resistance to Musk's influence,” the judge said.

The case is is In Re Tesla Motors Inc. Stockholders Litigation, No. 12711, Delaware Chancery Court (Wilmington).

To contact the reporter on this story: Jef Feeley in Wilmington, Delaware at jfeeley@bloomberg.net.

To contact the editors responsible for this story: Elizabeth Wollman at ewollman@bloomberg.net, Joe Schneider

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