In re Tesla Motors, Inc. Stockholder Litigation ( 2022 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE TESLA MOTORS, INC. ) CONSOLIDATED
STOCKHOLDER LITIGATION ) C.A. No. 12711-VCS
MEMORANDUM OPINION
Date Submitted: January 18, 2022
Date Decided: April 27, 2022
Jay W. Eisenhofer, Esquire, Christine M. Mackintosh, Esquire, Kelly L. Tucker,
Esquire and Vivek Upadhya, Esquire of Grant & Eisenhofer P.A., Wilmington,
Delaware; Michael Hanrahan, Esquire, Kevin H. Davenport, Esquire and Samuel L.
Closic, Esquire of Prickett, Jones & Elliott, P.A., Wilmington, Delaware; Daniel L.
Berger, Esquire of Grant & Eisenhofer P.A., New York, New York; Lee D. Rudy,
Esquire, Eric L. Zagar, Esquire, Justin O. Reliford, Esquire, Matthew Benedict,
Esquire of Kessler Topaz Meltzer & Check, LLP, Radnor, Pennsylvania; Randall J.
Baron, Esquire and David T. Wissbroecker, Esquire of Robbins Geller
Rudman & Dowd LLP, San Diego, California, Attorneys for Plaintiffs.
David E. Ross, Esquire, Garrett B. Moritz, Esquire and Benjamin Z. Grossberg,
Esquire of Ross Aronstam & Moritz LLP, Wilmington, Delaware and Evan R.
Chesler, Esquire, Daniel Slifkin, Esquire, Vanessa A. Lavely, Esquire and
Helam Gebremariam, Esquire of Cravath, Swaine & Moore LLP, New York,
New York, Attorneys for Defendant Elon Musk.
Kevin R. Shannon, Esquire, Berton W. Ashman, Jr., Esquire, Jaclyn C. Levy,
Esquire and Nicholas D. Mozal, Esquire of Potter Anderson & Corroon LLP,
Wilmington, Delaware, Attorneys for Nominal Defendant Tesla, Inc.
SLIGHTS, Vice Chancellor
In 2006, Elon Musk, co-founder, CEO and Chairman of Tesla Motors, Inc.,
publicly declared in a so-called “Tesla Motors Master Plan” (the “Master Plan”) that
“Tesla’s mission is to accelerate the world’s transition to sustainable energy” and,
more specifically, “to help expedite the move from a mine-and-burn hydrocarbon
economy towards a solar electric economy . . . .”1 Ten years later, Tesla purported
to execute the Master Plan when it announced on June 21, 2016, that it would acquire
a solar energy company, SolarCity Corporation, in a stock-for-stock merger
(the “Acquisition”) valued at the time at approximately $2.6 billion. Several Tesla
stockholders have alleged the Acquisition, as consummated, was the product of
breaches of fiduciary duty and other wrongdoing. They have sued members of the
Tesla board of directors (the “Tesla Board”) and, separately, Elon as Tesla’s
controlling stockholder seeking damages and equitable remedies. After denying
defense motions to dismiss and cross-motions for summary judgment, the Court
convened an eleven-day trial.2 This is the Court’s post-trial verdict.
1
Plaintiffs named both Elon Musk and his brother, Kimbal Musk, as defendants. To avoid
confusion, I will refer to the brothers Musk by their first names. I intend no familiarity or
disrespect.
2
All named defendants, except Elon, settled with the plaintiffs in advance of trial, leaving
Elon as the sole remaining defendant.
1
As will be described in detail below, Elon owned approximately 22% of
Tesla’s common stock at the time of the Acquisition. In addition to his leadership
roles at Tesla, Elon was Chairman of the SolarCity board of directors (the “SolarCity
Board”) and the largest stockholder of that company. He was also the catalyst and
a vocal proponent of the Acquisition. Despite conflicts among its members,
the Tesla Board elected not to form a special committee of independent directors to
negotiate the Acquisition. It did, however, condition the Acquisition on the
affirmative vote of a majority of the minority of Tesla’s disinterested stockholders,
even though that vote was not required by Delaware law. While Elon was recused
from certain Tesla Board discussions regarding the Acquisition, he actively
participated in others. And he had several private discussions directly with the target
(SolarCity) and with Tesla’s financial advisor for the deal without the knowledge of
the Tesla Board.
According to the plaintiffs, as Tesla’s controlling stockholder, Elon caused
Tesla’s servile Board to approve the Acquisition of an insolvent SolarCity at a
patently unfair price, following a highly flawed process, in order to bail out his
(and other family members’) foundering investment in SolarCity. This, say the
plaintiffs, was a clear breach of Elon’s fiduciary duty of loyalty. Given Elon’s status
as a conflicted controlling stockholder, the plaintiffs maintain that the Court must
2
review their claims under the entire fairness standard, which requires Elon to prove
the Acquisition was the product of a fair process that yielded a fair price.
Elon counters that the plaintiffs failed to prove he was Tesla’s controlling
stockholder, failed to prove the Tesla Board was conflicted, and failed to prove the
Tesla stockholder vote approving the Acquisition was uninformed or coerced. Given
these failures of proof, Elon maintains that he is entitled to deference under
Delaware’s venerable business judgment rule. Should the Court disagree, Elon
argues the trial evidence reveals the Acquisition was entirely fair, regardless of
which party bore the burden of proof.
Against this factual backdrop, the plaintiffs’ claims against Elon, and Elon’s
defenses, call out like a carnival barker, beckoning the Court to explore a wide range
of interesting and arguably unsettled legal issues, including, among others, the
contours and nuances of Delaware’s controlling stockholder law, the extent to which
personal and business relationships among fiduciaries will result in disabling
conflicts of interest, the appropriate means by which a corporation’s board of
directors can disable fiduciary conflicts, the applicability and effect of an eleventh-
hour “fraud on the board” theory of fiduciary liability, the applicability and effect of
stockholder ratification of fiduciary conduct as a defense to various breach of
fiduciary duty claims, the triggers and effects of shifting burdens of proof when
litigating claims of fiduciary misconduct under the entire fairness standard of review,
3
and the interaction between fair process and fair price when reviewing a transaction
for entire fairness. To be sure, in answer to the barker’s call, it is tempting to venture
into each tent and confront the legal enigmas that await there. Given the clarity
provided by compelling trial evidence, however, there is no need to take on the
challenge of discerning the appropriate standard of review by which to decide the
plaintiffs’ claims. Even assuming (without deciding) that Elon was Tesla’s
controlling stockholder, the Tesla Board was conflicted, and the vote of the majority
Tesla’s minority stockholders approving the Acquisition did not trigger business
judgment review, such that entire fairness is the standard of review, the persuasive
evidence reveals that the Acquisition was entirely fair.
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. And conflicts among other Tesla
Board members were not completely neutralized. With that said, the Tesla Board
meaningfully vetted the Acquisition, and Elon did not stand in its way. Equally if
not more important, the preponderance of the evidence reveals that Tesla paid a fair
price—SolarCity was, at a minimum, worth what Tesla paid for it, and the
Acquisition otherwise was highly beneficial to Tesla. Indeed, the Acquisition
marked a vital step forward for a company that had for years made clear to the market
4
and its stockholders that it intended to expand from an electric car manufacturer to
an alternative energy company. The Court’s verdict, therefore, is for the defense.
I. BACKGROUND
The following facts were either stipulated to by the parties or proven by a
preponderance of the credible, competent evidence presented during trial.3
A. The Parties and Relevant Non-Parties
Co-lead plaintiffs, Arkansas Teachers Retirement System, Roofers Local 149
Pension Fund, Oklahoma Firefighters Pension and Retirement System, KBC Asset
Management NV, Erste Asset Management GmbH, and Stitching Blue Sky Active
Large Cap Equity Fund USA (collectively, “Plaintiffs”), were Tesla stockholders at
all relevant times.4 They, along with their counsel, were selected by the Court to
prosecute these claims following a vigorous leadership contest.5
Nominal defendant, Tesla, is a publicly traded Delaware corporation that
designs, develops, manufactures and sells electric vehicles (“EVs”) and energy
3
I cite to the joint trial exhibits as “JX __”; the docket items as “D.I. __”; the trial transcript
as “Tr. __ (witness name)”; the Amended Stipulated Joint Pre-Trial Order (D.I. 454)
as “PTO [paragraph number]”; and depositions lodged as evidence as “(Name) Dep. __.”
4
PTO ¶¶ 27–32.
5
D.I. 86, 92–93.
5
storage products.6 At the time of the Acquisition, its stock traded at
$185.02 per share.7 As of this writing, the stock trades at about $900.00 per share.8
Defendant, Elon Musk, is Tesla’s co-founder and largest stockholder.9 At the
time of the Acquisition, he owned approximately 22% of Tesla’s common stock.10
He also served as the chairman of the Tesla Board from April 2004 to November
2018,11 and has continuously served as Tesla’s CEO since October 2008.12 Elon
directs Tesla’s operational and strategic decisions.13 Tesla is “highly dependent on
[his] services,” and his departure from the company would likely “disrupt [its]
operations, delay the development and introduction of [its] vehicles and services,
and negatively impact [its] business, prospects and operating results.”14 According
6
PTO ¶¶ 120–21.
7
PTO ¶ 180.
8
See Tesla, Inc. (TSLA), Yahoo! Finance (last accessed Apr. 27, 2022),
https://finance.yahoo.com/quote/TSLA/.
9
PTO ¶ 125; Tr. 81:24–82:1 (Elon) (describing himself as “co-founder” of Tesla).
10
PTO ¶ 41.
11
PTO ¶ 33.
12
PTO ¶ 34.
13
See, e.g., Tr. 2222:6–8 (Jurvetson) (describing Elon as Tesla’s “chief product architect
and visionary” and “[a]n incredible leader and motivator of people”); JX 3109
(Elon tweets: “Working on Top Secret Tesla Masterplan, Part 2”); Tr. 78:24–79:19 (Elon)
(testifying he wrote the Master Plan himself).
14
JX 824 at 21.
6
to Musk, he tried “very hard not to be the CEO of Tesla,” “[but], unfortunately, [he]
had to or the company was going to die.”15
Non-party, SolarCity, was a publicly traded Delaware corporation founded in
2006 by Elon’s cousins, Peter Rive and Lyndon Rive.16 It installed and financed
solar photovoltaic (“PV”) systems.17 Elon served as the Chairman of the SolarCity
Board from the company’s formation in 2006 until the Acquisition closed.18 He was
also SolarCity’s largest stockholder, holding approximately 21.9% of its common
stock.19
Non-party, Space Exploration Technologies Corporation (“SpaceX”), is a
private aerospace manufacturer and space transport services company founded by
15
Tr. 72:12–14 (Elon). As of March 15, 2021, Elon can add the title “Technoking of Tesla”
to his resume. See Tesla, Inc., Current Report (Form 8-K) (Mar. 15, 2021); Tr. 89:14–24
(Elon) (“Q. You crowned yourself ‘Technoking’ in 2021. Right? A. Well, I, you know,
do have a sense of humor. I think—I think I’m funny. Q. But it’s not just a joke, Mr.
Musk. You actually officially changed your title to Technoking. Correct? A. Well, and
also the CFO was added ‘Master of Coin.’ Q. Yes. A. Let’s not forget that.”).
16
PTO ¶¶ 45, 131. Just as I address Elon and Kimbal by their first names, I refer to
Peter Rive and Lyndon Rive by their first names for clarity. Again, no disrespect or
familiarity is intended.
17
PTO ¶ 133.
18
PTO ¶¶ 36, 131.
19
PTO ¶ 42; JX 2121 at 184.
7
Elon in 2002.20 Between March 2015 and March 2016, SpaceX purchased
$255 million in SolarCity corporate bonds called “Solar Bonds.”21
At the time of the Acquisition, Tesla’s sitting directors were Elon, Kimbal,
Brad Buss, Robyn Denholm, Ira Ehrenpreis, Antonio Gracias, and Stephen
Jurvetson.22 According to Plaintiffs, except for Denholm, each Tesla director was
conflicted (in varying degrees) with respect to the Acquisition.
Buss served on the Tesla Board from November 2009 until June 2019.23
At Elon’s request, Buss became SolarCity’s CFO in 2014 and remained in this
position until February 2016.24 After stepping down as CFO, Buss worked as a
20
Elon has served as the Chief Executive Officer and Chief Technology Officer of SpaceX
since 2002. PTO ¶ 35.
21
PTO ¶¶ 104–06.
22
See PTO ¶¶ 50, 57, 66, 73, 89, 94.
23
PTO ¶ 94.
24
Tr. 2383:8–23, 2396:3–2397:14 (Buss); PTO ¶ 95. Plaintiffs allege that Buss earned
more than $30 million in compensation while serving as SolarCity’s CFO. See Second
Am. Verified Class Action and Deriv. Compl. (“Compl.”) (D.I. 102) ¶ 29; JX 995 at 44
(SolarCity’s April 2016 proxy statement). At trial, however, Buss credibly testified that
his compensation “was nowhere near that [amount]. It was a fraction.” Tr. 2386:2–6
(Buss). Although SolarCity’s April 2016 proxy statement reported that Buss’s total
compensation for 2015 was approximately $31 million, this amount included unvested
equity awards. Tr. 2386:24–2387:7 (Buss). The overwhelming majority of these equity
awards, consisting of restricted stock awards and option awards, never vested. Tr. 2387:3–
2389:21 (Buss). The amount of compensation Buss actually earned, as he credibly
testified, was less than 10% of the amount proffered by Plaintiffs and, according to Buss,
was “actually below market.” Id.
8
consultant for SolarCity until March 2016.25 When the Tesla Board was considering
the Acquisition, approximately 45% of Buss’s wealth was attributable to his
relationship with Elon and Elon’s companies.26 At the time the Acquisition closed,
Buss beneficially owned 111,241 shares of Tesla common stock27 and 37,277 shares
of SolarCity common stock,28 meaning his investment in Tesla was worth
significantly more to him than his investment in SolarCity.29 According to Tesla’s
public disclosures, Buss did not qualify as an independent director under the
NASDAQ Listing Rules.30
Ehrenpreis is co-founder and co-managing partner of DBL Equity Fund-
BAEF II, L.P. (“DBL”), a venture capital fund he started with Nancy Pfund to pursue
“impact investing.”31 Pfund served on SolarCity’s Board and its special committee
25
Tr. 2397:15–2298:22 (Buss); PTO ¶¶ 95–96.
26
JX 3215 at 4 (Buss’s declaration stating that as of September 23, 2016, he owned Tesla
shares valued at $23.1 million, SolarCity shares valued at $720,000, and more than
$30 million in net assets exclusive of his Tesla and SolarCity holdings); Tr. 2442:6–2443:2
(Buss) (same).
27
PTO ¶ 98.
28
PTO ¶ 97.
29
JX 2862 at ¶¶ 27–30.
30
In re Tesla Motors, Inc. S’holder Litig., 2018 WL 1560293, at *3 (Del. Ch. Feb. 4, 2020)
(denying defendants’ motion to dismiss) (the “MTD Opinion”) (citing JX 345 at 24).
The MTD Opinion is filed as D.I. 128.
31
Tr. 2257:8–21 (Ehrenpreis); see also Ehrenpreis Dep. 13:6–14.
9
for the Acquisition.32 DBL held 928,977 shares of SolarCity common stock at the
time of the Acquisition, making it one of SolarCity’s largest investors.33 DBL also
invested several million dollars in SpaceX.34 Ehrenpreis personally held
254,713 shares of SpaceX stock at the time of the Acquisition.35 SpaceX, in turn,
held millions of dollars of SolarCity bonds at the time of the Acquisition and would
have been adversely affected had SolarCity failed.36 DBL’s promotional materials
identify Tesla, SolarCity and SpaceX as DBL portfolio companies, and identify Elon
and Lyndon as “Advisors” to DBL.37 While he denies a “personal friendship,”38
Ehrenpreis acknowledges that Elon has had a “significant influence on [his]
32
PTO ¶¶ 107–08.
33
JX 2121 at 185.
34
Tr. 2329:8–2330:17 (Ehrenpreis); JX 2741 at 9.
35
JX 2741 at 9; Tr. 2329:8–2330:6 (Ehrenpreis).
36
See Tr. 170:18–21 (Elon) (“Q. But to be clear, SpaceX was the primary purchaser of
bonds from SolarCity; correct? A. I think the single biggest, but there were many others.”);
JX 2121 at 121 (describing the ownership of Solar Bonds, including the amounts purchased
by SpaceX, Elon and other parties).
37
JX 577 at 4 (“Over the last eleven years, the success of our portfolio companies and
double bottom line assistance to our management teams has helped to put impact investing
on the map.”).
38
Tr. 2279:12–15 (Ehrenpreis).
10
professional career” and that his continued status as a Tesla director has been “a real
benefit in fund-raising.”39
Gracias, like Elon, was a director of both Tesla (since May 2007) 40 and
SolarCity (from February 2012 until the Acquisition closed).41 Gracias was recused
from certain discussions regarding, and from voting on, the Acquisition.42
Jurvetson served on Tesla’s Board from June 2009 to July 2020. 43 He was a
managing director of a venture capital firm, Draper Fisher Jurvetson (“DFJ”),
SolarCity’s third-largest institutional stockholder, which held 4,827,000 shares as of
the Acquisition.44 Jurvetson personally owned 417,000 shares of SolarCity common
stock,45 but he testified that his personal holdings in SolarCity were equivalent to
routine single-day swings of his net worth.46 At the time of the Acquisition,
Jurvetson also personally held 50,000-plus shares of Tesla stock,47 and beneficially
39
Ehrenpreis Dep. 10:10–13, 62:20–63:6.
40
PTO ¶ 57.
41
PTO ¶ 60.
42
JX 2121 at 68.
43
PTO ¶ 73.
44
JX 1234 at 16; JX 2121 at 115.
45
Tr. 2229:10–24 (Jurvetson).
46
Tr. 2231:20–2232:21 (Jurvetson).
47
Tr. 2235:3–24 (Jurvetson).
11
owned 7,008,576 shares of SpaceX.48 Additionally, Jurvetson’s partner at DFJ,
John Fisher, was on the SolarCity Board.49 Jurvetson was also serving as a SpaceX
director at the time of the Acquisition.50
Kimbal is Elon’s brother.51 As such, he “did not qualify as independent under
the NASDAQ rules, which have a bottom line standard that a director is not
independent if [he] has ‘a relationship which, in the opinion of the Company’s board
of directors, would interfere with the exercise of independent judgment.’”52 He was
also a SolarCity stockholder and had significant margin loans on his SolarCity shares
at the time of the Acquisition.53 Kimbal was not recused from discussions regarding,
or the Tesla Board vote on, the Acquisition.54
48
PTO ¶ 81.
49
Tr. 2242:19–23 (Jurvetson); PTO ¶ 79.
50
JX 2744 at 8–10; PTO ¶ 79.
51
Tr. 99:21–24 (Elon); PTO ¶ 44.
52
Sandys v. Pincus, 152 A.3d 124, 126 (Del. 2016) (quoting NASDAQ Marketplace
Rule 5605(a)(2)); see id. at 131 (“[T]he Delaware independence standard is context
specific and does not perfectly marry with the standards of the stock exchange in all cases,
but the criteria NASDAQ has articulated as bearing on independence are relevant under
Delaware law and likely influenced by our law.”).
53
JX 2742 at 8–9, 17–18; JX 519.
54
PTO ¶ 56.
12
Denholm has continuously served on Tesla’s Board since August 201455 and
has served as the Tesla Board chair since November 2018.56 She has never held any
financial interest in SolarCity.57 Her disinterest in the Acquisition and her
independence were not seriously questioned at trial.58
Several other non-party fact witnesses testified at trial or via deposition:
(1) George Bilicic, the 30(b)(6) representative from Lazard Ltd., which served as
SolarCity’s financial advisor for the Acquisition;59 (2) Courtney McBean,
the 30(b)(6) representative from Evercore Partners, which served as Tesla’s
financial advisor for the Acquisition;60 (3) Tanguy Serra, the President and CFO of
SolarCity from early 2016 until just before the Acquisition closed;61 (4) Jeffrey
Straubel, a co-founder of Tesla, who was a member of the SolarCity Board and
55
PTO ¶ 66.
56
PTO ¶ 67.
57
PTO ¶ 69.
58
As this Court observed previously in this litigation, Denholm was not a dual fiduciary,
and she had no financial interest in SolarCity. In re Tesla Motors, Inc. S’holder Litig.,
2020 WL 553902, at *12 (Del. Ch. Feb. 4, 2020) (denying defendants’ motion for summary
judgment) (the “SJ Opinion”); see also PTO ¶¶ 69–72. The SJ Opinion is filed as D.I. 385.
59
PTO ¶ 187.
60
PTO ¶ 188.
61
Tr. 893:5–8 (Serra); Serra Dep. 22:14–24:15.
13
Tesla’s CTO at the time of the Acquisition;62 (5) Jason Wheeler, Tesla’s CFO from
November 2015 to April 2017;63 (6) Toby Corey, SolarCity’s former chief revenue
officer;64 (7) Hayden Barnard, SolarCity’s chief revenue officer at the time of the
Acquisition;65 (8) Donald Kendall, a SolarCity director and member of its special
committee;66 and (9) Radford Small, a capital markets executive at SolarCity who
became its CFO just before the Acquisition.67
The parties also presented several expert witnesses. Plaintiffs offered the
expert opinions of Ronald Quintero, Murray Beach and Juergen Moessner. Quintero
testified that, in his opinion, SolarCity was “insolvent” and “would have been unable
to satisfy its financial obligations . . . as a standalone entity, absent the merger.”68
Beach testified that SolarCity could not have executed a seasoned equity offering as
of a specific date, suggesting that SolarCity’s ability to finance itself was
62
PTO ¶¶ 114–15.
63
PTO ¶ 116.
64
Corey Dep. 16:4–7, 19:15–20:23.
65
Barnard Dep. 34:18–22.
66
See PTO ¶ 161.
67
Small Dep. 14:18–16:23.
68
JX 2840 at 4.
14
dangerously limited prior to the Acquisition.69 Moessner testified that the financial
projections used by SolarCity and Tesla (and their financial advisors) to value
SolarCity were overly optimistic.70
For his part, Elon offered the expert testimony of Dan Reicher,
Jonathan Foster, Frederick Van Zijl and Daniel Fischel. Reicher testified that the
combination of an EV company and a solar company could achieve several strategic
synergies, and the Acquisition provided those benefits to Tesla.71 Foster testified
that the Tesla Board’s process was consistent with custom and practice.72 Van Zijl
offered rebuttal testimony and, in particular, countered the position that SolarCity
was insolvent.73 And Fischel testified that Tesla did not overpay for SolarCity.74
B. The Tesla Motors Master Plan
In 2006, Elon authored and released the Master Plan.75 There, he declared
that Tesla would “accelerate the world’s transition to sustainable energy” by
69
JX 2834 at 1, 30, 33.
70
JX 2833 at 4–5.
71
JX 2841 at 4–5.
72
JX 2842 at 7–8.
73
JX 2853 at 3–6.
74
JX 2839 at 7.
75
JX 12; Tr. 21:3–17 (Elon).
15
“help[ing] to expedite the move from a mine-and-burn hydrocarbon economy
towards a solar electric economy.”76 As the Master Plan explained, EVs, by
themselves, are not a complete solution to reducing carbon emissions because the
traditional source of electricity used to power EVs is, itself, derived from fossil
fuels.77 With this in mind, the Master Plan was built upon “three fundamental
pillars”: (1) sustainable energy generation from clean sources, such as solar power;
(2) energy storage in batteries; and (3) energy consumption through EVs.78 Tesla’s
directors uniformly testified that they understood from the outset that Tesla’s long-
term goal was to “accelerate the world’s transformation to an alternative energy
future.”79
76
JX 12 at 1; Tr. 86:18–20 (Elon).
77
JX 12 at 2; Tr. 25:10–26:16 (Elon).
78
Tr. 21:13–24:8, 409:7–410:19 (Elon); JX 12 at 2.
79
Tr. 445:24–446:16 (Kimbal); Tr. 1953:15–17 (Denholm) (“The entire mission of the
company was to accelerate the world’s transition to sustainable energy.”); Tr. 2215:22–
2216:9 (Jurvetson) (“[W]hen we first invested in Tesla, we were aware of the master
plan. . . . And if I look out 50 years, it seems inevitable that we will have a future that is
all electric vehicles with storage and renewable sources of electricity to feed them.
You couldn’t . . . make an electric [vehicle] without also dealing with the electricity supply
problem.”); Tr. 2261:22–2262:8 (Ehrenpreis) (“A. Tesla had published what was known
as the master plan, which laid out the long-term strategy. Q. And what did you understand
that long-term strategy to be? A. The strategy was a design to essentially shift from a
fossil-fuel-reliant economy to a more sustainable economy and do so through a set of stages
that started with the production of a vehicle, and then ultimately added a storage component
to that, and then ultimately a renewable generation component.”); Tr. 2371:22–2373:21
(Buss) (testifying that he was “super passionate” about “the master plan concept” to
16
SolarCity was part of this vision.80 It is specifically mentioned in the
Master Plan, where Tesla announced it would be co-marketing “modestly sized and
priced” solar panels from SolarCity along with Tesla’s sports car.81
C. Tesla Before the Acquisition
As the industry leader for both EVs and battery technology, 82 Tesla was
uniquely positioned vertically to integrate EVs, solar energy, and stationary battery
storage.83 Tesla’s leadership understood that energy generated from the sun can
produce “ridiculous amounts of power” using little space; it is also more affordable
and scalable than other clean energy alternatives.84 On the other hand, they also
understood that consumers historically viewed solar energy as unreliable because,
when the sun is not shining, traditional solar power systems do not generate or
become “the leader and model for sustainable energy” and that solar was “definitely a big
part” of Tesla’s future plans).
80
Indeed, Elon explained that it was “largely an accident of history” that SolarCity was
formed separately from Tesla. JX 1618 at 2; see Tr. 447:12–448:17 (Kimbal) (explaining
that it was always understood SolarCity would and should be part of Tesla).
81
JX 12 at 3; Tr. 23:13–24:8 (Elon).
82
Tr. 27:7–9 (Elon).
83
Tr. 1911:13–1912:6 (Reicher).
84
JX 2992; see also Tr. 898:14–24 (Serra); Tr. 485:3–24 (Kimbal).
17
deliver energy.85 Another piece was “needed to [facilitate] a proper transition to the
sustainable energy world”—high capacity stationary battery storage.86
Well before the Acquisition, Tesla invested heavily in batteries for its EVs
and energy storage products. In February 2014, Tesla announced the construction
of its “Gigafactory,” a massive lithium-ion battery manufacturing factory.87
The Gigafactory “was intended to produce more [lithium-ion] batteries . . . than the
entire manufacturing battery production of every other manufacturing facility on the
planet earth combined.”88 To achieve economies of scale, the Gigafactory would
have to be fully utilized.89 Tesla anticipated that the Gigafactory would easily meet
its need for batteries to power Tesla EVs,90 but the excess manufacturing capacity
85
Tr. 26:17–27:6, 407:3–409:1 (Elon); JX 2992; Tr. 1840:2–17 (Peter); Tr. 1910:1–16
(Reicher).
86
JX 2992; see also Tr. 2834:10–17 (Gracias); Tr. 2266:6–2267:3 (Ehrenpreis).
87
JX 169 at 8.
88
Tr. 2265:12–2266:5 (Ehrenpreis); see also JX 2382 at 1 (“Already, the current structure
has a footprint of 1.9 million square feet, which houses 4.9 million square feet of
operational space across several floors. And we are still less than 30% done. Once
complete, we expect the Gigafactory to be the biggest building in the world.”).
89
See Tr. 2216:10–19 (Jurvetson) (“We were going to start producing batteries at a scale
that was unprecedented at the time. And whenever you build a new factory with an
enormous capacity for a new product like batteries . . . you want to fully utilize that factory
from day one. You want to be at 100 percent capacity utilization to make the business
make business sense.”); JX 2382 at 1–2.
90
Tr. 2425:21–2426:14 (Buss); Tr. 2832:5–2833:2 (Gracias); Tr. 1954:3–15 (Denholm);
Tr. 2215:19–2217:15 (Jurvetson).
18
presented opportunities to advance the goals stated in the Master Plan with the
design and production of solar energy storage products, including “Powerwalls,”
designed to store solar energy for home use, and “Powerpacks,” designed to store
solar energy for commercial use.91
The Tesla Board toured the Gigafactory while it was under construction on
March 3, 2015.92 At the conclusion of the tour, having witnessed firsthand the
massive scale and capacity of the facility, the Tesla Board discussed Tesla’s long-
stated goal of acquiring a solar company.93 A little over a month later, Tesla publicly
launched Tesla Energy and debuted its Powerwall and Powerpack products.94 At the
launch, Elon explained the company’s vision: “[T]he path that I’ve talked about, the
91
Tr. 451:9–452:12 (Kimbal); Tr. 2215:14–2217:15 (Jurvetson) (“Where would those
batteries go? Products like Powerwall, right, stationary storage . . . .”); JX 824 at 10
(Tesla Form 10-K describing production at the Gigafactory); see also Tr. 38:4–16 (Elon)
(describing Powerwalls).
92
JX 306 at 1 (Tesla Board minutes); Tr. 2217:16–2218:21 (Jurvetson); Tr. 453:7–455:11
(Kimbal).
93
JX 849 at 1 (recognizing that the Tesla Board had “a number of previous discussions”
about “a potential acquisition of SolarCity,” including “at the regular meeting of the Board
on March 3, 2015”); Tr. 2833:3–9 (Gracias); Tr. 454:5–18 (Kimbal); Tr. 1954:3–15
(Denholm). As Plaintiffs point out, the discussion regarding a solar company acquisition
was not documented in board minutes. But each member of the Tesla Board testified
consistently and credibly that the discussion occurred. Perhaps the reason there are no
minutes is that the conversation occurred while the Tesla directors were touring the roof of
the Gigafactory. Tr. 2832:5–2833:9 (Gracias).
94
JX 2992; Tr. 2267:13–2268:4 (Ehrenpreis).
19
solar panels and the batteries, it’s the only path that I know that can do this. And I
think it’s something that we must do and we can do and that we will do.”95
Having now built the Gigafactory and reiterated the goals of the Master Plan,
Tesla set the stage for a combination of its battery storage capabilities with solar
energy. Prior to the Acquisition, Tesla had explored partnering with SolarCity at
arm’s length. Specifically, the two companies formed a joint venture to convert the
power supply on an island in American Samoa from diesel generators to solar
power.96 But the related-party nature of the companies’ dealings made cooperation
between engineers “very difficult” and ultimately caused the project to fail.97
If Tesla was to collaborate with SolarCity effectively, the two companies would
need to combine.98
D. SolarCity Before the Acquisition
As explained below, SolarCity had an innovative and aggressive business
model that prioritized growth and relied on external financing to fund that growth.
95
JX 2992.
96
JX 2331; Tr. 1844:14–1846:2 (Peter).
97
Tr. 1846:3–20, 1852:14–1854:16 (Peter); Tr. 448:18–450:1 (Kimbal) (describing the
related-party nature of the companies’ relationship as “very difficult and frustrating” and
“an enormous headache for [Tesla] that would reach the board level”).
98
See, e.g., JX 1618 (“We can’t [integrate energy generation and storage] well if Tesla and
SolarCity are different companies, which is why we need to combine and break down the
barriers inherent to being separate companies.”).
20
This model, combined with macroeconomic headwinds, resulted in liquidity
problems for SolarCity in late 2015 into 2016.
1. The SolarCity Business Model
At bottom, SolarCity designed, sold, installed and financed solar PV systems
for residential and commercial customers.99 SolarCity sold these systems through
various means, including internal call centers, door-to-door sales, in-store sales at
Home Depot, a channel partner network, and a customer referral program.100
Because most consumers cannot afford to purchase expensive solar panels outright,
SolarCity offered financing options.101 If a customer chose to finance the solar
system, SolarCity would pay the cost of installing and activating the solar panels in
exchange for the customer’s commitment to repay SolarCity incrementally, with
interest, over a period of 20–30 years.102 The vast majority of SolarCity’s customers
chose to finance their systems,103 and the delinquency rate was less than 1%.104
99
PTO ¶ 133.
100
PTO ¶ 135.
101
Tr. 1638:3–1639:7 (Lyndon); Tr. 898:6–13 (Serra); see PTO ¶¶ 136–42.
102
Tr. 1209:1–13 (Van Zijl); JX 199 at 21; Tr. 900:3–12 (Serra).
103
Tr. 900:3–12 (Serra); Tr. 1650:4–10 (Lyndon).
104
Tr. 936:15–938:17 (Serra); JX 772 at 8 (“Delinquencies of 180+ days remain
comfortably below 1%.”); JX 700 at 27 (showing delinquency rates consistently
below 1%).
21
To facilitate this business model, SolarCity organized itself into two
segments: DevCo and PowerCo. “DevCo represent[ed] growth and investment”—
booking new customers and installing new systems; PowerCo “represent[ed] the
long-term return on” SolarCity’s investment in the form of a “steady stream of
energy, revenue and cash flow over the estimated 30-year” life of SolarCity’s
contracted solar installations.105 Within the organization, SolarCity referred to
DevCo as the “Goose That Lays Golden Eggs” and PowerCo as the basket
containing those eggs.106
This financing model (and SolarCity’s prodigious growth) required SolarCity
to raise capital to bridge the gap between its short-term costs and long-term cash
flows.107 SolarCity historically monetized a portion of its long-term recurring cash
flows through variable interest entities (with third-party investors) and financing
structures (primarily tax equity funds and asset-backed notes).108 SolarCity also sold
105
JX 530 at 6; Tr. 1436:5–17 (McBean); Tr. 1984:7–1985:8 (Denholm).
106
JX 718 at 7–8, 18; Tr. 966:11–968:18, 970:3–972:1 (Serra).
107
See JX 700 at 58 (observing “M[egawatts (“MW”)] Have Grown 80% Per Year Since
2013”); JX 2853 at 11 (observing that between 2012 and 2015 SolarCity’s revenues had a
compound annual growth rate of 47% and its customer compound annual growth rate was
90%); Tr. 161:19–162:5 (Elon); Tr. 901:15–20 (Serra); Tr. 1641:23–1642:24 (Lyndon);
Tr. 684:14–18 (Moessner); JX 2853 at 16; Tr. 1209:1–13 (Van Zijl); Tr. 1144:14–18
(Beach).
108
JX 2853 at 7, 18; Tr. 1209:22–1210:6 (Van Zijl).
22
Solar Bonds, principally to Elon and SpaceX.109 When Evercore diligenced
SolarCity in connection with the Acquisition, it was struck by the success of the
SolarCity financing model and the sophistication of its capital markets team.110
At the end of 2016, SolarCity sponsored over 54 financing funds with 22 investors111
and carried substantial debt.112
In 2014, Elon asked Buss, who had considerable solar and public company
CFO experience, to join SolarCity as CFO to “clean up” SolarCity’s financial
accounting.113 Following Buss’s arrival, SolarCity attempted to integrate vertically
by acquiring solar-cell manufacturer Silevo LLC in September 2014.114 But Silevo
was a startup and had no experience with high-volume manufacturing.115
109
See Tr. 170:18–21 (Elon) (“Q. But to be clear, SpaceX was the primary purchaser of
bonds from SolarCity; correct? A. I think the single biggest, but there were many others.”);
JX 2121 at 121 (describing the distribution of Solar Bonds, including the amounts
purchased by SpaceX, Elon and other parties).
110
Tr. 1409:1–11 (McBean).
111
PTO ¶ 144.
112
JX 1231 at 18 (SolarCity—Summary Debt Overview).
113
Tr. 2384:11–2385:10 (Buss).
114
PTO ¶ 134; JX 241 at 2.
115
Straubel Dep. 112:13–24; see also JX 1917 (email from Straubel stating that “Silevo is
certainly not ready [to produce the solar roof] at any kind of volume”); JX 1708 (email from
Chang stating that Silevo was expected to supply “a fraction of [SolarCity’s] overall
module consumption” and observing a “[l]ack of maturity in Silevo manufacturing; still
very much in R&D stage”); Tr. 2304:5–11 (Ehrenpreis) (“Q. Was SolarCity in the
23
Consequently, by 2015, SolarCity was incurring substantial costs building-out
Silevo’s factories.116
2. SolarCity’s Liquidity Problems
By the fall of 2015, the culmination of massive capital outlays for Silevo, debt
maturities coming due, and lower-than-expected installations caused SolarCity’s
management to believe that a “major liquidity crisis” was on the horizon.117
On September 29, 2015, a SolarCity executive reminded his superiors that SolarCity
needed to maintain an average monthly cash balance of approximately $116 million
to remain compliant with its revolving debt facility’s “Liquidity Covenant.”118
A breach would trigger a default on SolarCity’s revolver and cross-defaults on other
debts.119 At the same time, management projected that cash could drop to
manufacturing business at all at the time of the acquisition? A. Just some. They had a
small part of the business known as Silevo, producing some panels.”); Tr. 1650:23–
1651:14 (Lyndon) (testifying that Silevo manufacturing was a “[v]ery small part of
[SolarCity’s] business” at the beginning of 2016 because they “were still ramping up
manufacturing” and “[t]he technology was a new technology”); JX 1096 (email from
Straubel expressing concerns about manufacturing).
116
JX 1587 at 54, 277 (Tesla Board presentation explaining that “SolarCity’s
manufacturing operations, Silevo, require significant expenditures” and detailing those
expenditures); JX 780 at 68–69, 146.
117
JX 491 at 1; see also Tr. 2408:14–20 (Buss) (describing looming liquidity crisis).
118
JX 486 at 2–3.
119
JX 2002 at 3; see Serra Dep. 83:13–84:16.
24
$35 million by the week of November 20, 2015.120 The next day, SolarCity’s new
CFO, Serra, informed management that SolarCity’s “total war chest” of available
cash, which had filled to $1.1 billion in January 2015, would be drawn down to only
$200 million by year-end.121 To manage the company’s cash position, Lyndon
immediately instituted “weekly cash meeting[s].”122
On October 15, 2015, Buss and Lyndon told the SolarCity Board, including
Elon and Gracias, that SolarCity needed $180 million to $300 million in additional
cash to meet its various obligations.123 SolarCity management also reported that
2015 installations were expected to be “920MW versus budget of 1.05GW
[gigawatts],” thereby “reduc[ing] cash inflow.”124 On October 21, 2015, following
a weekly cash meeting, SolarCity management confirmed that “updated forecast[s]
project[] our December monthly average balance at ~$91 million, which is $24
million below our revolver covenant threshold.”125 At the next SolarCity Board
meeting, management informed SolarCity’s directors that management had spoken
120
JX 486 at 2–3.
121
JX 491 at 1.
122
JX 503 at 1; JX 505; Lyndon Dep. 38:15–39:7.
123
JX 506 at 4.
124
Id. at 3.
125
JX 522 at 1.
25
with two investment banks the company had been working with about a potential
equity raise, but “both banks d[id] not recommend an equity raise” at the time
because market volatility would likely result in “a meaningful discount.”126
In late 2015, macroeconomic headwinds exacerbated SolarCity’s liquidity
problems. One of SolarCity’s competitors, SunEdison, Inc., filed for bankruptcy.127
This increased market scrutiny of solar companies, which, in turn, increased the time
needed to close asset-backed refinancing deals.128 Changes in net metering laws also
had a profound—and highly publicized—effect on SolarCity.129 In addition, certain
federal tax credits available to solar customers were set to expire, and although
Congress had historically extended the tax credits, it had yet to do so.130
126
JX 527 at 8; see also JX 514 at 5; Buss Dep. 172:23–173:3. The presentation suggested
other options, stating “[a]n At The Market [ATM] program is an option as well as a
traditional marketed deal or bank bought deal.” JX 527 at 8.
127
JX 3180.
128
Tr. 2697:12–2698:24 (Moessner).
129
Net metering allows solar customers to sell excess solar energy back to the power grid,
reducing their electricity bills. Tr. 1645:10–1646:8 (Lyndon); see also Tr. 1839:13–20
(Peter) (“Q. What is net metering? Could you remind us what net metering is?
A. Sure. . . . The customer essentially gets full retail credit for their excess solar
production during the day that they can count against their nighttime usage when the sun
isn’t shining.”); Tr. 1661:19–1665:5 (Lyndon) (explaining effects of changes in net
metering laws on SolarCity).
130
See, e.g., JX 2841 at 12 (“While the credit was initially set to expire at the end of 2007,
Congress voted to extend the credit on three separate occasions—in 2006, 2008 and again
in 2015.”); JX 596 (letter and emails discussing the tax credits).
26
To combat its liquidity issues, SolarCity increased monetization. Serra
developed a four-year plan to solve the cash crisis, which he presented to SolarCity
executives in December 2015.131 Among other components, Serra introduced the
idea of “cash equity” transactions—selling a portion of the future cash flows from
recurring customer payments to a third-party investor in exchange for an upfront
payment.132 SolarCity was quick to implement the plan; it completed the industry’s
first cash equity transaction with John Hancock Financial in May 2016.133 Two
similar transactions followed in 2016,134 and by Q1 2016, SolarCity’s DevCo was
cash-flow positive.135 SolarCity retained the rest of its future cash flows, which it
estimated to be worth billions of dollars.136
131
Tr. 956:5–18, 957:17–20, 961:12–964:7 (Serra); JX 604 at 1.
132
Tr. 1210:7–17 (Van Zijl); JX 2853 at 7, 18–19; JX 1855 at 10; Tr. 981:20–982:7 (Serra).
These cash equity transactions have now become standard in the solar power industry.
Tr. 981:20–984:19 (Serra); JX 1008 at 12; JX 2853 at 19.
133
Tr. 982:1–3 (Serra); JX 2853 at 19; Tr. 1243:17–23 (Van Zijl).
134
Tr. 2690:6–2692:15 (Moessner); Tr. 2720:14–2722:15 (Beach).
135
Tr. 984:20–985:3, 1022:18–1023:10 (Serra). As Plaintiffs point out, SolarCity was not
“generating [positive] cash flows [solely] from operations,” as the SEC noted.
JX 1185 at 8; see also JX 1849 (“[W]e cannot use the words ‘cash flow positive’
[in our Q2 shareholder letter and slide deck]. The SEC sent us a letter saying we should
not use those words. The reason for being cash flow positive is the financing of the
assets.”).
136
JX 1855 at 9; Tr. 1215:22–1217:1 (Van Zijl); Tr. 923:20–932:11 (Serra). Using a
“retained value” methodology (calculating the net present value (“NPV”) after accounting
for the repayment of associated debt), SolarCity valued its future cash flows as of Q2 2016
27
Despite achieving success with its creative financing strategies, SolarCity still
did not have the cash it needed “to sustain the growth and produce new volume in
line with [its four-year] plan.”137 By Q1 2016, the SolarCity Board decided to shift
focus to cash sales and began reducing costs.138 These steps reduced “deployments”
and that, in turn, caused SolarCity to fall short of Serra’s bullish four-year plan.139
Yet SolarCity management felt the company was “in a very good position” at the
beginning of 2016, given that it “had cash [on hand] of about $360 million.”140
Meanwhile, SolarCity’s lenders were concerned about its declining
creditworthiness.141 In early 2016, the Office of the Comptroller of Currency—one
at $2.2 billion (NPV) in retained value. This amount was available for monetization at the
time of the Acquisition. Tr. 1215:11–1217:1, 1226:24–1227:21 (VanZijl); Tr. 923:20–
932:11, 964:4–16, 1013:1–14, 1070:18–1071:21 (Serra); Tr. 873:9–13 (Quintero);
Tr. 684:8–13 (Moessner); JX 1855 at 9.
137
Tr. 2686:6–17 (Moessner).
138
Tr. 1681:17–1682:11 (Lyndon) (testifying that SolarCity determined it could
“reduce capital expenditures,” “reduce headcount” and work with vendors to “push out
payables”); Tr. 1682:15–18 (Lyndon) (“The—the right-sizing the company, we definitely
wanted to do. The slowing down manufacturing and deploying that and slowing down that
capital, we—we didn’t necessarily want to do that.”).
139
See Tr. 640:2–14 (Moessner) (“[I]f you lack the capability to underwrite because you’re
liquidity-constrained, then that slows your machinery, slows your operation, and your
growth is significantly hampered. You simply can’t process the volume anymore.”).
140
Tr. 1680:21–24 (Lyndon).
141
Tr. 645:11–646:20 (Moessner); Tr. 1309:10–1310:5 (Van Zijl); Tr. 1687:3–1688:1
(Lyndon).
28
of the primary regulators of SolarCity’s banks—downgraded SolarCity’s credit
rating.142 Even so, in the first quarter of 2016, SolarCity was able to secure
$305 million in tax equity financing, although that amount fell well short of the
$940 million originally projected.143
Despite its cash problems, the evidence leaves little doubt that SolarCity was
still a valuable company in 2016.144 It was the undisputed market share and cost
leader in the solar energy sector, with over 30% market share for U.S. residential
solar, 22% market share for U.S. commercial solar, and 15% of total U.S. solar.145
142
Tr. 994:11–13 (Serra).
143
Tr. 1304:1–1306:1 (Van Zijl); compare JX 669 at 3, with JX 951 at 2.
144
Plaintiffs argue that SolarCity was becoming increasingly less valuable with every
customer transaction because “SolarCity historically spent more than $2.00 in operating
and equipment costs to generate $1.00 in revenue. By 2015, SolarCity spent more than
$1.00 in sales and marketing costs alone to produce $1.00 in revenue.” Pls.’ Post-Trial Br.
(“POB”) (D.I. 476) at 63. This is misleading. As Elon correctly observed, “Plaintiffs focus
only on costs and revenue within a single accounting recognition period, ignoring that
SolarCity’s entire business model was creating long-term assets that would generate
recurring revenue for 20–30 year periods.” Def.’s Answering Post-Trial Br. (“DAB”)
(D.I. 481) at 21–22; see also Tr. 1211:5–1212:21 (Van Zijl) (testifying that the present
value per watt installed and activated was over 50 cents higher than the cost); Tr. 1665:16–
1666:21 (Lyndon) (explaining the SolarCity business model “is to raise capital and deploy
it into solar assets that produce long-term recurring revenue streams”); Tr. 2846:14–2849:7
(Gracias). As Serra testified, SolarCity was the residential solar industry’s cost leader and
its installation costs per watt were “dramatically cheaper than anyone else.” Tr. 907:18–
909:22, 950:5–951:9 (Serra); see also JX 2853 at 16 (“SolarCity also had the lowest all-in
unit costs in the industry in the year leading up to the Initial Tesla Proposal. . . . In exchange
for incurring [] upfront costs, SolarCity received long-term cash flows . . . .”).
145
JX 700 at 13; Tr. 903:22–905:16 (Serra); Tr. 1643:1–10 (Lyndon).
29
With respect to residential solar installations and revenues, SolarCity exceeded its
two closest competitors (Vivint and Sunrun) combined.146 And with respect to costs,
SolarCity’s were 30% lower than its competitors.147 As noted, as of Q2 2016,
SolarCity had accumulated what it estimated to be $2.2 billion (NPV) in retained
value,148 using a 6% discount rate and assuming 100% contract renewals.149 And it
continued to raise billions of dollars from sophisticated financial institutions that had
deep access to SolarCity’s financials.150 SolarCity’s cash challenges were
ramifications of rapid growth, not market disinterest in its product or poor business
execution.151
146
Tr. 873:14–24 (Quintero).
147
Tr. 1653:19–1654:19 (Lyndon).
148
Tr. 1215:22–1216:6 (Van Zijl); Tr. 923:20–932:11 (Serra); JX 1855 at 9.
149
Tr. 2687:9–15 (Moessner).
150
JX 2853 at 21, 62 (illustrating that SolarCity raised $2.7 billion from 2015 to the first
half of 2016); Tr. 981:5–19 (Serra).
151
See Tr. 1219:17–24 (Van Zijl) (“[T]he management had a number of things that were
their prerogative, one of which was to simply slow down their growth. If they had stopped
their growth, the company would have become very cash positive. That would have been
bad for their equity, it wasn’t advisable to do that, but they could have slowed down their
growth rate. Growing over 45 percent on a sustained basis is a very, very rapid rate of
growth.”).
30
E. The Tesla Board Rebuffs Elon’s Initial Acquisition Overtures
In February 2016, Lyndon convened an emergency “cash planning” meeting
with Elon and SolarCity management to discuss “how we are going to manage our
cash needs.”152 Among other things, SolarCity management discussed measures to
conserve cash,153 including ranking accounts payable to modulate costs.154
Management also developed “finance postpone guidelines” to suspend certain
installations based on their cash impact.155 Immediately following this February
2016 meeting, Elon and Lyndon discussed Tesla potentially acquiring SolarCity.156
152
Tr. 1755:11–16 (Lyndon); see also JX 777; Tr. 162:23–163:12 (Elon).
153
Tr. 1755:7–10 (Lyndon); Lyndon Dep. 71:14–21; JX 812; JX 794; JX 1110 at 1–2.
154
JX 882 (SolarCity cash forecast).
155
JX 891 at 4.
156
Tr. 1755:21–24 (Lyndon). Plaintiffs argue that the Tesla stockholder vote on the
Acquisition was not informed because the Joint Proxy Statement/Prospectus (“Proxy”) did
not disclose Lyndon and Elon’s preliminary discussions about the Acquisition.
See JX 2121; POB at 54–55. But the Proxy did disclose that Elon and Lyndon “have at
various points . . . discussed . . . the possibility of Tesla acquiring SolarCity,” including
that “[i]n February 2016, Mr. Elon Musk suggested to Mr. Lyndon Rive that he believed
more serious consideration of a potential combination between Tesla and SolarCity was in
order.” JX 2121 at 66–67. Any discussions that occurred later happened outside of the
merger negotiations context. See Tr. 1703:13–23 (Lyndon) (“Q. Yeah. Okay. So after
the public offer was made, did you continue to discuss the parameters of the transaction,
the merger, with your cousin Elon Musk? A. No. At that point, we established a special
committee, and I was removed for the most part of the process. Q. Did you have any
conversations with Elon Musk? A. Yes, I still had plenty of conversations relating to the
operations of SolarCity.”); JX 1278 at 1 (discussing the “economic value creation of [the]
transaction”); JX 1340 at 1 (discussing the impact of SolarCity’s debt on Tesla’s balance
sheet); JX 1455 at 1 (discussing SolarCity’s cash balances).
31
On February 27, 2016, Elon called Tesla’s CFO, Jason Wheeler, and asked
him to prepare a financial analysis of a Tesla/SolarCity merger for presentation at a
special Tesla Board meeting two days later.157 Before the meeting, Lyndon and Elon
arranged for the law firm Wilson Sonsini Goodrich & Rosati—which had
historically represented both companies—to waive conflicts and attend Tesla’s
Board meeting.158
At this special meeting of the Tesla Board, Tesla’s directors considered a
potential acquisition of SolarCity to “complement the Company’s Tesla Energy
business . . . and to create other product, service and operational synergies.”159
Wheeler presented preliminary financial information, including information
highlighting SolarCity’s historically low stock price.160 While the Tesla Board
recognized the significant potential product synergies,161 it ultimately declined to
proceed with an acquisition, notwithstanding Elon’s strong endorsement, so that
157
Wheeler Dep. 30:8–31:7.
158
JX 833. Plaintiffs emphasize that the conflict waiver was not disclosed to Tesla
stockholders. POB at 54. While that is true, it is difficult to see how the disclosure would
have been material. After the February 2016 Tesla Board meeting attended by Wilson
Sonsini, during which the Board decided not to proceed with the Acquisition, the firm had
nothing more to do with the Acquisition. See JX 849; Tr. 393:6–15 (Elon).
159
JX 849 at 1.
160
Id.; JX 855 at 5 (comparing current stock price to 52-week high and low).
161
JX 849 at 1; Tr. 1958:10–1959:6 (Denholm); Tr. 395:5–23 (Elon); Tr. 457:18–458:15
(Kimbal).
32
Tesla management could focus on resolving Tesla Model X production and delivery
challenges.162 The Tesla Board did, however, “authorize management to gather
additional details and to further explore and analyze a potential transaction with
SolarCity or other related businesses.”163
Beginning around March 2, 2016, investment websites and newspapers
reported that Elon might take SolarCity private, following which SolarCity’s stock
price rose from $18.01 on March 1 to $22.49 on March 3.164 The Tesla Board,
however, was not yet ready to move forward.
At a March 2016 board meeting, Tesla’s Board once again discussed the
possibility of acquiring SolarCity.165 And, just as before, it “determined not to
162
JX 849 at 2 (noting “the potential impact [of an acquisition] on the management team’s
time and resources in the near term”); Tr. 1959:7–1960:13 (Denholm); Tr. 457:4–17
(Kimbal); Tr. 2837:23–2838:12 (Gracias); JX 950 at 4; JX 1049 at 6. According to Elon,
the Model X production was behind schedule to such a degree that he was “sleeping in the
factory for Model X production in order to make the production system work.” Tr. 130:18–
21 (Elon).
163
JX 849 at 2; see also Tr. 1700:7–1701:2 (Lyndon) (expressing disappointment that the
Tesla Board did not authorize moving forward with the SolarCity acquisition); Tr. 1959:7–
1960:13 (Denholm); Tr. 457:4–17 (Kimbal); JX 950 at 4; JX 1049 at 6; Tr. 2837:23–
2838:12 (Gracias).
164
PTO Ex. C; JX 870; JX 3106; JX 3107; JX 3108; JX 868.
165
JX 902.
33
proceed” with an acquisition,166 reiterating that “this is something that we should
postpone to a later date.”167 Even so, Tesla’s Board discussed with management
preparatory steps that should be taken “in the event that [a solar] acquisition were to
be considered in the future.”168 These steps included engaging the law firm
Wachtell, Lipton, Rosen & Katz to advise the Tesla Board regarding the potential
transaction. This marked the first time that Tesla had engaged Wachtell.169 As Tesla
and the Tesla Board focused on other challenges, Elon asked Lyndon to manage
166
JX 902 (“[T]he Board determined not to proceed with evaluating a potential acquisition
of SolarCity or other similar businesses at this time, and directed management to instead
focus its efforts on the execution of current business matters[.]”).
167
Tr. 261:22–263:3 (Elon). Plaintiffs point out that the Proxy did not disclose this
meeting. See POB 19; JX 2121 at 67. This omission is not material given that it was a
repeat of what had occurred at the February meeting (which was disclosed in the Proxy)—
Elon proposed moving forward with the Acquisition and the Tesla Board said, in essence,
“not now.” Id.
168
JX 902 at 2.
169
Tr. 1964:11–13 (Denholm); Tr. 2840:8–12 (Gracias). Plaintiffs make much ado about
how Elon, Gracias and Maron (Tesla’s general counsel) engaged Wachtell to be deal
counsel for Tesla before the Tesla Board had decided it wanted to pursue a transaction, and
then the Tesla Board failed to disclose that fact in the Proxy. POB at 19, 23, 54; Plaintiffs’
Post-Trial Answering Br. (“PAB”) (D.I. 481) at 21, 24, 34; Tr. 263:23–265:12 (Elon);
JX 922; JX 3226 at 8. What Plaintiffs have failed to do, however, is to explain persuasively
how this timing presents a reason to question Wachtell’s independence or how the non-
disclosure was material. Plaintiffs did not demonstrate a longstanding relationship or
conflict between Elon or Tesla and Wachtell. To the contrary, based on the evidence, I am
satisfied that Wachtell was an independent and effective advisor to the Tesla Board.
For this reason, the failure to disclose the circumstances or timing of Wachtell’s
engagement in the Proxy was immaterial. See JX 2121 at 67.
34
SolarCity’s financial position until May 2016, when he would ask the Tesla Board
to revisit a potential acquisition.170
F. SolarCity’s Outlook Worsens
With $32 million in net negative cash flow in the first quarter of 2016,
SolarCity projected over $139 million in additional negative cash flow for the second
quarter before achieving positive cash flow in the third and fourth quarters.171
By April 2016, SolarCity management acknowledged that, in the short term, the
company had “no room for error.”172
At a SolarCity Board meeting on April 26, 2016, Lyndon addressed
“important/disturbing” issues.173 SolarCity expected installations of only 900MW
for 2016, 28% fewer than the 1,250MW guidance provided just two months
earlier.174 Importantly, Lyndon also warned that “May–August are at risk of tripping
170
Tr. 1684:14–1685:9, 1700:7–1701:2 (Lyndon).
171
JX 1008 at 16; Tr. 1016:11–24 (Serra). A Q2 report observed that “Cash Consumption
of ~$216 million in Q2 2016 was mainly because of: Project financing delays of ~30 days
due to the proposed Tesla acquisition” and “Investment in module manufacturing
operations and R&D.” JX 1855 at 11.
172
JX 982 at 1; Tr. 1041:19–1042:1 (Serra); see also JX 1855 at 11 (reporting cash crunch
but noting “[c]ash balance expected to increase by the end of Q3 2016 . . . and to further
increase by the end of Q4 2016”).
173
JX 1007; see also JX 1010 (email containing SolarCity Board Q2 2016 meeting
materials).
174
JX 1010 at 23.
35
[the revolver] covenant,” and presented an “Updated 2016 Liquidity by Month”
report that showed intra-month cash balances dropping to $73 million and remaining
below the Liquidity Covenant through October 2016 before increasing at the end of
the year.175
After SolarCity announced disappointing first quarter results, its stock price
dropped, with an excess negative return of 17.4% relative to its peers. 176 Internal
bookings reports were “drenched in a sea [of] red.”177 The company was fighting
175
Id. at 18. Notably, despite the chart showing that the revolver covenant could be
breached in February, the “covenant was not tripped.” Id. Plaintiffs seize on the fact that
SolarCity’s Form 10-Q for the first quarter of 2016 failed to disclose these issues and
reported instead that SolarCity would have sufficient cash to “meet cash requirements for
the next 12 months.” JX 1072 at 41. And management only lowered guidance to 1,000–
1,100MW rather than the 900–1,000MW range in management’s 2016 Reforecast.
See JX 1066 at 9. But, as Plaintiffs admit, SolarCity did in fact have sufficient cash to meet
its requirements and never breached its Liquidity Covenant. See POB at 65 (“Plaintiffs
proved that SolarCity was . . . likely to breach its Liquidity Covenant . . . .”) (emphasis
added); Pls.’ Post-Trial Reply Br. (D.I. 484) at 18 (mentioning “SolarCity’s many near-
breaches of its Liquidity Covenant”) (emphasis added); Tr. 1196:2–4 (Beach); Tr. 380:2–
4 (Elon); Tr. 991:21–24 (Serra); Tr. 2705:7–10 (Moessner). And although Lyndon
recommended to the SolarCity Board that the company conservatively reduce 2016
guidance to 900MW on April 26, 2016, SolarCity ultimately forecasted additional
international MW because of “a strong pipeline in Mexico” that was “just getting started”
and ultimately generated the installation of a “large system of over 30 megawatts,” bringing
guidance above 1,000MW. Tr. 1694:22–1696:20 (Lyndon); JX 1010 at 29.
176
Tr. 2721:4–8 (Beach).
177
JX 1387 at 2.
36
“turnover” and “morale” problems among its sales staff and was “exposed and
vulnerable” to losing its top sales talent.178
Meanwhile, SolarCity continued to raise cash, but in lower amounts than
originally projected.179 It was able to close two tax equity transactions during
Q2 2016, including a reduced $80 million commitment by Bank of America, one of
SolarCity’s largest tax equity lenders.180 SolarCity reported $145.7 million in cash
and cash equivalents as of June 30, 2016—less than $30 million above the Liquidity
Covenant.181 To save cash, SolarCity worked with vendors on accounts payable and
slowed the Silevo deployment.182
Elon and Lyndon again spoke privately about the Acquisition in May 2016.183
Lyndon wanted to proceed with the Acquisition immediately, but Elon told him
Tesla would have to “push[] it out to June.”184 In a later call between the two,
Lyndon emphasized that he “need[ed] to know that [SolarCity would] get a bridge
178
Corey Dep. 37:2–38:10, 42:18–43:21; Barnard Dep. 65:3–7; JX 1000.
179
JX 951; JX 1230; Tr. 1308:8–20 (Van Zijl) (acknowledging that in Q2 2016, “SolarCity
brought in substantially less” than forecasted).
180
Tr. 1308:4–7 (Van Zijl); JX 951 at 3 (Cast3 Fund).
181
JX 1854 at 4, 50.
182
Tr. 1791:1–1792:10 (Lyndon).
183
Tr. 1778:4–13 (Lyndon); JX 1451.
184
Tr. 1700:20–1701:12, 1785:7–1786:5 (Lyndon).
37
loan when the offer” arrived, or else he would need to “put the deal off so we can go
raise equity.”185 Elon told Lyndon that Tesla would provide a bridge loan to
SolarCity along with its acquisition proposal.186
G. Acquisition Talks Heat Up
On May 31, 2016, Elon again brought the idea of acquiring SolarCity to the
Tesla Board.187 This time, the Board thought the timing was right for an acquisition.
Tesla had stabilized Model X production and was poised to commence Model 3
production, which it expected to be difficult but manageable in light of the Model X
experience.188
1. The Initial Advice from Independent Advisors
The Tesla Board authorized management to: (1) engage an independent
financial advisor; (2) assess a potential solar acquisition; and (3) instruct Tesla’s deal
counsel, Wachtell, to undertake a legal review.189 The Tesla Board later selected
Evercore as the financial advisor for the potential merger.190 Elon and Gracias were
185
Tr. 1701:3–12 (Lyndon).
186
Tr. 1776:9–15 (Lyndon); Elon Dep. 275:7–13; JX 1451.
187
JX 1131.
188
Tr. 1962:18–1963:3 (Denholm); Tr. 405:22–406:17 (Elon); Tr. 462:23–463:6 (Kimbal);
Tr. 2872:14–22 (Gracias).
189
JX 1131 at 1–2.
190
JX 2121 at 67; Tr. 2355:1–5 (Foster); JX 2842 at 19–20.
38
not involved in Evercore’s selection and, like Wachtell, Evercore had not previously
worked for Tesla or SolarCity.191
On June 20, 2016, Elon called another special meeting of the Tesla Board.192
Prior to the meeting, he reviewed a draft offer letter and blog post announcing the
offer,193 as well as a draft presentation from Evercore.194
Once the Tesla Board decided it would pursue an acquisition of SolarCity,
following discussions with counsel,195 it was determined that Elon and Gracias
should be recused from any vote relating to the transaction given, among other
conflicts, their roles on the SolarCity Board.196 But the Tesla Board believed that
Elon and Gracias’ perspectives regarding the solar industry and SolarCity,
191
Tr. 2840:13–18 (Gracias); Tr. 465:15–17 (Kimbal); Tr. 1368:8–15 (McBean);
Tr. 1964:11–1965:14 (Denholm).
192
JX 1228.
193
JX 1231 at 114–22; JX 1224; Tr. 279:23–280:6 (Elon).
194
JX 1227.
195
JX 1228 at 4–5; JX 2121 at 68.
196
JX 1233 at 5; JX 2121 at 68; Tr. 1969:19–1970:17 (Denholm). For reasons unclear, the
Tesla Board “didn’t discuss whether [Kimbal] should be recused along with [Elon].”
Tr. 525:24–526:2 (Kimbal).
39
in particular, would be helpful, so it was agreed that the two could participate in
certain high-level strategic discussions regarding the Acquisition.197
At the June meeting, Evercore presented an overview of potential solar
acquisition targets.198 Based on Evercore’s analysis, SolarCity was the “clear market
leader” and “the most attractive asset in the solar market.”199 The Tesla Board
197
JX 2121 at 68; Tr. 30:15–22 (Elon); Tr. 2842:3–8 (Gracias). Plaintiffs argue that the
extent of Elon’s recusal was overstated in the Proxy. But as Elon points out, the Proxy
disclosed that Elon was recused from any vote relating to the Acquisition, which he was.
See Tr. 1377:21–1378:14 (McBean) (testifying that the Proxy description was “consistent
with what actually happened” and that Elon did not “vote on any matters relating to the
SolarCity acquisition”). The Proxy disclosed that Elon’s “strategic vision, expertise and
perspectives . . . would continue to be helpful to the Tesla Board’s evaluation of a potential
acquisition,” and so he was not fully recused. JX 2121 at 68. Additionally, the Proxy
disclosed the Tesla Board meetings Elon attended. Id. at 73, 75–76. With that said, as
discussed below, the recusal protocol was not precise, and the fluidity of its enforcement
revealed a flaw in the deal process.
198
JX 1228 at 3; JX 1231 at 33–40; Tr. 1379:21–1380:12 (McBean); Tr. 1966:12–17
(Denholm).
199
JX 1231 at 9; Tr. 1378:15–1382:12 (McBean); JX 1228 at 3. In this regard, I am
satisfied that Evercore performed a more than adequate survey of solar targets before
recommending Elon’s preferred target. Evercore, and the Tesla Board, believed SolarCity
was the obvious choice and for good reason. E.g., Tr. 2399:15–2401:1 (Buss) (“Q. Did
you personally have a view on which target Tesla should pursue? A. Yes. It was very
obvious to me. Q. And what was that view? A. Really was SolarCity. . . . I think with
the vision and scale of where Tesla was and where we expected it to go, not doing a market
leader really wouldn’t have made sense. . . . And then the other big factor in the solar space
is really cost. You need to be a low-cost provider. And they were the lowest-cost provider
out there. . . . And obviously, my prior company, SunPower, was on the list. Right? I
think they were number four. And I wouldn’t have supported that either.”); Tr. 1382:1–12
(McBean) (“So you say ‘Clear Market Leader’ here. Was it a close call, in Evercore’s
view, as to which company was the best target? A. No, not at all. Q. Can you explain
that? A. Because of their position in the market, it was just—and the vertical integration,
it was a very obvious choice. As I said, they had, you know, a much higher market share
40
discussed SolarCity’s financial condition and “ability to meet its current and future
debt obligations and financing needs.”200 Evercore presented its preliminary
valuation and its recommendation that market conditions favored a stock-for-stock
deal.201 With Evercore’s guidance, the Tesla Board was focused on the strategic
rationale for the transaction and recognized the “significant synergies” a solar
acquisition would bring to the table.202 It discussed how it would structure an
acquisition, including the need to pay a premium over SolarCity’s closing stock
price.203 According to notes from an Evercore team member, Elon, in attendance,
noted that the price had to be “publicly defensible,” meaning “in the middle . . . of
precedent premia paid.”204
The Tesla Board expressed that it was not willing to do the deal unless it made
sense financially for Tesla and discussed “a walkaway price.”205 Evercore
than the other participants. And it just wasn’t—it was kind of a no brainer. It’s not usually
that obvious; it was in this situation.”).
200
JX 1228 at 3; Tr. 1982:12–1983:9 (Denholm).
201
JX 1228 at 3; JX 1231 at 11.
202
JX 1238 at 1; see also Tr. 1389:20–1390:6 (McBean) (testifying that the Tesla Board
did not approve the deal “to bail out SolarCity” but was “really focused on the strategic
rationale and the combination of solar and storage”).
203
JX 1228 at 2–3; Tr. 1987:2–24 (Denholm).
204
JX 1238 at 2.
205
Tr. 1389:13–19 (McBean).
41
recommended a stock exchange ratio equating to a $25–$27 per share offer.206
For his part, Elon observed that, given SolarCity’s much higher “historical trading
performance,” “[p]remia to current prices don’t mean that much” or “might come in
a bit low.”207 While not entirely clear in the evidence, Elon appears to have proposed
a 30% premium over SolarCity stock’s 4-week trailing price, which amounted to
$28.50 per share.208 The Tesla Board discussed the specific exchange ratio of
“0.122x to 0.131x” (equating to $26.50–$28.50 per SolarCity share).209 Elon was
“not a fan of using ranges,” but Denholm insisted that “giving a range [] provides
flexibility” in due diligence.210 Elon and Gracias then left the meeting, and the
remaining directors continued to discuss the potential acquisition.211
206
JX 1239 at 5 (notes from second Evercore deal team member: “Our thoughts–risk vs
return: if our offer is 25–27, upside is relatively limited.”); JX 1238 at 2 (notes from
Evercore deal team member: “What range are we actually suggesting? $25–27 under
EVR’s suggested exchange ratio.”).
207
JX 1238 at 2.
208
See id. (“Robyn–what’s the best way to arrive at specific prices? Stu–FF indicates mid-
to-high 20s, 30-day premium . . . Elon–30% over 4-week trailing (~$28.50).”).
209
Compare JX 1228 at 3 and JX 1238 at 2, with JX 2121 at 68.
210
JX 1238 at 2.
211
JX 1228 at 4–5.
42
2. The Initial Offer
With Elon and Gracias recused, the Tesla Board approved a preliminary, non-
binding proposal to acquire SolarCity, subject to due diligence, using an exchange
ratio range of 0.122–0.131 shares of Tesla common stock per share of SolarCity
common stock.212 The exchange ratio represented a premium of approximately 21%
to 30% over SolarCity’s trading price at the time.213 Even though not required under
Delaware law, the Tesla Board also determined that any acquisition proposal would
be conditioned “on the approval of a majority of disinterested SolarCity stockholders
and Tesla stockholders voting on the transaction.”214 Notably, despite Elon’s
request, the Tesla Board did not include a bridge loan in the preliminary proposal,215
as Evercore and the Tesla Board “didn’t think it was in Tesla’s best interest.”216
212
JX 1228 at 5; JX 1233 at 2; Tr. 1993:17–1994:21 (Denholm).
213
JX 1275 at 2; JX 1233.
214
JX 1233 at 2 (meeting minutes) (emphasis added); see JX 2121 at 68 (description of
required votes in the Proxy); Tr. 1973:22–1974:13 (Denholm).
215
JX 1233; Tr. 1701:20–23 (Lyndon).
216
Tr. 1517:13–16 (McBean); see also Tr. 2186:4–18 (Denholm) (testifying that she
“was not in favor of doing a bridge loan at all, that we would discuss it at the board, but,
for me, it didn’t sound like a good idea”); Tr. 2187:10–21 (Denholm) (“Q. Was it, in fact,
the case that Tesla did not want to do a bridge loan? A. Yes. I mean, I didn’t want to do
a bridge loan. And in the subsequent discussions with the rest of the board, the board
agreed with me that we did not want to do a bridge loan. Q. And, again, what was
Mr. Musk’s position, as far as you understood at the time, on whether Tesla should do a
bridge loan to SolarCity? A. Again, my understanding was he wanted to do a bridge loan
and thought it would be best if that bridge loan came from Tesla.”).
43
On June 20, 2016, Tesla made an offer to acquire SolarCity at an exchange
ratio of 0.122 to 0.131 Tesla common shares for each SolarCity common share.217
Tesla announced its preliminary proposal after market close on June 21, 2016.218
In response to the initial offer, the SolarCity Board formed a special committee
consisting of directors Nancy Pfund and Don Kendall.219
Following the announcement, Tesla’s stock price dropped by more than 10%,
or $3.07 billion—an amount greater than SolarCity’s entire market capitalization.220
Evercore’s McBean, who spoke with market commentators, explained that
“it became very clear that they did not understand” the strategic logic of the
combination because “the media and the public thought of Tesla as a car
company.”221 Tesla’s stock price quickly rebounded and ultimately rose above the
unaffected price by mid-July.222
217
PTO ¶ 159.
218
Id.
219
PTO ¶ 161.
220
JX 1590 at 254; JX 2834 (Beach Expert Report) ¶¶ 33–34.
221
Tr. 1394:15–1396:21 (McBean); see also JX 1590 at 254 (concluding the stock fell
“mainly due to investors lack of understanding regarding the timing of the announcement
and the strategic rationale”).
222
See PTO Ex. A. 10–11.
44
After the initial offer, Bank of America further downgraded SolarCity’s risk
rating.223 One week later, SolarCity ended the second quarter with ⁓$216 million in
negative cash flow.224 According to SolarCity, Tesla’s initial offer created financial
strain for SolarCity.225 In this regard, whether Tesla’s offer made it more difficult
for SolarCity to finance itself was the subject of much debate at trial, and there is
evidence to support both sides.226 Ultimately, the preponderance of the evidence
suggests that Tesla’s offer caused delays in SolarCity’s financing efforts, which
ultimately exacerbated SolarCity’s liquidity problem.227 Despite these problems,
223
JX 1355; Tr. 1792:15–1793:15 (Lyndon).
224
Tr. 1031:8–1032:4 (Serra); JX 1858 at 12.
225
Tr. 1701:20–1702:1 (Lyndon).
226
See, e.g., Tr. 1510:16–21 (McBean) (“Q. SolarCity had liquidity concerns before Tesla
made its public offer. Right? A. Yes.”); JX 1406 (email from Evercore’s Roger Altman:
“Mark me down as a skeptic on the argument that this proposed merger makes it harder for
them to finance themselves.”); Tr. 1510:22–1512:24 (McBean) (discussing Altman’s
email); Tr. 422:14–423:10 (Bilicic) (“I think the company had a liquidity problem that had
almost nothing to do with the presence of the Tesla proposal.”).
227
See, e.g., Tr. 477:19–24 (Kimbal) (“I’ve been through this a few times with companies
I’ve been part of. If you create a public offer, you freeze the options of your acquisition
target, You force any lender or equity provider to come to you and you can, hence, control
their options.”); Tr. 1703:24–1704:18 (Lyndon) (explaining how “the financial institutions
had to now go back to their credit committees and get approval for continuing to invest in
SolarCity” and how that caused a delay of “two or three weeks” which “put[] a lot of stress”
on the company’s cash situation); JX 1360 (email from J.P. Morgan stating that because of
the Tesla offer, additional approvals will be needed and “we do not expect to be able to
complete the additional approvals in time to make the requested [] closing date”);
JX 1858 at 2 (“Because of the Tesla Motors acquisition proposal, we experienced greater
than usual delays closing new project financing commitments.”).
45
Bank of America continued to lend and sought to deepen its ties to SolarCity.228
In fact, when all was said and done, SolarCity’s financing counterparties participated
in financing transactions with SolarCity worth more than $3 billion from Q4 2015
through Q4 2016, including times when Plaintiffs claim SolarCity was insolvent.229
On June 25, 2016, SolarCity’s special committee retained Lazard as a
financial advisor.230 Lazard confirmed that SolarCity “was close to breaching a
liquidity covenant under the Company’s revolving credit facility” and “would be
operating with little margin for error until October 2016.”231 One of the Lazard
bankers advising SolarCity was worried about the damage a liquidity event could
cause the company and was “concerned” that such an event would threaten “the
company on a stand-alone basis going forward.”232
228
Tr. 1235:1–1238:8, 1347:24–1348:24 (Van Zijl); Tr. 998:1–9 (Serra) (“Q. In 2016, did
Bank of America ever conclude that SolarCity was not viable as a going concern? A. Quite
the opposite. I mean, the investment bank of Bank of America was trying to do more
business with us.”); JX 1430 at 27.
229
JX 2384; JX 2028; JX 2853 Ex. 8.
230
JX 1347 at 2; JX 1350.
231
JX 1453 at 1; see also JX 1721 at 2 (stating that SolarCity was “on the brink of a liquidity
event”).
232
Tr. 429:15–430:1 (Bilicic) (“So the company had a liquidity problem based on our
analysis, which had a risk of producing a covenant problem but, more generally, had the
risk of damaging the overall business. And the other concern we had here was . . . we were
concerned about the company on a stand-alone basis going forward.”).
46
3. Negotiations Begin
Denholm led due diligence and negotiations with SolarCity,233 spending
nearly six weeks and hundreds of hours on the Acquisition.234 She met with the
chairman of SolarCity’s special committee,235 managed the due diligence team,236
reported to the Tesla Board and led the exchange of offers and counteroffers.237
In aid of Denholm’s efforts, Evercore performed extensive diligence. McBean
credibly testified that Evercore’s 10-member team spent thousands of hours
reviewing SolarCity’s financial condition, conducting valuation analyses and
negotiating with Lazard.238
233
Tr. 2001:14–23 (Denholm); Tr. 30:23–31:14, 279:2–280:9 (Elon); Tr. 1376:3–7
(McBean); Tr. 466:18–467:8 (Kimbal). Plaintiffs dispute this fact because, they say, there
are no Tesla Board minutes or resolutions that state the Tesla Board put Denholm in charge
of the negotiations. See PAB at 23–26. This argument fails. All director testimony is
consistent that Denholm was in charge. And there are special meeting minutes that imply
the same. See JX 1673 at 2–3 (noting that Denholm “updated the other members of the
Board with respect to her discussion the prior day with Mr. Donald R. Kendall [regarding
SolarCity’s counteroffer]”). More importantly, I found Denholm to be an extraordinarily
credible witness. If she says she was in charge, then she was in charge.
234
Tr. 2001:24–2002:8 (Denholm).
235
Tr. 2024:2–15 (Denholm); JX 2121 at 69.
236
Tr. 1966:18–1967:24, 2001:14–23 (Denholm).
237
Tr. 30:23–31:14 (Elon); Tr. 2027:1–19 (Denholm).
238
Tr. 1466:12–15 (McBean).
47
Outside the Tesla Board process, Lyndon provided Elon with updates on
SolarCity’s cash position and need for bridge financing.239 On July 9, 2016, Lyndon
and Elon discussed SolarCity’s liquidity needs and the Acquisition.240 Lyndon
reminded Elon that SolarCity was “running crazy close” to its Liquidity Covenant,
and he acknowledged he was “really afraid of the domino effect” that would result
if SolarCity did not get cash soon.241 The next day, Lyndon emailed Elon the “cash
forecast [he] gave the [SolarCity Board] in April,” again warned of the “domino
effect” that SolarCity faced due to “delay[s] [in] funding,” and asked Elon to speak
over the phone about SolarCity’s $200 million bridge loan request.242 In response,
Elon informed Lyndon that, contrary to Elon’s wishes, Tesla’s Board would not
authorize a bridge loan.243
239
Elon Dep. 272:21–23; Lyndon Dep. 106:6–107:42.
240
Tr. 1794:2–10 (Lyndon).
241
JX 1451; Lyndon Dep. 107:5–11; see also Elon Dep. 272:10–273:12 (recounting the
conversation with Lyndon).
242
JX 1455; Tr. 1796:10–16 (Lyndon). Plaintiffs point out that this communication was
not disclosed in the Proxy. See JX 2121 at 71–72. Here again, the missing disclosure was
not material as the bridge loan was never approved.
243
Tr. 1702:24–1703:6, 1798:3–1799:12 (Lyndon).
48
4. The Tesla Board Becomes Aware of SolarCity’s Cash Issues
Through due diligence, Evercore discovered SolarCity’s significant liquidity
concerns.244 On July 15, 2016, Evercore had a “very concerning” call with Lazard,
during which Lazard claimed it was unaware that SolarCity was at risk of tripping
its Liquidity Covenant.245 McBean immediately telephoned Elon.246 Elon “was
surprised . . . that [Lazard] didn’t know that [SolarCity] could potentially default on
its revolver.”247 But Elon did not appear surprised by the liquidity problems;248
instead, changing the subject, he advised McBean that he was “very concerned about
the pace of diligence.”249
Within an hour of that call, Elon arranged daily meetings with the Evercore
team to push along the pace of due diligence.250 It is not clear from the record if
244
JX 1471; Tr. 1513:18–1515:24 (McBean). Plaintiffs correctly observe that Elon did not
disclose these issues to his fellow Tesla Board members, likely because he was wearing
his SolarCity Board hat when he received the information.
245
JX 1512; Tr. 1518:12–1519:2 (McBean).
246
JX 1528; Tr. 1520:18–1521:1 (McBean).
247
McBean Dep. 163:20–164:8, 238:3–12; see also Tr. 1521:2–5 (McBean).
248
McBean Dep. 164:9–12, 238:14–17.
249
Tr. 1521:6–23 (McBean).
250
Tr. 1521:2–1522: 21 (McBean). Plaintiffs argue that Elon’s daily calls with Tesla’s
advisors and management were not disclosed to stockholders. See POB at 30. That is true,
and the omission may well have been material given Elon’s conflicts.
49
Elon’s meetings with Evercore came at the suggestion of the Tesla Board. McBean
testified that she thought the idea originated at the board level.251 Denholm knew
about “a daily call with Evercore and the due diligence team, many of which [she]
sat in on, and Elon was on some of those,” but testified she did not know that Elon
“was having [] private conversations with Evercore.”252 Regardless, the evidence
suggests that the purpose of any calls with Evercore likely was for the bankers to
update Elon on the progress and speed of the deal so Elon could prod SolarCity to
respond to outstanding diligence requests.253
The first “daily call” took place the following morning, on July 16, 2016,254
and addressed “the status of all the work streams.”255 Less than 30 minutes after the
start of the call, McBean emailed her team: “We are running out of time. Plan is to
sign this week and fairness is on Monday,” which was in two days.256
Over the next 48 hours, Evercore created its own “downside” case projections.
On July 18, 2016, these projections were presented to Evercore’s Fairness
251
Tr. 1402:18–1403:18, 1526:5–1527:19 (McBean).
252
Tr. 2144:17–2145:1, 2152:22–2154:3 (Denholm).
253
Tr. 1403:3–6 (McBean); see also JX 1526 at 2 (“[W]e’re going to have a daily check-
in call with Elon to discuss gating items and progress.”).
254
JX 1526; Tr. 1523:2–7 (McBean).
255
Tr. 1527:24–1528:24 (McBean).
256
JX 1527 at 2; Tr. 1534:12–1535:18 (McBean).
50
Committee, which proposed some changes.257 Later that day, Evercore sent Wheeler
the same downside case it shared with its Fairness Committee and McBean called
Elon.258
At the next Tesla Board meeting on July 19, Evercore presented on
SolarCity’s dire liquidity situation. Evercore explained that SolarCity could trip its
Liquidity Covenant by July 30, 2016,259 and warned that disclosure of an event of
default “could lead to potential cross defaults” and “impair SolarCity’s ability to
monetize future assets.”260 Evercore further detailed SolarCity’s significant
257
Tr. 1561:4–16 (McBean); JX 1575 (“We just finished a call with our opinion committee
and they would like us to make a number of changes to the analysis . . . SolarCity just sent
us some data that we needed to complete our analysis this morning . . . .”).
258
JX 1553; Tr. 1561:19–1563:12 (McBean). Plaintiffs argue that “[a]fter talking with
Musk, Evercore’s projections doubled overnight,” implying that Evercore changed its
projections at Elon’s request. POB at 32. That implication is not supported by the credible
evidence. McBean was asked if Elon “ever ask[ed] Evercore to change one of its
presentation or advice that it was providing to the Tesla board” or if “Evercore [was]
seeking approval from Elon Musk on valuation,” in response to which she credibly
testified, “No. Never.” Tr. 1628:1–8 (McBean). To the contrary, McBean testified that
“around the same time we were working with Tesla to finalize the sensitivity case,” Tesla
was continuing to give Evercore adjustments, and Evercore “would have received signoff
from Jason [Wheeler]” for additional changes. Tr. 1565:20–1569:24 (McBean). SolarCity
was also supplying relevant information at the last minute. See JX 1575. In any event, the
final deal price implicated the middle of the lowest sensitivity case before any adjustments
were made. See POB at 32 (showing a DCF range of $15–$25); Tr. 1572:3–1573:1
(McBean).
259
JX 1588 at 28, 30; Tr. 1573:6–1575:6 (McBean).
260
JX 1588 at 28, 30; see also Tr. 1573:6–1575:6 (McBean) (describing Evercore’s advice
regarding the SolarCity Liquidity Covenant). Plaintiffs argue the fact that Evercore
advised the Tesla Board that breaching the Liquidity Covenant would threaten SolarCity’s
51
upcoming expenses in connection with Silevo.261 From McBean’s perspective, the
Tesla Board fully understood and was “particularly concerned” about SolarCity’s
financial challenges.262
The day after his fellow directors learned the extent of SolarCity’s liquidity
crisis, Elon self-published the so-called “Master Plan Part Deux.”263 In addition to
promising that Tesla’s EVs would feature self-driving capabilities and touting the
prospect of heavy-duty EV trucks and urban transport, Elon explained that “the time
has come” for Tesla to acquire SolarCity and “sell integrated solar and energy
storage systems.”264 With this declaration, Elon went directly to Tesla’s
stockholders to explain that Tesla’s vision for the future could not be achieved
without a solar company.265
solvency was not disclosed to stockholders. While true, the fact remains that SolarCity
never breached the Liquidity Covenant.
261
JX 1588 at 28; Tr. 1579:19–1580:8 (McBean).
262
Tr. 1576:13–1577:4 (McBean).
263
JX 1618.
264
Id.
265
Tr. 574:8–22, 576:9–19 (Kimbal). I note that Oppenheimer stated that the Master Plan
Part Deux did not come as a shock to the market. See JX 1617 at 1. (“That TSLA plans to
move into higher powered vehicles like semi and pick-up trucks, introduce/coordinate a
fleet of autonomous driving vehicles, and sell integrated solar and energy storage systems
will not surprise many investors.”) (emphasis added).
52
Given the information discovered in diligence, Evercore decided to
recommend that Tesla lower its offer.266 The recommendation was communicated
to Elon during a call on July 21 and to the Tesla Board the following day.267
On July 24, the Tesla Board met to discuss the merger and whether to revise
the offer.268 Elon agreed that SolarCity’s liquidity issues should lower the deal value
but reiterated his belief that the “strategic rationale was still intact.”269 After Elon,
Gracias and Straubel left the meeting, Evercore “provided an update of [its]
valuation analysis.”270 Among other things, the Tesla Board discussed whether to
make a revised offer before the release of SolarCity’s Q2 2016 results and reduced
installation guidance, which they anticipated would lower SolarCity’s stock price.271
After discussion, the Tesla Board “determined to make a revised proposal to acquire
SolarCity at a lower price that reflected [Tesla’s] due diligence findings, prior to
266
JX 1619; Tr. 1592:20–24 (McBean).
267
JX 1619; JX 1655 at 2–3. Plaintiffs point out that Evercore’s call with Elon was not
disclosed to the stockholders or the Tesla Board. See POB at 34. The fact that Evercore
told management that they were planning on making a formal recommendation to the Tesla
Board is not material evidence of a conflict. There is no evidence Elon resisted or pushed
back on the idea; indeed, he agreed that SolarCity’s liquidity issues should affect the price
Tesla was willing to pay. See Tr. 1603:20–1605:5 (McBean).
268
JX 1673.
269
Tr. 1603:20–1605:5 (McBean).
270
JX 1673.
271
Tr. 1598:5–1599:23 (McBean).
53
SolarCity’s announcement of its second quarter results.”272 The Tesla Board
lowered the offer to an exchange ratio of 0.105 shares of Tesla stock per SolarCity
share, and negotiations continued.273
H. The Final Terms of the Acquisition
On July 30, 2016, the Tesla Board offered to pay 0.110 shares of Tesla stock
for each share of SolarCity stock274—well below the initial offer range of 0.122–
0.131. As detailed below, Evercore provided a fairness opinion to the Tesla
272
JX 1673. I note that Tesla protected itself from a SolarCity liquidity event by requiring
as a condition of the Acquisition that SolarCity remain in compliance with its debt
covenants. JX 2121 at 249–50 (§ 7.02(e)); Tr. 1407:2–23 (McBean). And, of course,
SolarCity’s second quarter and third quarter results were a matter of public knowledge by
the time the Tesla stockholders voted on the Acquisition. Tr. 2029:19–2030:1 (Denholm).
273
Tr. 2160:9–2161:1 (Denholm). Plaintiffs argue that before this lowered offer, the Tesla
Board called Elon to ask whether Tesla could acquire the Silevo assets instead of SolarCity
in total, to which “[Elon] said no.” POB at 35. This is not a fair characterization of the
exchange. Denholm testified that, in discussing price (with Elon and Gracias recused), the
Tesla Board “wanted to understand if there was an alternative strategy around acquiring a
certain set of technologies of SolarCity rather than the entirety of the company.”
Tr. 2032:16–2033:5 (Denholm). The Tesla Board was exploring alternatives in case the
revised offer they contemplated of 0.105 was rejected outright, given that SolarCity had
counteroffered with a price above the range Tesla initially proposed, and Tesla had planned
to counter with a proposal even lower than the initial range. Id. In other words, this
alternative was being considered “if we couldn’t get to a negotiated outcome.” Tr. 2033:6–
12 (Denholm). Without discussing price, the Tesla Board called Elon to discuss
“the technology assets themselves,” and ultimately decided not to make a separate offer for
just Silevo because “it would not allow [Tesla] to do the integrated product that was key to
the strategy.” Tr. 2033:13–2034:1 (Denholm).
274
JX 1736 at 2–3.
54
Board,275 which concluded that the Acquisition consideration was fair to Tesla.276
In fact, the Acquisition price fell within or below each of the seven stock price ranges
Evercore presented to the Tesla Board (plus two illustrative reference ranges).277
I. The Merger Agreement Is Executed and the Acquisition Is Announced
Tesla and SolarCity executed the Agreement and Plan of Merger (the “Merger
Agreement”) on July 31, 2016, and announced the Acquisition the following day.278
The Merger Agreement limited SolarCity’s ability to issue equity or take on
275
JX 2121 at 83.
276
Id. Plaintiffs argue that “Evercore’s fairness opinion was unreliable.” POB at 60
(citing Gerber v. Enter. Prods. Hldgs., LLC, 67 A.3d 400, 420–21 (Del. 2013) (affirming
trial court’s finding that a financial advisor had “compromise[d] its professional valuation
standards to achieve the controller’s unfair objective”), overruled on other grounds by
Winshall v. Viacom Int’l, Inc., 76 A.3d 808 (Del. 2013)). I disagree. The preponderance
of the evidence reveals this opinion was reliable, honest and independently given.
Evercore was a diligent advisor with no previous ties to Tesla, and McBean credibly
explained and defended its work and advice. Tr. 1401:4–12, 1414:6–18, 1421:15–1428:13,
1448:4–1458:1 (McBean); see also Tr. 1467:20–1468:6 (McBean) (“Q. One final
question. Sitting here today, do you stand by Evercore’s work and the fairness opinion that
was issued for this deal? A. Absolutely. Tesla paid a great price for a very valuable
company. As I said many times, the strategic rationale is sound and it just becomes clearer
every day. The combination of solar and storage is incredibly compelling, and they were
able to get this company at a very good price. So absolutely.”). As explained below,
however, Evercore’s fairness opinion is just one of many pieces of evidence that justify the
price paid in the Acquisition.
277
JX 1735 at 23.
278
PTO ¶¶ 1, 173–74; JX 2121 at 79.
55
additional debt without Tesla’s consent.279 Importantly, it also required SolarCity to
remain in compliance with its debt covenants pending closing.280
In the Form 8-K Tesla filed to disclose the Merger Agreement, Tesla informed
its stockholders that the Acquisition exchange ratio represented an equity value for
SolarCity of approximately $2.6 billion, or $25.37 per share, based on the 5-day
volume-weighted average price of Tesla stock as of July 29, 2016.281 At the time
the Acquisition closed, however, the agreed upon exchange ratio resulted in Tesla
paying a good bit less––an equity value of $20.35 per share of SolarCity common
stock (or approximately $2.1 billion).282
With the executed Merger Agreement in hand, SolarCity still faced short-term
liquidity tightness that it needed to address into August 2016 to avoid tripping its
Liquidity Covenant prior to closing.283 Lyndon recognized that, given delays in
financing, SolarCity could not close on available debt fast enough and was “now at
the last resort stage.”284 Although SolarCity could have improved its liquidity
279
JX 2121 at 226–27 (§ 5.01(b)); Tr. 1716:21–1717:11 (Lyndon).
280
JX 2121 at 249–50 (§ 7.02(e)).
281
JX 1762 at 163.
282
JX 2839 ¶ 12; JX 2443 at 76–77.
283
Tr. 1717:12–19, 1719:24–1720:7 (Lyndon).
284
JX 1850; see also JX 1869 (SolarCity cash meeting materials).
56
position through macro changes, such as scaling back installations, these changes
would not solve SolarCity’s short-term liquidity problem, nor would they comply
with the Merger Agreement’s ordinary course covenant.285 To make matters worse,
SolarCity could not access funds from its usual investors as a result of the pending
Acquisition, its recent failure to secure certain credit approvals, and the quick
turnaround required to satisfy SolarCity’s financing needs.286
With other sources more difficult to access, SolarCity turned to its existing
shelf registration for Solar Bonds to meet its need for cash.287 On August 23, Elon
Remainder of Page Intentionally Left Blank
285
Tr. 1717:12–1718:2 (Lyndon); JX 2121 at 226–27 (§ 5.01(b) (ordinary course
covenant)).
286
Tr. 1718:12–1720:7 (Lyndon); JX 1885 at 3.
287
Tr. 1720:13–20 (Lyndon); Tr. 33:15–20 (Elon); JX 1907 at 2.
57
and his cousins purchased $100 million of 12-month 6.5% Solar Bonds,288 which
solved SolarCity’s short-term cash needs.289
J. The Tesla Stockholder Vote
On August 31, 2016, Tesla filed a preliminary proxy that included:
(1) an explanation of the Acquisition’s strategic rationale; (2) descriptions of the
deal process, including the scope of Elon’s and Gracias’ recusals; (3) estimated cost
synergies; (4) the financial advisors’ projections and sensitivity cases; (5) the
fairness opinions and valuation methods of Lazard and Evercore; (6) disclosures of
the Tesla directors’ holdings in related companies; and (7) a description of the risks
posed by SolarCity’s liquidity challenges.290
288
JX 1921 at 2. Plaintiffs argue that Elon and the Rive brothers’ purchase of Solar Bonds
should have been disclosed to Tesla stockholders to underscore the lengths to which
SolarCity was forced to go in order to raise cash. POB at 57. The argument
mischaracterizes the record. While the parties may dispute the desirability of the rates
imposed for the short-term bridge financing available to SolarCity in advance of closing,
or the timing in which a financing deal could have been consummated, the preponderance
of the evidence shows SolarCity was discussing bridge financing with various banks and
other investors in advance of closing, and I am satisfied that these options presented viable
(albeit less attractive) alternatives to the sale of Solar Bonds to insiders. See, e.g., JX 2853
at 34–37 (highlighting various financing options SolarCity was exploring).
289
Tr. 1723:24–1724:2 (Lyndon).
290
JX 1952 at 11, 65–123, 209–305. Plaintiffs maintain that “[Elon] did not disclose that
SolarCity was insolvent; could not pay its bills or employees on time without breaching
debt covenants; could not raise equity; and had no viable solution to a ‘liquidity crisis’ that
began in 2015.” POB at 2. I address those contentions below.
58
The preliminary proxy also disclosed three sets of SolarCity financial
projections to the Tesla stockholders: (1) the SolarCity Base Case: the base case
reflecting the best view of SolarCity’s management on the company’s future as of
2016;291 (2) the Evercore Sensitivity Case: the sensitivity case prepared by Evercore
and Tesla by adjusting the SolarCity Base Case to “reduce[] SolarCity’s projected
capital needs;”292 and (3) the Lazard Sensitivity Case: the sensitivity case prepared
by Lazard and SolarCity that assumed SolarCity faced challenges accessing the
capital markets and with borrowing costs.293
Evercore’s initial fairness analyses were based on the SolarCity Base Case
and Evercore Sensitivity Case because the Lazard Sensitivity Case was not yet
provided to Tesla or Evercore.294 Upon learning that Lazard had developed a
downside case, Evercore immediately obtained a copy and re-ran its cash flow
analyses.295 Evercore determined that the Evercore Sensitivity Case was more
291
JX 2121 at 85. The SolarCity Base Case is referenced in the Proxy as the “Unrestricted
Liquidity Case.”
292
Id. at 109. The Evercore Sensitivity Case is referenced in the Proxy as the “Revised
Sensitivity Forecasts.”
293
Id. at 85; Tr. 2521:22–2522:16 (Fischel). The Lazard Sensitivity Case is referenced in
the Proxy as the “Liquidity Management Case.”
294
Tr. 1245:16–22, 1437:3–6, 1458:5–1459:3 (McBean).
295
Tr. 1459:12–15, 1463:3–7 (McBean).
59
conservative than the Lazard Sensitivity Case, which generated uniformly higher
values for SolarCity.296 Evercore then presented this analysis to the Tesla Board.297
The market’s reaction to the Acquisition announcement was mixed, with
extensive commentary.298 After learning that some major Tesla stockholders had
concerns about the Acquisition, Elon told Buss that certain things “need to happen
to change investor sentiment,” including that SolarCity would need to “solv[e] its
liquidity crisis,” and Tesla stockholders would need a “joint product demo” of a
promising SolarCity product in development––the “Solar Roof.”299
296
JX 2922 at 4; Tr. 1461:16–1464:2 (McBean).
297
Tr. 1463:8–20 (McBean).
298
Tr. 2653:1–2655:7 (Fischel); Tr. 1998:11-18 (Denholm). Fischel’s Expert Report
compiles some of the robust commentary surrounding the Acquisition. See JX 2839
at 162–65, 170–72. To highlight just a few, Cowen & Company said the offer was
“well short of our $35 price target”; Guggenheim Securities stated, “[w]e think the offer
for SCTY is low”; Credit Suisse stated that the price was “too low” and “could be a steal
for TSLA shareholders”; Oppenheimer stated the offer range “represents a fair price”;
JP Morgan stated that the offer is “slightly above our $25 price target” and expressed
skepticism “that there are near-term customer, product or technology synergies”;
Roth Capital stated that the Acquisition “would serve as yet another front or major
challenge” for both companies; Raymond James thought SolarCity stockholders “are being
shortchanged”; and Morningstar stated the proposal “is a great value for SolarCity
shareholders.” Id. at 163–64, 168.
299
JX 2038 at 1. The Solar Roof integrated solar technology into roof tiles so the roof
itself would generate electricity. See JX 2200 at 2; Tr. 1847:2–5 (Peter) (“[W]e realized
that the only way to make solar power look really good is that it can’t be something that is
on the roof; it needs to be the roof.”).
60
On October 12, 2016, Tesla and SolarCity filed the definitive Proxy
incorporating by reference their recent SEC filings.300 Proxy advisory firms ISS and
Glass Lewis both offered voting recommendations to stockholders. ISS
recommended the Acquisition, characterizing it as “a necessary step towards
TSLA’s goal of being an integrated sustainable energy company” for which Tesla
was paying “a low to no premium.”301 Glass Lewis recommended against the deal,
calling it a “thinly veiled bail-out plan” and “significantly value destructive” to Tesla
because “SolarCity’s principal stand-alone business, as it exists today, is
increasingly and materially incapable of supporting itself.”302
Given the mixed market reaction, Tesla took steps to persuade the market of
the deal rationale and the value proposition. Denholm led outreach to Tesla’s
institutional stockholders, ISS, and Glass Lewis.303 As the CEO of the proposed
combined company, Elon participated in some outreach as well to share his vision
for the combination.304 Specifically, Elon focused on selling the “integrated
300
JX 2121 at 191–92.
301
JX 2249 at 11, 15.
302
JX 2237 at 7–9.
303
Tr. 2050:3–17, 2058:24–2060:1 (Denholm); Tr. 2473:1–3 (Foster).
304
Tr. 31:23–32:9 (Elon).
61
product” solution to stockholders.305 On October 28, 2016, Tesla and SolarCity
jointly presented to the market a prototype of the Solar Roof product, showcasing a
future combination of the Solar Roof, solar storage through the Powerwall and Tesla
EVs powered by solar.306 SolarCity had no budget for this product, which was just
conceptual in nature and prototyped “for demonstration of the aesthetics.”307
Days after the product launch, Elon tweeted that “first solar roof deployments will
start next summer.”308 On cross examination, Elon admitted that, in 2016, Tesla did
not have a formalized plan to begin installing solar roofs in 2017, and that the time
from idea phase to volume deployment would likely take up to three years, but he
allowed that the roll out could “[p]ossibly” be done in the timeframe he touted to the
market.309
305
Tr. 343:2–9 (Elon).
306
JX 2199.
307
Tr. 343:19–344:8 (Elon) (explaining that the Solar Tiles were not operational at the time
of the demonstration); see also JX 2304 at 1 (Tesla management commenting, “SCTY
Finance has zero visibility on how much it is going to cost [to] make a solar roof, install it,
R&D, where it will be manufactured . . . running blind here which may be a big risk?”).
308
JX 2241. Plaintiffs also point to Elon’s statement at an investor Q&A where he said
“we expect to start doing the solar roofs in volume somewhere next year,” and argue this
false representation shaped the Tesla stockholder vote. JX 2302 at 9; see POB at 38.
But this comment was made after the Acquisition was approved by stockholders.
See JX 2302 at 6.
309
Tr. 346:3–13 (Elon) (“Q. But this is more than optimistic. This is just plain out false.
There is no way with an idea that is in existence at Q3 2016 that you would [] start doing
solar roofs in volume by 2017; correct? A. Well, I think—it’s not out of the question,
62
During a special stockholder meeting held on November 17, 2016, Tesla’s
stockholders overwhelmingly voted to approve the Acquisition.310 Approximately
85% of votes cast by Tesla’s stockholders were voted in favor of the deal.311 Most
of those votes were cast by sophisticated institutional investors.312
18 months later, thereabouts, that we could start production of it, but not deployment.
Q. And certainly not volume. A. I don’t know. Possibly. It’s not out of the question.”);
Tr. 339:20–340:23 (Elon) (confirming that it would take three to four years to take a
product idea like the Solar Roof from idea phase to volume production).
310
JX 2302 at 6; JX 2320 at 7. At the time of special meeting, Tesla had 1,792,626 total
shares outstanding. The results of the vote were: 68,788,787 shares voted in favor of the
Acquisition (excluding the Tesla shares owned, directly or indirectly, by SolarCity
directors and named executive officers or their affiliates); 12,067,314 shares voted in
opposition of the Acquisition; and the holders of 569,421 shares abstained from voting.
PTO ¶ 179.
311
JX 2320 at 7. I note Plaintiffs have argued that votes cast by institutional investors who
held stock in both Tesla and SolarCity cannot be counted as disinterested votes.
MTD Opinion at *10 n.183 (discussing Plaintiffs’ argument that votes of stockholders who
held shares in both Tesla and SolarCity should not be counted when addressing the
defendants’ stockholder ratification defense). Because I have not considered the
ratification defense in reaching my verdict, I need not address this interesting argument,
and leave it to others to decide whether similar arguments are persuasive. Cf. Lockton v.
Rogers, 2022 WL 604011 at *10 (Del. Ch. Mar. 1, 2022) (holding that Corwin cleansing
will not be triggered by a stockholder vote where the majority of votes cast were not truly
disinterested) (citing Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015));
In re CNX Gas Corp. S’holders Litig., 4 A.3d 397, 416 (Del. Ch. 2010) (observing that a
stockholder with “roughly equivalent equity interests” in the seller and the acquirer has
“materially different incentives” than a stockholder invested in only one company,
“thereby calling into question the effectiveness of the majority-of-the-minority condition”).
312
JX 2237 at 2 (listing Tesla’s largest stockholders by percentage); Tr. 2529:9–2530:1
(Fischel) (“Q. Now, you note on this slide that almost 62 percent of Tesla’s stock was held
by large, sophisticated institutional investors including some of the top-40 wealth
management firms in the United States. Okay. So to you, what is the weight of those
facts? A. I think just it adds credibility to the importance of the shareholder vote . . . .”);
63
K. Closing the Acquisition
The Acquisition closed on November 21, 2016.313 Despite its liquidity issues
in late 2015 and 2016, as of closing, SolarCity brought substantial value to Tesla.
It had 15,000 employees,314 $200 million a month in business,315 over $3 billion in
future cash flows,316 over 300,000 customers,317 and net assets in excess of its market
capitalization (as confirmed by KPMG), resulting in Tesla booking an $89 million
gain on the Acquisition.318 As noted, as of closing, SolarCity had accumulated and
continued to accumulate substantial net retained value. 319
Shortly after closing, in early 2017, Tesla faced its most difficult challenge to
date—launching the Model 3, the company’s first volume production EV.320
Tr. 860:3–861:13 (Quintero) (acknowledging the sophistication of certain wealth
management firms that voted in favor of the Acquisition).
313
PTO ¶ 181.
314
Tr. 1733:11–17 (Lyndon).
315
Tr. 1648:10–1650:22 (Lyndon).
316
Tr. 1733:11–1734:12 (Lyndon); Tr. 349:4–350:23, 404:6–16 (Elon); Tr. 2309:24–
2310:4 (Ehrenpreis); JX 2971 at 40, 58; Tr. 2857:2–21 (Gracias).
317
Tr. 1647:22–1648:2 (Lyndon).
318
JX 2443 at 77.
319
Tr. 1215:22–1216:6 (Van Zijl); Tr. 923:20–932:11 (Serra); JX 1855 at 9; JX 2853 at 7,
19–20.
320
Tr. 36:11–37:1, 127:13–20 (Elon).
64
Notwithstanding its confidence that the experience bringing the Model X to market
would ease the strain of the Model 3 rollout, unexpected production delays and other
logistical knots surfaced post-Acquisition. Tesla leadership understood that if the
Model 3 issues were not solved and solved quickly, then Tesla would face
commercial disaster.321 Recognizing that “Tesla was in extremely dire straits and at
mortal risk,” Elon repurposed everyone in Tesla—from Tesla Energy
(former SolarCity) personnel to Tesla’s legal department—to work on the Model 3
launch.322
The Tesla Energy personnel helped Tesla survive, but their redeployment to
Model 3 substantially slowed the progress of the solar business.323 By the end of
2016, Tesla Energy had terminated 4,163 employees,324 including its solar
installation workforce.325 Tesla had also eliminated SolarCity’s main sales channels,
321
Tr. 34:8–36:10 (Elon) (testifying “we were headed for bankruptcy, frankly, at a very
high speed”).
322
Tr. 35:21–37:1 (Elon).
323
Tr. 347:10–348:23 (Elon); JX 2863 at 8 (“So for about 1.5 years, we unfortunately
stripped Tesla Energy of engineering and other resources and even took the cell production
lines that were meant for Powerwall and Powerpack and directed them to the car because
we didn’t have enough cells. Now that we feel that Model 3 production is in a good place
and headed to a great place, we’ve restored resources to Tesla solar and storage. And that’s
going to be, I think, the really crazy growth for as far [in the] future as I can imagine.”);
Tr. 486:24–487:5 (Kimbal); Tr. 1747:11–1748:17 (Lyndon).
324
JX 2731 at 5.
325
Tr. 660:22–661:23 (Moessner).
65
including its “big box” retailer and door-to-door sales.326 As of trial, Tesla continued
to rely on other solar companies to manufacture, produce, install and sell parts of its
solar products.327 In other words, the synergistic integration that Tesla hoped for is
still a work in progress.
Despite these challenges, Tesla’s value has massively increased following the
Acquisition. The preponderance of the evidence suggests that the Acquisition was
and is synergistic. Tesla has realized approximately $1 billion in nominal cash flows
and expects, conservatively, to realize at least $2 billion more from the legacy
SolarCity systems.328 It has achieved cost synergies by eliminating high-cost,
traditional solar sales channels (door-to-door marketing and big box stores), using
Tesla’s high-traffic website and stores to sell solar products instead.329 And it has
achieved revenue synergies by cross-selling electric cars, battery storage, and solar
326
Elon Dep. 328:25–329:7.
327
For example, Tesla negotiated a joint venture with Panasonic so that Panasonic,
not Silevo, would manufacture Tesla’s solar cells in Buffalo. Straubel Dep. 54:6–24;
JX 2147. As of today, Tesla does not produce “critical components” of its solar PV system.
Tr. 661:24–662:20 (Moessner). And customers can “still buy a Tesla Powerwall through
one of SolarCity’s competitors.” Tr. 660:19–21 (Moessner).
328
Tr. 349:4–350:23, 404:6–16 (Elon); Tr. 2309:24–2310:4 (Ehrenpreis); JX 2971 at 40,
58; Tr. 2857:2–21 (Gracias).
329
Tr. 37:2–16 (Elon); JX 2679 at 3; Tr. 2866:5–12 (Gracias); JX 2763 at 2–3; Tr. 2301:19–
2302:21 (Ehrenpreis).
66
products to its customers.330 One of Elon’s expert witnesses, Fischel, provided
credible testimony regarding the causal connection between the Acquisition and
Tesla’s skyrocketing performance.331 As long-promised, following the Acquisition,
Tesla became “the world’s first vertically integrated sustainable energy company,
offering end-to-end clean energy products.”332
L. Procedural History
This litigation began when several stockholders filed separate actions bringing
claims against the entire Tesla Board in connection with the Acquisition. 333 The
Court consolidated the individual actions and appointed certain plaintiffs and
counsel to leadership positions.334 All defendants moved to dismiss, and after the
parties briefed and argued that motion, this Court issued a Memorandum Opinion
330
JX 2993; Tr. 2308:9–2309:5 (Ehrenpreis); Tr. 2870:3–23 (Gracias); JX 3182 at 13;
see JX 2679 at 3 (“At the end of Q3, there were almost 450,000 Tesla vehicle owners
around the world. Ultimately, we believe this group will become the largest demand
generator for our residential solar and Powerwall business.”).
331
Tr. 2667:9–2670:4 (Fischel). Of course, the evidence does not allow a meaningful
assessment of the extent to which the Acquisition has contributed to Tesla’s growth, much
less a conclusion that the Acquisition helps to explain the Tesla zeitgeist. Accordingly,
I have not based my verdict on any supposition in this regard.
332
JX 2908 at 4.
333
PTO ¶ 2.
334
PTO ¶ 4.
67
denying the motion (the “MTD Opinion”).335 Specifically, the Court held, in part,
that “the Complaint pleads sufficient facts to support a reasonable inference that
[Elon] exercised his influence as a controlling stockholder with respect to the
Acquisition.”336 The MTD Opinion also observed that, even though Plaintiffs
carried their burden of well-pleading that Elon’s status as Tesla’s controlling
stockholder was reasonably conceivable at the motion to dismiss stage, “[t]he facts
developed in discovery may well demonstrate otherwise.”337 Defendants filed an
application for certification of interlocutory appeal, which this Court (and later the
Supreme Court) denied.338
On April 18, 2021, the Court entered a Stipulated Order of Class Certification
with respect to certain of Plaintiffs’ claims.339 Plaintiffs and Defendants then filed
cross-motions for summary judgment and, after briefing and oral argument,340
335
PTO ¶ 7; MTD Opinion.
336
MTD Opinion at *19.
337
Id. (citing In re W. Nat’l Corp. S’holders Litig., 2000 WL 710192 (Del. Ch. May 22,
2000) (determining the controlling stockholder issue at summary judgment); In re Cysive,
Inc. S’holders Litig., 836 A.2d 531, 552 (Del. 2003) (determining the controlling
stockholder issue post-trial)).
338
PTO ¶ 8.
339
PTO ¶ 14; D.I. 234. At this stage of the litigation, Plaintiffs were pressing their direct
class action claims based on Gentile v. Rossette, 906 A.2d 91 (Del. 2006) (recognizing the
viability of certain direct claims based on allegations of dilution and overpayment).
340
PTO ¶ 15.
68
the Court issued a Memorandum Opinion (the “SJ Opinion”) denying the motions,
with limited exceptions not relevant here.341
Well before trial, Plaintiffs reached an agreement with all Tesla Board
members except for Elon—namely, Kimbal, Gracias, Jurvetson, Buss, Ehrenpreis
and Denholm—to settle all claims against them for $60 million, funded by
insurance.342 This partial settlement was approved by the Court on August 17,
2020.343
After several delays caused by the COVID-19 pandemic,344 the Court held a
ten-day, in-person trial from July 12–16 and July 19–23, with one additional remote
trial day on August 16, 2021.345 After receiving post-trial briefs,346 the Court heard
post-trial oral argument on January 18, 2022.347 The matter was deemed submitted
for decision on that date.
341
PTO ¶ 17; SJ Opinion at *2.
342
PTO ¶ 16.
343
PTO ¶ 23.
344
PTO ¶¶ 20–22, 24.
345
D.I. 459–63, 466–70, 475.
346
D.I. 476–77, 481–82, 484–85.
347
D.I. 491.
69
On September 20, 2021, the Supreme Court of Delaware issued its opinion in
Brookfield Asset Management, Inc. v. Rosson,348 expressly overruling Gentile v.
Rossette,349 and holding that “corporation overpayment/dilution Gentile claims,
like those present here, are exclusively derivative under Tooley.”350 Following this
development, the parties stipulated to decertify the class, dismiss the direct claims,
and submit only Plaintiffs’ derivative claims for decision.351 I address those claims
in turn below.
II. ANALYSIS
Four counts remain to be adjudicated after motion practice and settlement:
Counts I and II assert derivative breach of the duty of loyalty claims against Elon 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;352 Count III asserts a
348
261 A.3d 1251 (Del. 2021).
349
906 A.2d 91 (Del. 2006).
350
Brookfield Asset Mgmt., 261 A.3d at 1277.
351
D.I. 480.
352
Compl. ¶¶ 294–302. As discussed below, neither the Complaint nor the pretrial order
assert claims against Elon in his capacity as Tesla’s CEO. This is significant since Tesla’s
certificate of incorporation contains an exculpatory provision, as permitted by
Section 102(b)(7) of the Delaware General Corporation Law, that, by its terms, and as a
matter of law, exculpates Elon for any breaches of the duty of care as a Tesla director but
does not exculpate him for breaches of the duty of care as Tesla’s CEO.
See 8 Del. C. § 102(b)(7); JX 19 (attaching Tesla charter), § 8.1 (exculpatory provision).
70
claim of unjust enrichment against Elon in connection with the Tesla stock he
received in the Acquisition;353 and Count VI asserts that the Acquisition constituted
waste.354
The parties’ dispute begins, unsurprisingly, with the “gating question” of what
standard of review is implicated by Plaintiffs’ showcase claims of breach of
fiduciary duty.355 Again unsurprisingly, Plaintiffs argue the Court should review the
fiduciary duty claims under the entire fairness standard, and they proffer the means
by which entire fairness is triggered here—namely, that a majority of the Tesla
Board was conflicted with respect to the Acquisition and that Elon is a conflicted
controlling stockholder. Predictably, Elon counters that the business judgment rule
is the correct answer to the standard of review question because he is not a
controlling stockholder, a majority of the Tesla Board was not conflicted and, even
if it was, the fully informed, uncoerced vote of Tesla’s stockholders “cleansed” any
fiduciary duty breaches.
I have approached my deliberations in the following sequence. First, I recount
the parties’ contentions and identify the factual and legal support on both sides.
353
Compl. ¶¶ 303–07.
354
Compl. ¶¶ 320–25.
355
See Larkin v. Shah, 2016 WL 4485447, at *7 (Del. Ch. Aug. 25, 2016) (noting that
standard of review is often the “gating question” that “largely dictates the end result” in
breach of fiduciary duty cases).
71
In doing so, however, I remain focused on the point of post-trial deliberations––to
reach a verdict. With this focus in mind, after explaining the factual and legal bases
for doing so, I assume Plaintiffs’ best case on standard of review––that entire
fairness applies––and consider the trial evidence through that lens. After setting the
standard of review, I explain my finding that Elon has proven the Acquisition was
entirely fair and, therefore, he did not breach his fiduciary duties. The evidence
adduced at trial proved the Acquisition process, like most worldly things, had both
flaws and redeeming qualities. The linchpin of this case, though, is that Elon proved
that the price Tesla paid for SolarCity was fair—and a patently fair price ultimately
carries the day. That same finding puts the nail in Plaintiffs’ unjust enrichment and
waste claims. My reasoning follows.
A. The Breach of Fiduciary Duty Claims
The gravamen of Plaintiffs’ fiduciary duty claims is that Elon breached the
duty of loyalty both as a controlling stockholder and director of Tesla by
“orchestrat[ing] Board approval of the Acquisition, which unfairly provides
SolarCity’s stockholders . . . with excessive value.”356 Put simply, Plaintiffs seek to
prove that “[Elon] Musk harmed Tesla” by causing Tesla to bail out an insolvent
356
Compl. ¶ 296.
72
SolarCity.357 As noted, Plaintiffs do not allege that Elon breached the duty of care
as an officer of Tesla.358 Accordingly, I focus, as the parties do, on Elon’s conduct
as alleged controller and as a member (and Chair) of the Tesla Board to assess
whether he breached his fiduciary duty of loyalty.
1. The Standard of Review
“The starting point for analyzing a fiduciary breach is to determine the correct
standard of review.”359 “Delaware has three tiers of review for evaluating director
decision-making: the business judgment rule, enhanced scrutiny, and entire
fairness.”360 As noted, the battle line here is drawn between entire fairness
357
POB at 2.
358
See, e.g., Compl. ¶¶ 299–300 (“[E]ach of the Individual Defendants had a fiduciary duty
to, among other things, act in furtherance of the best interests of the Company and its
stockholders so as to benefit all stockholders equally and not in furtherance of their
personal interests. Each of the Individual Defendants breached his or her fiduciary duty of
loyalty by causing and/or allowing Tesla to enter into the self-dealing SolarCity
Acquisition.”); POB at 3 (“Given Musk’s disloyalty, the Court has wide discretion to
fashion an equitable remedy.”) (emphasis added); id. at 44 (citing duty of loyalty
jurisprudence); id. at 78 (“Here, Musk’s disloyal conduct caused Tesla to pay excessive
shares for an insolvent company.”) (emphasis added); see generally id. (failing to discuss
the duty of care or Elon’s duties as CEO of Tesla).
359
In re Columbia Pipeline Gp., Inc. Merger Litig., 2021 WL 772562, at *30 (Del. Ch.
Mar. 1, 2021).
360
Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 457 (Del. Ch. 2011).
73
(Plaintiffs’ proffered standard)361 and the deferential business judgment rule
(Elon’s proffered standard).362 Neither party has advocated for enhanced scrutiny.363
a. The Competing Standards of Review
To explain my decision to review for entire fairness, it is useful to identify the
catalysts for the parties’ competing legal arguments. To state it bluntly, the knock-
on effects of two decisions of our Supreme Court––Corwin and MFW––frame the
standard of review controversy here.364 These seminal decisions offer conflicted
fiduciaries two pathways to the coveted deference afforded by the business judgment
rule.365 Elon wants that deference; Plaintiffs want to deny him that deference.
361
POB at 44.
362
Def.’s Opening Post-Trial Br. (“DOB”) (D.I. 477) at 2, 83.
363
Plaintiffs have not asserted a Revlon claim presumably because, as stockholders of the
buyer, they do not dwell in “Revlon Land.” See Revlon, Inc. v. MacAndrews & Forbes
Hldgs., Inc., 506 A.2d 173 (Del. 1986); Mohsen Manesh, Defined by Dictum:
The Geography of Revlon-Land in Cash and Mixed Consideration Transactions,
59 Vill. L. Rev. 1, 5, 18 (2014) (explaining that when a board decides the company it serves
is for sale, and thereby “enters Revlon-land, as it is colloquially called, the board loses the
presumption of the deferential business judgment rule and becomes subject to enhanced
judicial scrutiny under an objective standard of reasonableness”) (emphasis in original)
(internal citations omitted); see also Leo E. Strine, Jr., Categorical Confusion:
Deal Protection Measures in Stock-for-Stock Merger Agreements, 56 Bus. Law. 919, 927
n.25 (2001) (stating that the “[t]he Revlon principle grows out of the traditional principle
that fiduciaries must sell trust assets for their highest value”).
364
Corwin v. KKR Fin. Hldgs., 125 A.3d 304, 313–14 (Del. 2015); Kahn v. M & F
Worldwide Corp., 88 A.3d 635, 644 (Del. 2014) (“MFW”).
365
See Corwin, 125 A.3d at 305–06 (affirming that “the business judgment rule is invoked
as the appropriate standard of review for a post-closing damages action when a merger that
74
If Elon is deemed a controlling stockholder of Tesla, he cannot invoke Corwin
to achieve business judgment deference.366 Not surprisingly, then, Plaintiffs argue
that Elon is a controlling stockholder; Elon steadfastly maintains that he is not.367
In making their controlling stockholder argument, Plaintiffs, no doubt, are
comforted by the fact that Elon, as controller, cannot invoke MFW to achieve
business judgment review because the Tesla Board elected not to form an
independent special committee, a predicate to the operation of MFW’s ratchet from
entire fairness down to the business judgment rule.368 If Elon is deemed a controlling
stockholder of Tesla, therefore, his conduct will be subject to the “onerous” entire
is not subject to the entire fairness standard of review has been approved by a fully
informed, uncoerced majority of the disinterested stockholders”); MFW, 88 A.3d at 644(“We hold that business judgment is the standard of review that should govern mergers
between a controlling stockholder and its corporate subsidiary, where the merger is
conditioned ab initio upon both the approval of an independent, adequately-empowered
Special Committee that fulfills its duty of care; and the uncoerced, informed vote of a
majority of the minority stockholders.”) (emphasis added); Aronson v. Lewis, 473 A.2d
805, 812 (Del. 1984) (explaining that the business judgment rule embodies a “presumption
that in making a business decision the directors of a corporation acted on an informed basis,
in good faith and in the honest belief that the action taken was in the best interests of the
company”), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000).
366
Larkin, 2016 WL 4485447, at *8 (holding the Corwin does not apply in cases involving
conflicted controlling stockholders); In re Merge Healthcare, Inc. S’holders Litig.,
2017 WL 395981, at *6 (Del. Ch. Jan. 30, 2017) (same).
367
See Gladriel Shobe & Jarrod Shobe, The Dual Class Spectrum, 39 Yale J. Reg. 101, 147
(forthcoming 2022) (“Shobe”) (observing that “questions of whether a shareholder has
control can significantly change the standard of review, and therefore the outcome, of
fiduciary duty cases”).
368
MFW, 88 A.3d at 644.
75
fairness review since there is no question he was conflicted with respect to the
Acquisition.369
If Elon clears the controlling stockholder hurdle, he still has to traverse the
treacherous terrain of board-level conflicts to reach business judgment arcadia.
When “properly reviewable facts reveal that the propriety of a board decision is in
doubt because the majority of the directors who approved it were grossly negligent,
acting in bad faith, or were tainted by conflicts of interest,” the court will review the
decision for entire fairness.370 On the other hand, if the Tesla Board was not
conflicted, and Elon was not a controlling stockholder, then the business judgment
rule is the standard of review.371 Thus, the parties understandably clash over the
extent to which a majority of the Tesla Board was conflicted with respect to the
Acquisition by way of self-interest or a lack of independence from those who were
self-interested.
369
In re Trados Inc. S’holder Litig., 73 A.3d 17, 44 (Del. Ch. 2013) (characterizing entire
fairness review as “onerous”); see also Flannery v. Genomic Health, Inc.,
2021 WL 3615540, at *11 (Del. Ch. Aug. 16, 2021) (holding “the presence of a controller
will not per se trigger entire fairness review; this heightened standard is only appropriate
when a controller ‘engage[s] in a conflicted transaction’”) (quoting In re Crimson Expl.
Inc. S’holder Litig., 2014 WL 5449419, at *14 (Del. Ch. Oct. 24, 2014)).
370
In re Dollar Thrifty S’holder Litig., 14 A.3d 573, 598 (Del. Ch. 2010).
371
Id.76
Here again, the spirit of Corwin looms large. Even if the Acquisition was
approved by a conflicted Tesla Board, assuming Elon is not a controlling
stockholder, the uncoerced, fully informed vote of a majority of Tesla’s disinterested
minority stockholders will “cleanse” any breach of fiduciary duty by triggering
business judgment deference.372 And so, the parties dispute whether Tesla’s
stockholders were given the full and accurate information they needed to cast an
informed vote in favor of the Acquisition.
b. The Court Will Skip to Entire Fairness
As the above discussion reveals, the parties have explored all of the recesses
of Delaware law regarding shifting standards of review, from controlling
stockholder liability to stockholder ratification and all of the nooks in between.373
372
In re Merge Healthcare, 2017 WL 395981, at *6 (holding “the only transactions that
are subject to entire fairness that cannot be cleansed by proper stockholder approval are
those involving a controlling stockholder”).
373
In a single sentence in their opening post-trial brief, Plaintiffs assert for the first time in
this years-long litigation that Elon “withheld critical information from the Board and
stockholders about his reasons for the Acquisition and SolarCity’s true financial condition”
such that he committed “fraud on the board.” POB at 42. They cite Mills Acquisition Co.
v. MacMillan, which held that a fiduciary’s silence in the boardroom “in the face of [a]
rigorous affirmative duty of disclosure” amounts to a fraud perpetrated upon his fellow
board members. Mills Acq. Co. v. MacMillan, Inc., 559 A.2d 1261, 1283 (Del. 1989).
If Plaintiffs intended to assert and prove a “fraud upon the board” theory, they should have
raised the issue well in advance of their post-trial briefs. See PharmAthene v. SIGA Techs.,
Inc., 2001 WL 6392906, at *2 (Del. Ch. Dec. 16, 2011) (“The general rule . . . that a party
waives any argument it fails properly to raise shows deference to fundamental fairness and
the common sense notion that, to defend a claim or oppose a defense, the adverse party
deserves sufficient notice of the claim or defense in the first instance.”); ABC Woodlands
77
The parties’ claims and defenses present provocative questions that could be debated
at even the most fashionable corporate law conferences.374 Beyond satisfying idle
L.L.C. v. Schreppler, 2012 WL 3711085, at *3 (Del. Ch. Aug. 15, 2012) (“When an
argument is first raised in a pretrial brief after the parties already have shaped their trial
plans, it is simply too late and deemed waived.”). Even if not deemed untimely, the
argument stands wholly undeveloped. Beyond the off-handed mention in their opening
post-trial brief, Plaintiffs did not argue fraud on the board in any other submission to the
Court before or after trial. Nor did they argue fraud on the board during post-trial oral
argument. D.I. 491. Accordingly, I do not consider the argument here. See, e.g., Voigt v.
Metcalf, 2020 WL 614999, at *8 (Del. Ch. Feb. 10, 2020) (observing that defendants
“invested so little in those arguments that they can be regarded as waived”). Of course, in
addressing the entire fairness of the Acquisition, I necessarily have considered the state of
the Tesla Board’s knowledge at relevant times during the deal process, as discussed in
detail below.
374
The controlling stockholder question is of particular interest. Elon owned less than 50%
of Tesla’s voting stock. At the pleadings stage, and at summary judgment, I held there was
a triable issue of fact regarding whether Elon “exercised actual domination and control
over the directors” such that “independent directors could not freely exercise their
judgment.” MTD Opinion at *12 (cleaned up); see also SJ Opinion at *7
(citing Williamson v. Cox Commc’ns, Inc., 2006 WL 1586375, at *6 (Del. Ch. June 5,
2006) (“The question whether a shareholder is a controlling one is highly contextualized
and is difficult to resolve based solely on the complaint.”)). Our law regarding controlling
stockholders is, and has been for some time, in flux. See, e.g., Ann M. Lipton,
After Corwin: Down the Controlling Shareholder Rabbit Hole, 72 Vanderbilt L. Rev. 1977,
2011 (2019) (“Delaware’s difficulties in dealing with controlling shareholders are not new;
inconsistencies and ambiguities go back decades.”); id. (“[T]he combination of Corwin,
C & J Energy, and MFW have spotlighted those doctrinal fissures by requiring courts to
draw artificially sharp distinctions between control and noncontrol transactions when in
fact control exists on an increasingly nuanced spectrum.”); Shobe, at 147–48 (discussing
entire fairness review in the evolving context of control exercised via dual-class stock);
compare In re Pattern Energy Gp. Inc. S’holders Litig., 2021 WL 1812674, at *38
(Del. Ch. May 6, 2021) (“It is an open question under Delaware law whether the Entity
Defendants’ soft power alone, anchored in historical and commercial ties and the
contractual Consent Right, can support including the Entity Defendants [non-stockholders]
in a control group and imposing fiduciary duties.”); id. at *39 (discussing cases where the
court “looked beyond the bounds of stock ownership to other sources of soft power”);
78
curiosity, however, there is no point to be served by pondering these questions
further here. And there is certainly no reason to answer them.375
Blue v. Fireman, 2022 WL 593899, at *16 (Del. Ch. Feb. 28, 2022) (observing that even
though “stock ownership is the traditional vehicle through which outsiders gain voting
power, [] holding stock is not a prerequisite to exercising voting control that carries the
weight of fiduciary duties”); SJ Opinion at *5–6 (discussing the “inherent coercion”
doctrine in the context of minority blockholders acting as controlling stockholders); with
Lawrence Hamermesh et al., Optimizing the World’s Leading Corporate Law: A 20-Year
Retrospective and Look Ahead 6 (Harv. L. Sch. Program on Corp. Governance, Discussion
Paper No. 2021-12, 2021), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=3954998
(“[W]e propose limiting the concept of ‘controlling stockholder’ to the situation where a
stockholder’s voting power gives it at least negative power over the company’s future, in
the sense of acting as a practical impediment to any change of control.”) (“Hamermesh”);
Corwin, 125 A.3d at 307 (“In addressing whether KKR was a controlling stockholder, the
Chancellor was focused on the reality that in cases where a party that did not have majority
control of the entity’s voting stock was found to be a controlling stockholder, the Court of
Chancery, consistent with the instructions of this Court, looked for a combination of potent
voting power and management control such that the stockholder could be deemed to have
effective control of the board without actually owning a majority of stock.”).
375
In justifying his decision to assume certain points and skip over others when deciding a
motion to dismiss, Chancellor Chandler explained, “[i]t has been said that ‘[t]he art of life
is the art of avoiding pain; and he is the best pilot, who steers clearest of the rocks and
shoals with which it is beset.’ Accordingly, I steer a course that will be more comfortable
for all involved.” MCG Cap. Corp. v. Maginn, 2010 WL 1782271, at *13 (Del. Ch. May 5,
2010) (quoting Thomas Jefferson, The Jeffersonian Cyclopedia: A Comprehensive
Collection of the Views of Thomas Jefferson 503 (John P. Foley ed., Funk & Wagnalls Co.
1900)). While the controlling stockholder issue, in particular, calls out for guidance from
this court and ultimately our Supreme Court, I “steer a course” that avoids the “rocks and
shoals” of unsettled questions ever mindful that, unlike my judicial colleagues, I soon will
inhabit a place where I am not burdened with the effects of my answers on future cases.
See, e.g., State ex rel. Smith v. Carey, 112 A.2d 26, 28 (Del. 1955) (“[T]he expression of
dictum is ordinarily to be avoided.”); Gatz Props., LLC v. Auriga Cap. Corp., 59 A.3d
1206, 1220 (Del. 2012) (“To the extent Delaware judges wish to stray beyond those issues
and, without making any definitive pronouncements, ruminate on what the proper direction
of Delaware law should be, there are appropriate platforms, such as law review articles, the
classroom, continuing legal education presentations, and keynote speeches.”); United
79
The parties have proffered evidence on both sides of the controlling
stockholder issue, the board-level conflicts issues, and the “Corwin cleansing” issue
(particularly regarding the quality of the disclosures made to Tesla stockholders).376
This is not a case where business judgment deference is obviously justified from
undisputed or clearly proven facts. Whether by virtue of Elon’s control,377 or by
States v. Leon, 468 U.S. 897, 963 (1984) (Stevens, J., concurring in part) (“[W]hen the
Court goes beyond what is necessary to decide the case before it, it can only encourage the
perception that it is pursuing its own notions of wise social policy, rather than adhering to
its judicial role.”).
376
With regard to board-level conflicts, I acknowledge Plaintiffs’ arguments that each
member of the Tesla Board, save Denholm, was either interested or lacked independence
with respect to the Acquisition. I have already reviewed the relevant evidence in that regard
as I introduced each Tesla Board member in the Background section of this opinion.
Suffice it to say, there is a bona fide dispute regarding whether a majority of the Tesla
Board was conflicted as it considered, negotiated and ultimately approved the Acquisition.
There is, therefore, a factual basis to justify an assumption that entire fairness is the
standard of review on this basis alone.
377
I pause here to emphasize that the source of Elon’s control was hotly disputed. Plaintiffs
focused at trial on Elon’s “managerial supremacy,” not his stock ownership or the voting
power flowing from his stock. POB at 51 (quoting Cysive, 836 A.2d at 553). Of course,
that argument brings the controlling stockholder debate in clear focus. See Hamermesh,
at 36 (“Being valuable to the company does not make an executive a controlling
stockholder, nor does it implicate the concerns underlying Lynch—namely, the potential to
use affirmative voting power to unseat directors and implement transactions that the
minority stockholders do not like, and use blocking voting power to impede other
transactions.”); Matt Levine, Elon Musk Never Wanted to be CEO, Money Stuff,
Bloomberg Law (July 13, 2021), https://news.bloomberglaw.com/banking-law/matt-
levines-money-stuff-elon-musk-never-wanted-to-be-ceo (“[T]his is a matter of being a
charismatic founder-CEO, not a controlling shareholder. The fact that [Elon] owns 18%
or 22% of Tesla’s stock is not what gives him power over Tesla; what gives him power
over Tesla is that he is the CEO and product architect and visionary and social media
manager, and it would die without him, or so he and the board and let’s face it the
shareholders think. This has nothing to do with his shareholder voting power or his ability
80
virtue of irreconcilable board-level conflicts,378 there is a basis for assuming that
entire fairness is the governing standard of review. Accordingly, I will give no
deference to Elon (or his fellow Tesla Board members) and will review Plaintiffs’
breach of fiduciary claim with the highest degree of scrutiny recognized in our law.
or inability, as a matter of technical corporate governance, to remove directors who
disagree with him. It has to do with his personality, and his job as CEO, and the love that
retail shareholders have for him, and the general backdrop that boards of directors of public
tech companies tend to be very deferential to charismatic founder-CEOs regardless of how
many shares they own.”). Again, I have chosen not to enter into the fray of this debate, as
the outcome does not depend on whether Elon is or is not a controller (or a controlling
stockholder, if that is different). In avoiding the question, I take some comfort in the
observation of a noted scholar that “some ex ante doubt about controller status” may better
incentivize boards to “be strict about cleansing mechanisms.” Ann Lipton, Will He or
Won’t He?, Law Professor Blogs Network (July 17, 2021), https://
lawprofessors.typepad.com/business_law/2021/07/will-he-or-wont-he.html (observing
that the Court could reach its verdict in this case without deciding the controlling
stockholder issue).
378
In this regard, this case presents yet another question not yet answered in Delaware,
at least not directly. Each of the allegedly conflicted directors was asked directly, under
oath, whether he made his decision regarding the Acquisition based on conflicted
motivations or whether he considered only the best interests of Tesla and its stockholders.
Each arguably conflicted director credibly testified (and, in detail, explained how) he made
his decision consistent with his duty of loyalty. Yet the facts implicating the potential for
self-interest or lack of independence, all similar to scenarios where Delaware courts have
found a reasonably conceivable disabling conflict on pled facts, were proven at trial
(e.g., familial ties, personal friendships, “thick” business relationships, cross-investments,
etc.). This raises the question whether credible (and convincing) testimony revealing loyal
decision making can overcome proven facts revealing recognized scenarios where the
potential for conflict exists. Here again, I raise but do not answer the question.
81
2. The Acquisition Was Entirely Fair
“The concept of fairness has two basic aspects: fair dealing and fair
price.”379 Fair dealing (or fair process) “embraces questions of when the transaction
was timed, how it was initiated, structured, negotiated, disclosed to the directors, and
how the approvals of the directors and the stockholders were obtained.”380 Fair price
“relates to the economic and financial considerations of the proposed merger,
including all relevant factors: assets, market value, earnings, future prospects, and
any other elements that affect the intrinsic or inherent value of a company’s
stock.”381
Entire fairness is a composite. “Although the two aspects may be examined
separately, ‘the test for fairness is not a bifurcated one as between fair dealing and
price. All aspects of the issue must be examined as a whole since the question is one
of entire fairness.’”382 And while it is generally understood that “perfection is not
379
Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del. 1983); see also Cinerama, Inc. v.
Technicolor, Inc., 663 A.2d 1156, 1163 (Del. 1995) (“Technicolor II”) (explaining that
under entire fairness review, the defendant (absent a burden-shifting) must prove
“to the court’s satisfaction that the transaction was the product of both fair dealing and fair
price”) (internal quotation marks omitted).
380
Weinberger, 457 A.2d at 711.
381
Id.382
Trados, 73 A.3d at 56 (citing Weinberger, 457 A.2d at 711); see also Owen v. Cannon,
2015 WL 3819204, at *32 (Del. Ch. June 17, 2015) (“Under the entire fairness standard,
I must make a unitary conclusion as to whether the Merger was entirely fair.”).
82
possible, or expected” when designing and executing a deal process,383 “[e]vidence
of fair dealing [or not] has significant probative value to demonstrate the fairness of
the price obtained.”384 As our Supreme Court has explained, though, “[t]he
paramount consideration [] is whether the price was a fair one.”385 Much like the
idiom “all roads lead to Rome,” in our law, while there are necessary stops along the
way, all roads in the realm of entire fairness ultimately lead to fair price.386
383
Weinberger, 457 A.2d at 709 n.11; Technicolor II, 663 A.2d at 1179 (“Thus, ‘perfection
is not possible, or expected’ as a condition precedent to a judicial determination of entire
fairness.”) (citation omitted); see also Brinckerhoff v. Texas E. Prod. Pipeline Co., LLC,
986 A.2d 370, 395 (Del. Ch. 2010) (“Perfection is an unattainable standard that Delaware
law does not require, even in a transaction with a controller.”).
384
Ams. Mining Corp. v. Theriault, 51 A.3d 1213, 1244 (Del. 2012); see also Reis, 28 A.3d
at 467 (“A strong record of fair dealing can influence the fair price inquiry, reinforcing the
unitary nature of the entire fairness test. The converse is equally true: process can infect
price.”); Trados, 73 A.3d at 78 (“As the Delaware Supreme Court has recognized, an unfair
process can infect the price, result in a finding of breach, and warrant a potential remedy.”);
Kahn v. Tremont Corp., 694 A.2d 422, 432 (Del. 1997) (“[H]ere, the process is so
intertwined with price that under Weinberger’s unitary standard a finding that the price
negotiated by the Special Committee might have been fair does not save the result.”).
385
Ams. Mining Corp., 51 A.3d at 1244.
386
See, e.g., eBay Domestic Hldgs., Inc. v. Newmark, 16 A.3d 1, 42 (Del. Ch. 2010)
(“Price, however, is the paramount consideration because procedural aspects of the deal
are circumstantial evidence of whether the price is fair.”); Weinberger, 457 A.2d at 711(“[I]n a non-fraudulent transaction we recognize that price may be the preponderant
consideration outweighing other features of the merger.”); 2 Donald J. Wolfe & Michael A.
Pittenger, Corporate and Commercial Practice in the Delaware Court of Chancery,
§ 16.09[c], 16-126 (2d ed. 2020) (“[T]he Court of Chancery has been reluctant to exercise
its discretion in favor of awarding monetary damages when plaintiffs receive a fair price
in a transaction that does not comport with entire fairness solely because of an unfair
process.”); Oliver v. Boston Univ., 2006 WL 1064169, at *25 n.239 (Del. Ch. Apr. 14,
2006) (finding of fair price precluded damages (except nominal damages) even when there
was “no process to protect the interests of the minority shareholders”) (emphasis added).
83
That fair price is the preponderant consideration in entire fairness review
makes perfect sense. Just as “[a] strong record of fair dealing can influence the fair
price inquiry,”387 a demonstrably fair price is inconsistent with the notion that a
fiduciary disloyally attempted to channel value to himself or third parties at the
expense of the beneficiaries of his duties.388 That being said, this court has held that
a fair price “does not ameliorate a process that was beyond unfair.”389 “Factors such
as coercion, the misuse of confidential information, secret conflicts, or fraud could
387
Reis, 28 A.3d at 467.
388
See, e.g., Ams. Mining Corp., 51 A.3d at 1253 (finding that “defendants breached their
duty of loyalty” by channeling value away from stockholders through the exchange of
“over $3 billion worth of actual cash value for something that was worth much less”);
In re Orchard Enters., Inc. S’holder Litig., 88 A.3d 1, 36 (Del. Ch. 2014) (“[T]he members
of the Board . . . owed a duty of loyalty to the stockholders to seek the alternative that
maximized the value of their residual claims without regard to the particular interests of
the controller.”); Macrophage Therapeutics, Inc. v. Goldberg, 2021 WL 2582967, at *17
(Del. Ch. June 23, 2021) (finding evidence that a conflicted fiduciary channeled
consideration away from stockholders to himself supported the archetypical case of breach
of the duty of loyalty).
389
In re Nine Sys. Corp. S’holders Litig., 2014 WL 4383127, at *1 (Del. Ch. Sept. 4, 2014);
see also id. at *3 “[A]lthough [the transaction at issue] was approved and implemented at
a fair price, [it] was not entirely fair because of the Defendants’ grossly unfair dealing.”)
(emphasis added); Ravenswood Inv. Co., L.P. v. Estate of Winmill, 2018 WL 1410860,
at *17 (Del. Ch. Mar. 21, 2018) (observing that the court “arguably could end the
[entire fairness] analysis” after holding that “Defendants failed to prove fair process”),
aff’d, 210 A.3d 705 (Del. 2019) (TABLE); William Penn P’ship v. Saliba, 13 A.3d 749,
756–57 (Del. 2011) (“A party does not meet the entire fairness standard simply by showing
that the price fell within a reasonable range that would be considered fair.”).
84
lead a court to hold that a transaction that fell within the range of fairness was
nevertheless unfair compared to what faithful fiduciaries could have achieved.”390
Turning briefly to the burden of proof, when a transaction is subject to entire
fairness review, the burden of persuasion typically rests with the defendant, but the
burden can shift to the stockholder challenging the transaction if the defendant
“show[s] that the transaction was approved either by an independent board majority
(or in the alternative, a special committee of independent directors) or, assuming
certain conditions, by an informed vote of the majority of the minority
shareholders.”391 In this case, the parties dispute who bears the burden of persuasion
and, given the many genuine disputes of material fact at play, I was unable to decide
that issue prior to trial.392 Having now deliberated the evidence, “[f]or reasons of
390
Basho Techs. Holdco B, LLC v. Georgetown Basho Invs., LLC, 2018 WL 3326693,
at *37 (Del. Ch. July 6, 2018), aff’d sub nom Davenport v. Basho Techs. Holdco B, LLC,
221 A.3d 100 (Del. 2019) (TABLE); ACP Master, Ltd. v. Sprint Corp., 2017 WL 341142,
at *19 (Del. Ch. July 21, 2017) (same), aff’d, 184 A.3d 1291 (Del. 2018). To be clear,
given the unitary nature of the entire fairness inquiry, “the fact that the directors did not
follow a fair process does not [alone] constitute a separate breach of duty.”
Trados, 73 A.3d at 78. Instead, the failure to execute a demonstrably fair process will force
the fiduciary “to prove at trial that the [transaction at issue] was entirely fair”––if she
succeeds, she will defeat the breach of fiduciary duty claim; if she does not, she will be
held liable. Id.; see also Frederick Hsu Living Tr. v. Oak Hill Cap. P’rs III, L.P.,
2020 WL 2111476, at *43 (Del. Ch. May 4, 2020) (“Because this decision has found that
the defendants’ actions were entirely fair, there was no fiduciary breach . . . .”).
391
In re S. Peru Copper Corp. S’holder Deriv. Litig., 52 A.3d 761, 788 (Del. Ch. 2011),
aff’d sub nom. Ams. Mining Corp. v. Theriault, 51 A.3d 1213 (Del. 2012).
392
See SJ Opinion at *7 n.54.
85
efficiency and clarity of logic,” I have determined that I need not decide the burden
of proof question and may, instead, “jump right into the thick of the fairness
inquiry.”393 In my view, the evidence favoring the defense is that compelling. 394
Before addressing the merits, I cannot help but observe that Elon (and the rest
of the Tesla Board members) likely could have avoided this expensive and time-
consuming litigation had they just adopted more objectively evident procedural
protections. Delaware law incentivizes parties “to employ deal techniques that
provide protection to [] stockholders that [are] substantially equivalent to arm’s
length bargaining.”395 That Elon and the Tesla Board failed to follow this clear
guidance and yet prevailed here should not minimize those incentives or dilute the
393
Cysive, 836 A.2d at 553 (noting that “[t]he intermediate issue of burden-shifting might
possibly be of moment in some cases but not in this one”); see also In re Dole Food Co.,
Inc. S’holder Litig., 2015 WL 5052214, at *4 (Del. Ch. Aug. 27, 2015) (stating that
“the Delaware Supreme Court has explained that the real-world benefit of burden-shifting
is ‘modest’ and only outcome-determinative in the ‘very few cases’ where the ‘evidence is
in equipoise’”) (quoting Ams. Mining Corp., 51 A.3d at 1242).
394
I emphasize here that the court’s “judgment concerning ‘fairness’ will inevitably
constitute a judicial judgment that in some respects is reflective of subjective reactions to
the facts of a case.” Cinerama Inc. v. Technicolor, Inc., 663 A.2d 1134, 1140
(Del. Ch. 1994) (“Technicolor I”), aff’d, 663 A.2d 1156 (Del. 1995). The standard is not
“endlessly elastic”; it is, instead, “a standard which in one set of circumstances or another
reasonable minds might apply differently.” Id.395
Lawrence A. Hamermesh & Michael L. Wachter, The Importance of Being Dismissive:
The Efficiency Role of Pleading Stage Evaluation of Shareholder Litigation, 42 J. Corp. L.
597, 638 (2017) (collecting cases); see also Andrew F. Tuch, Reassessing Self-Dealing:
Between No Conflict and Fairness, 88 Fordham L. Rev. 939, 977 (2019) (observing that
“interested directors nevertheless have powerful incentives to invoke exceptions before the
transaction occurs”).
86
implications of the onerous entire fairness standard of review. Their choices
constricted the presumptive path to business judgment deference and subjected
Elon’s conduct to post-trial judicial second-guessing. In other words, if Chancery
opinions are “parables,”396 let this be a parable of unnecessary peril, despite the
outcome.397
a. Fair Process
As I begin my review of the evidence regarding the Tesla Board’s deal
process, I am mindful that my assumptions justifying entire fairness review carry
certain implications. In the controlling stockholder analysis, “[t]he requisite degree
of control can be shown to exist generally or with regard to the particular transaction
that is being challenged.”398 In either circumstance, this court has recognized that
396
See William B. Chandler III, Our National Challenge: A Blueprint for Restoring the
Public Trust, 6 U. St. Thomas L. J. 421, 423 (Winter 2009) (“[T]he opinions of the Court
of Chancery [are] akin to parables; that is, they read like morality stories describing the
behavior of directors and managers, both the good behavior and the bad.”).
397
This point cannot be emphasized enough. 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.
398
Carsanaro v. Bloodhound Techs., Inc., 65 A.3d 618, 659 (Del. Ch. 2013).
87
the controlling stockholder brings with him into the boardroom an element of
“inherent coercion.”399 Thus, in keeping with an assumption that Elon possesses
some sort of general “managerial control” over Tesla and the Tesla Board, as
asserted by Plaintiffs,400 I searched during my deliberations for persuasive evidence
that Elon exploited the coercion inherent in his status as a controller to influence the
Tesla Board’s decision-making with regard to this “particular transaction.”401
As discussed below, the evidence reveals that any control Elon may have
attempted to wield in connection with the Acquisition was effectively neutralized by
a board focused on the bona fides of the Acquisition, with an indisputably
independent director leading the way.402 Elon did not “engage[] in pressure tactics
that went beyond ordinary advocacy to encompass aggressive, threatening,
disruptive, or punitive behavior.”403 In other words, even assuming Elon had the
399
See In re Pure Resources, Inc. S’holders Litig., 808 A.2d 421, 436 (Del. Ch. 2002);
SJ Opinion at *5–6.
400
POB at 51.
401
Carsanaro, 65 A.3d at 659.
402
See Basho Techs., 2018 WL 3326693, at *28 (“Invariably, the facts and circumstances
surrounding the particular transaction will loom large. Probative evidence can include
statements by participants or other contemporaneous evidence indicating that a defendant
was in fact exercising control over a decision.”).
403
Voigt, 2020 WL 614999, at *13; cf. Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110,
1114, 1119 (Del. 1994) (observing that the controller made threats to the board to get his
way); In re Dole Food, 2015 WL 5052214, at *5 (“Criticizing [the controller] was
unthinkable. On the rare occasions in the record where [he] was challenged, he responded
88
ability to exercise control over the Tesla Board, the credible evidence produced at
trial shows that he simply did not do so with respect to the Acquisition. 404 To be
sure, his presence in the boardroom, at times, was problematic. In particular, as
described below, Elon’s recusal from deliberations was fluid and the evidence
reveals that, when he was present, he simply could not help but to “voice [his]
opinion, obviously.”405 But the preponderance of the evidence reveals that Elon’s
influence did not degrade the entire fairness of the Acquisition.406
aggressively . . . .”); Basho Techs., 2018 WL 3326693, at *28 (finding that the plaintiffs
proved at trial that the controller exercised effective control over the company “for
purposes of the decision to consummate the [disputed transaction]” as a result of a
combination of factors). I note that none of the factors listed in Basho are present here.
404
See Odyssey P’rs, L.P. v. Fleming Cos., Inc., 735 A.2d 386 (Del. Ch. 1999) (holding that
the majority stockholder did not exercise de facto control over the holding company’s
board of directors); see also Superior Vision Servs., Inc. v. ReliaStar Life Ins. Co.,
2006 WL 2521426, at *4 (Del. Ch. Aug. 25, 2006) (“[T]he focus of the inquiry has been
on the de facto power of a significant (but less than majority) shareholder, which, when
coupled with other factors, gives that shareholder the ability to dominate the corporate
decision-making process. The concern is that the significant shareholder will use its power
to obtain (or compel) favorable actions by the board to the ultimate detriment of other
shareholders.”).
405
Elon Dep. 284:3–4.
406
See Emerald P’rs v. Berlin, 2003 WL 21003437, at *23 (Del. Ch. Apr. 28, 2003)
(“Of greater concern is that Hall and/or Berlin were present at some of those meetings.
Where director conduct is reviewed under the entire fairness standard, process laxity of
this kind cannot be condoned, and (as this Court has found) it should not have been allowed
to occur. Neither Hall nor Berlin should have been present at any of the non-affiliated
directors’ meetings or deliberations, or allowed to have any direct contact with their
advisors. To the extent that did occur, however inadvertently, it must be regarded as some
evidence of unfair dealing. But, in this case, that evidence does not overcome the
preponderating force of the other credible evidence which persuades this Court that the
89
I have also assumed that a majority of the Tesla Board was conflicted, either
by self-interest in the Acquisition or by a lack of independence. Elon certainly has
a factual basis to challenge that assumption, but there is also a factual basis to
support it. As I considered the Tesla Board’s process, therefore, I was mindful of
the conflicts and scrutinized carefully each director’s decision-making and rationale
for supporting the Acquisition. Ultimately, under the direction and influence of a
“disinterested decisionmaker,” Denholm, I am satisfied that the Tesla fiduciaries
placed the interests of Tesla stockholders ahead of their own.407
i. Process Flaws
The process flaws flow principally from Elon’s apparent inability to
acknowledge his clear conflict of interest and separate himself from Tesla’s
consideration of the Acquisition. Although the Tesla Board conditioned the
Acquisition on the approval of a majority of disinterested stockholders, for reasons
unexplained, it did not implement the other standard protection—an independent
special committee.408 With no formal independent negotiating body to manage
non-affiliated directors were, in fact, independent-and acted independently-of Hall.”),
aff’d, 840 A.2d 641 (Del. 2003).
407
Principles of Corp. Governance § 5.02 (Am. L. Inst. 1994) (“[A] corporation’s interest
will be better protected if it is independently represented in negotiating the transaction by
a person who has no conflict of interest in the transaction.”).
408
See In re John Q. Hammons Hotels, Inc. S’holder Litig., 2009 WL 3165613, at *12
(Del. Ch. Oct. 2, 2009) (noting that a “majority of the minority vote serves as a complement
90
conflicts, Elon was permitted to participate in the deal process to a degree greater
than he should have been:
- Elon had several communications (undisclosed to Tesla’s Board) with
SolarCity’s management about the Acquisition.409 For example, without
any approval or knowledge of the Tesla Board, Elon declared to Lyndon
that Tesla would acquire SolarCity, and later assured Lyndon that Tesla
would extend a bridge loan to SolarCity.410
- Having made the declaration to Lyndon, Elon then pressed the Tesla Board
to consider the Acquisition on several occasions.411 And, unbeknownst to
the Tesla Board, he directed Tesla’s CFO to prepare a financial analysis of
a potential transaction before first presenting his proposal that Tesla
acquire SolarCity to the Tesla Board.412
to, and a check on, the special committee,” and emphasizing that the formation of the
special committee is still “paramount” in providing procedural protection to stockholders
in conflicted transactions). Surprisingly, there is no clear explanation in the trial record for
why the Tesla Board elected not to form a special committee. See, e.g., Tr. 2133:1–21
(Denholm) (acknowledging there was no special committee but not explaining why that
was so); Foster Dep. 220:17–222:5 (“I have no idea what advice, if any, Wachtell Lipton
gave Tesla as regards forming or not forming a special committee.”); Kimbal Dep. 106:18–
107:9 (unable to explain why Tesla did not form a special committee). To the extent
Plaintiffs would have me surmise that the failure to form a special committee was somehow
Elon’s doing, there is simply no evidence to support that. Indeed, Elon was not asked a
single question about the formation of a special committee over the course of two
depositions or two days of trial testimony.
409
JX 1451; Tr. 1755:21–24, 1756:11–22 (Lyndon); Tr. 2101:9–2103:5 (Denholm).
410
Tr. 1755:21–24, 1756:11–22 (Lyndon); Tr. 2101:9–2103:5 (Denholm); JX 2789
at 274:4–13. Of course, a bridge loan was not extended.
411
E.g., JX 902; JX 1131.
412
Wheeler Dep. 30:8–31:7. But, as explained both above and below, the Tesla Board
rebuffed Elon until it determined the timing was right for Tesla.
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- Once the Tesla Board agreed to explore the Acquisition, Elon participated
in the selection of Tesla’s outside deal counsel.413
- Once the Tesla Board decided to pursue the Acquisition, Elon reviewed
Tesla’s offer letter and the blog post announcing the first proposal.414
- Elon was involved in preliminary discussions regarding price during
Evercore’s initial presentation and explained why a 30% premium—higher
than Evercore recommended but still in the range of fairness—might be
needed to close the deal.415
- Elon was in frequent communication with Evercore outside the boardroom
throughout the process, obtaining regular updates on timing and
diligence.416
- Elon self-published the Master Plan Part Deux in the middle of
negotiations in an apparent attempt to garner Tesla stockholder support for
the Acquisition while the Tesla Board was still considering Tesla’s
options.417
413
Tr. 1755:11–16 (Lyndon); Tr. 162:23–163:12, 265:7–12 (Elon); JX 27; JX 777; JX 3226
at 8. Even though Elon should not have been involved in the selection of counsel to advise
the Tesla Board, as explained above, I am convinced that Wachtell was a qualified,
independent advisor, not beholden to Elon in any way.
414
JX 1228; JX 1231 at 114–22; JX 1224. According to Elon, he reviewed the materials
“to explain to the public . . . the rationale for an acquisition. But this was, of course,
premised on a successful negotiation run by independent board members.” Tr. 279:23–
280:6 (Elon).
415
JX 1238 at 1–2; JX 1239 at 5–6. As explained, this conversation ultimately did not set
the price paid, as the Tesla Board, led by Denholm, negotiated the price down well below
the initial offer range.
416
See Tr. 1521:2–1522:21, 1563:14–1564:4 (McBean). As noted above, the
preponderance of the evidence suggests the purpose of these meetings was to speed up
diligence, not to influence the bankers regarding substantive aspects of the Acquisition.
417
JX 1618; Tr. 574:8–22, 576:9–19 (Kimbal); JX 1606. Although the Master Plan Part
Deux did discuss “a sustainable energy economy” and the integration of “energy generation
and storage,” it also focused on self-driving capabilities, electric “heavy-duty trucks” and
92
- When Evercore decided to recommend that the Tesla Board lower its offer,
it informed Elon of that advice before its meeting with the Tesla Board.418
- Elon was present for part of a Tesla Board meeting where the Tesla Board
discussed the revised offer for SolarCity.419
- Before the Tesla stockholder vote, Elon publicly demonstrated the
(inoperable) Solar Roof and made promises about the timing of the product
launch to the market.420
high passenger-density urban transport,” along with ride-sharing. JX 1618. And, while
the Tesla Board members did not know Elon was going to publish the Master Plan
Part Deux, the contents of the plan were well-known to Tesla Board members and the
public. See Tr. 600:6–601:15 (Kimbal) (testifying that “[b]efore” Part Deux was published
“we talked about it”); Tr. 83:10–84:5 (Elon) (“As for what is in the master plan part deux,
these issues were all discussed at the board multiple times. So they were fully aware that
this was, in fact, the plan. . . . [I]n fact, if you just summed up prior statements of what we
were going to do, I think almost everything, if not everything, that was said in various
disparate public statement and was discussed at multiple board meetings was in that secret
master plan part deux. Because, in fact, it was not secret.”). Elon’s testimony is
corroborated by an Oppenheimer report about the Master Plan Part Deux. See JX 1617
at 1 (“That TSLA plans to move into higher powered vehicles like semi and pick-up trucks,
introduce/coordinate a fleet of autonomous driving vehicles, and sell integrated solar and
energy storage systems will not surprise many investors.”) (emphasis added).
418
JX 1619; JX 1655; Tr. 1592:20–24 (McBean). This conversation appears to be no more
than Evercore providing Elon with an update of its analysis; as noted, Elon did not oppose
lowering the price.
419
JX 1673; Tr. 1597:16–1599:14 (McBean). But, as McBean credibly testified, Elon was
“not part of the discussion where we made any decisions.” Tr. 1602:13–22 (McBean);
see also McBean Dep. 290:6–12 (“I believe his view was that the strategic rationale was
still intact and we should take all of the information that we learned during diligence in our
perspective on value. But, again, when it came down to the board deliberations on whether
and when to go back to SolarCity, he recused himself.”).
420
Tr. 343:2–9 (Elon); JX 2303 at 9. Although the Solar Roof demonstration was intended
to garner stockholder support for the Acquisition, these statements either occurred after the
stockholder vote, were qualified or were accurate. I am satisfied investors knew the Solar
Roof was a part of Tesla’s “vision for the future” and a “goal,” not a ready-for-market
product offering. JX 2206; JX 2220.
93
- Elon’s brother, Kimbal, was not recused from Tesla Board discussions or
the vote to approve the Acquisition.421 Other arguably conflicted Tesla
directors likewise were not recused.422
Elon’s involvement was problematic because Tesla “should have been able to
negotiate [] unhindered” by his “dominating hand.”423 If these facts comprised the
entirety of the deal process, one would be justified in characterizing the process as
broken. But they do not. The Tesla Board’s process included several redeeming
features that emulated arms-length bargaining to the benefit of Tesla stockholders.
ii. Process Strengths
As noted, an inquiry into fair process studies “how [the transaction] was
initiated, structured, negotiated, disclosed to the directors, and how the approvals of
the directors and the stockholders were obtained.”424 I consider these and other
relevant factors below.
Timing. Plaintiffs assert that Elon bailed out SolarCity on a schedule that
worked for him.425 But there was no bailout and the facts illustrate the timing was
421
PTO ¶ 56.
422
See, e.g., JX 2121 at 68–81 (detailing the background of the Acquisition and noting that
only Elon and Gracias were recused).
423
Thorpe by Castleman v. CERBCO, Inc., 676 A.2d 436, 442 (Del. 1996).
424
Weinberger, 457 A.2d at 711.
425
POB at 43.
94
right for Tesla. Because of macroeconomic headwinds in the industry, solar
company stocks were trading at historic lows.426 The Tesla Board declined to
explore a transaction when Elon originally asked, choosing instead to pursue the
Acquisition only after Tesla had dealt with the Model X rollout and before it
attempted its biggest launch yet—the Model 3.427 And Tesla was poised to extract
full value from SolarCity to achieve its long-held mission to become a vertically
integrated alternative energy company. Its Gigafactory was massive and well-
positioned to produce batteries that could store electric power to fuel Tesla’s
growing fleet of EVs and larger batteries that could store the energy generated by
SolarCity’s solar power systems.428 The Acquisition allowed Tesla to utilize the
Gigafactory’s massive output to its fullest capacity on both fronts.
Structure. The Tesla Board conditioned the Acquisition on the approval of a
majority of disinterested stockholders.429 As one of the most extolled and powerful
protections afforded Delaware stockholders, such approval is “compelling evidence
426
Tr. 350:24–353:13 (Elon); Tr. 1662:18–1663:1 (Lyndon); Tr. 2390:22–2393:2 (Buss);
JX 1234 at 36–38.
427
JX 849 at 2; JX 950 at 4; Tr. 457:4–17, 462:23–463:6 (Kimbal); Tr. 1959:7–1960:13,
1962:18–1963:3 (Denholm); Tr. 2837:23–2838:12, 2872:14–22 (Gracias).
428
JX 169 at 8; JX 2382 at 1–2; Tr. 2216:10–19 (Jurvetson); Tr. 2832:5–2833:2 (Gracias).
429
JX 1233 at 2; JX 2121 at 68; Tr. 1973:22–1974:13 (Denholm).
95
that the price was fair.”430 As noted, Tesla selected independent, top-tier advisors to
represent the Tesla Board in the Acquisition (Wachtell and Evercore). Elon and
Gracias were not involved in Evercore’s selection, but Denholm, an indisputably
independent director, was “directly involved” in the selection.431 Evercore reviewed
the solar industry as a whole before recommending SolarCity as the obvious choice
to be acquired.432 After deliberations, the Tesla Board shared that view.433 Although
Elon and Gracias were not wholly recused from Acquisition-related discussions,
430
ACP Master, 2017 WL 3421142, at *29; see also Gesoff v. IIC Indus., Inc., 902 A.2d
1130, 1148 (Del. Ch. 2006) (“[T]his court has suggested repeatedly that the presence of a
non-waivable ‘majority of the minority’ provision is an indicator at trial of fairness because
it disables the power of the majority stockholder to both initiate and approve the merger.”).
I have given less weight to the Tesla stockholders’ approval of the Acquisition than I might
have otherwise in recognition of Plaintiffs’ disclosure arguments and their argument that
the magnitude of the approval vote might be overstated given the likelihood that many
stockholders who approved the Acquisition also owned SolarCity stock. That being said,
the stockholder vote is strong evidence against Plaintiffs’ contention that SolarCity was
worth nothing––an overwhelming majority of stockholders, many of them highly
sophisticated, likely would not have voted to acquire a worthless company.
431
Tr. 1965:1–14 (Denholm); Tr. 2840:13–18 (Gracias).
432
JX 2121 at 68; Tr. 1374:22–1375:10 (McBean); cf. In re Appraisal of Columbia
Pipeline Gp., Inc., 2019 WL 3778370, at *29–*31 (Del. Ch. Aug. 12, 2019) (observing
that favoring one buyer during the sale process was not an indicator of unfairness in that
case because that party “offered higher and more certain value than the alternatives” and
was “the optimal buyer”).
433
See, e.g., Tr. 1968:16–1969:8 (Denholm); Tr. 2399:14–2402:2 (Buss) (testifying that
SolarCity was the clear choice and that he would not have supported an acquisition of his
former company, SunPower).
96
they were recused from the final decision-making on price and from voting on the
Acquisition.434
Due Diligence Used to Lower Offer. As noted, Denholm led the diligence
and negotiations. The record reflects that Evercore was dutiful in keeping the Tesla
Board apprised of new developments and concerns, including the concerns relating
to SolarCity’s growing liquidity challenges.435 The information discovered during
the due diligence process was used to lower the price substantially—even below the
original offer range. Price increases or decreases that are the products of hard-nosed
negotiations are strong evidence of fairness.436
The Tesla Board Was Not “Dominated” by Elon. As noted, Plaintiffs assert
that the deal process was dominated by Elon,437 but the record contains several
instances where the Tesla Board simply refused to follow Elon’s wishes. Elon
brought up acquiring SolarCity in early 2016 and wanted to move quickly; the Tesla
434
JX 1233 at 5; JX 2121 at 68; Tr. 1969:19–1970:17 (Denholm); JX 1702 at 1 (special
meeting where the Tesla Board decided the final offer for SolarCity); JX 1736 at 1 (special
meeting where the Tesla Board approved the Acquisition).
435
Tr. 1408:7–21, 1457:3–6, 1466:6–11 (McBean).
436
See, e.g., In re Panera Bread Co., 2020 WL 506684, at *19–20 (Del. Ch. Jan. 31, 2020)
(noting that “extraction of multiple price increases” indicated fairness); Dell, Inc. v.
Magnetar Glob. Event Driven Master Fund Ltd., 177 A.3d 1, 28 (Del. 2017) (noting one
indicium of a fair deal price was that the bid was raised several times).
437
POB at 51–52.
97
Board rebuffed him numerous times, telling him the timing was not right for Tesla.438
Once the Tesla Board agreed to explore an acquisition, Elon proposed an initial offer
above the range initially recommended by Evercore (though still deemed fair); the
Tesla Board declined to extend that offer and used the fruits of due diligence to
negotiate a price well below that mark.439 Elon wanted Tesla to provide a bridge
loan to SolarCity and even promised Lyndon that Tesla would do so; the Tesla Board
declined to provide the loan based on its own assessment and Evercore’s
recommendation.440 The Tesla Board also insisted on a walkaway right in case
SolarCity breached any debt covenant, which was meaningful given what it knew
about SolarCity’s liquidity challenges.441 Elon wanted to expedite the Acquisition;
the Tesla Board and Evercore took their time to do extensive diligence.442 These
facts suggest an ultimately productive board dynamic that protected the interests of
stockholders, despite Elon’s assumed “managerial supremacy” and the assumed
438
See JX 849 at 2; JX 950 at 4; JX 1049 at 6; Tr. 457:4–17 (Kimbal); Tr. 1959:7–1960:13
(Denholm); Tr. 2837:23–2838:12 (Gracias).
439
Tr. 2025:17–2026:24, 2030:5–13, 2037:1–8 (Denholm).
440
Tr. 1702:24–1703:6; 1798:3–1799:12 (Lyndon); Tr. 1517:13–16 (McBean);
Tr. 2186:4–18 (Denholm).
441
See JX 2121 at 249–250 (§ 7.02(e)); JX 1588 at 28, 30; Tr. 1573:6–1575:6 (McBean).
442
Tr. 1401:1–1402:10 (McBean) (testifying that the amount of time Evercore spent on the
diligence process compared to other deals was “among the highest” and that it was “a very
thorough diligence process” that took “[a]bout six weeks”).
98
board-level conflicts.443 Indeed, each Tesla Board member credibly testified as to
why he or she supported the Acquisition.444
443
POB at 51. To be clear, while Elon did not dominate the Tesla Board’s process, he
inexplicably was given the opportunity to attempt to influence it. As stated, that should
not have happened.
444
Tr. 485:4–21 (Kimbal) (“Q. SolarCity was acquired by Tesla and is now part of the
company. Do you think that acquisition made strategic sense? A. Yes. Q. Do you think
it made sense for Tesla shareholders? A. Yes, absolutely. Q. Can you explain why?
A. We were, at the time, considered a car company, and we had been telling the world
forever that we are an alternative energy company. And we needed the world to understand
our bigger vision, which we have succeed[ed] at achieving that. But to be honest, the solar
industry is going to be the biggest industry in the world. It is much, much bigger than the
car industry. We never saw ourselves as purely a car company. And the strategic—it made
total strategic sense.”); Tr. 2173:22–2174:11 (Denholm) (“Q. Why did you vote for the
transaction? A. Because I believed that it was in the best interests of Tesla shareholders
to actually continue the mission of Tesla, which was to accelerate the world towards
sustainable energy. And the best way to do that was to have the solar generation capability
within the four walls of Tesla so that we could continue in terms of the technology journey
that it would take to satisfy the mission, and I believed that it was in the best interests of
all Tesla’s shareholders. Q. If you had not believed that, how would you have voted?
A. I would not have voted for the deal.”); Tr. 2399:19–2402:15 (Buss) (“Q. Did you
personally have a view on which target Tesla should pursue? A. Yes. It was very obvious
to me. Q. And what was that view? A. Really was SolarCity. . . . [I]t was the dominant
company by far. I mean, it was, I don’t know, 30, 35 percent market share. . . . And they
were the lowest-cost provider out there. And they had a very good, solid roadmap for down
the road. So to buy something subscale that didn’t have the cost, I wouldn’t have supported
it, to be quite honest. . . . [T]he timing was beautiful, in my mind. . . . [T]hings were kind
of lining up where it was like, okay, wow, we could really get this really good asset that
was part of our long-term vision really at a great price . . . . I think we got it at a discount,
personally.”); Tr. 2215:14–2217:15 (Jurveston) (testifying that he “thought it was in the
best interests of Tesla shareholders” based on synergies and long-term strategy);
Tr. 2873:7–19 (Gracias) (testifying that he was not worried about the “very short blip” in
integration because, thanks to the Acquisition, Tesla is “disrupting entire industries” and
“remaking the way you produce and consume energy in the world”); Tr. 2262:9–22
(Ehrenpreis) (testifying that because of the Acquisition, Tesla is “uniquely, a fully
integrated, sustainable energy company and really the only one of its kind” and is “being
valued as such”).
99
Market and Tesla Board Knowledge. The material aspects of the Acquisition
were known to Tesla stockholders. Tesla’s stock was well-covered by analysts and,
when news of the Acquisition hit the market, the analysts reveled in well-publicized
debates and transaction modeling.445 The market generally understood SolarCity’s
liquidity challenges.446 Some analysts called the Acquisition a bail-out;447 others
believed Tesla was getting “a steal.”448 As for the Tesla Board, its members were
well informed by Evercore about the Acquisition generally,449 and
445
See, e.g., Tr. 2653:1–2655:7 (Fischel) (discussing articles about the Acquisition,
projected synergies, the motivation behind the deal, etc.); Tr. 1998:11-18 (Denholm)
(testifying the public reaction to Tesla’s offer was “mixed”); JX 2839 at 162–65, 170–72
(Fischel report collecting analyst research, recommendations and observations).
446
See, e.g., JX 2852 at 10 (concluding that “[a]nalysts and news articles also discussed
SolarCity’s liquidity position at length, both before and after the release of the Tesla S-4”);
id. at 39–50 (detailing “SolarCity Analyst Commentary on Liquidity” and
“News Commentary on Liquidity”); JX 1068 (Credit Suisse “Decrease Target Price”
Report on SolarCity).
447
JX 2237 at 7–9.
448
JX 1390 at 1; see also Tr. 1998:11–18 (Denholm); JX 2839 at 162–65, 170–72.
449
See, e.g., JX 1678 (Evercore materials for July 24, 2016 meeting with Tesla Board);
JX 1703 (Evercore materials for July 27, 2016 meeting with Tesla Board); JX 1746
(Evercore materials for July 30, 2016 meeting with Tesla Board).
100
about SolarCity’s liquidity issues specifically.450 The bridge loan request itself
signaled to the Tesla Board that SolarCity was urgently in need of cash.451
Denholm. Denholm emerged as an independent, powerful and positive force
during the deal process who doggedly viewed the Acquisition solely through the lens
of Tesla and its stockholders.452 She had served as chair of Tesla’s audit committee
since 2014 and was acutely aware of Tesla’s financial condition and challenges.453
She directed Evercore in its selection of acquisition targets and was actively engaged
with Evercore with respect to the development and delivery of its fairness opinion.454
450
See, e.g., JX 1588 at 28, 30 (Evercore presentation materials for the Tesla Board
detailing SolarCity’s “liquidity situation” and “significant liquidity concerns,” including
that “cash balances were projected to be below the revolver liquidity”); JX 1678 at 6–7
(Evercore presentation materials for the Tesla Board explaining that “[d]uring diligence,
there were several key discoveries made that impact valuation,” including “liquidity
concerns”); Tr. 1408:7–21 (McBean) (“Q. What was Evercore trying to convey to the
Tesla board with this slide? A. This is a snapshot of SolarCity’s liquidity and cash flow,
and specifically, it shows that at several points SolarCity could potentially go below the
[$]116 million required by the revolver if they weren’t able to raise additional capital.
Q. So this is information that the Tesla board had during the due diligence process?
A. Yes.”).
451
JX 1588 at 28, 30; Tr. 1573:6–1575:6 (McBean); Tr. 2010:20–24 (Denholm) (“Q. First,
was there a discussion of why SolarCity needed or was asking for a bridge loan at this
point? A. Yeah, for their short-term liquidity needs that we discussed earlier.”).
452
Tr. 2133:15–21 (Denholm) (“Q. You were just one of five directors that considered and
voted on the SolarCity transaction; true? A. I was one of five, but I led the process and
sort of acted as the sort of corralling force. And I spent a lot of time on the due diligence
itself.”).
453
Tr. 2068:19–2069:5 (Denholm).
454
Tr. 1976:20–1977:9, 2039:1–2049:8, 2050:3–20 (Denholm).
101
And, importantly, as a director who was not, and would not be, unduly influenced
by Elon, she served as an effective buffer between Elon and the Tesla Board’s deal
process.455 Her credible and unequivocal endorsement of the Acquisition is highly
persuasive evidence of its fairness.456
* * * * *
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. And Elon did not push back against them—there were no threats, fits or
fights.457 While involved, Elon did not impede the Tesla Board’s pursuit of a fair
455
Tr. 1952:8–19 (Denholm); see also Tr. 2200:10–24 (Denholm) (testifying that she and
Tesla’s general counsel “tag team[ed]” to ensure that Elon and Gracias were recused when
needed); Tr. 2198:2–4 (Denholm) (testifying that she ensured Elon’s communications with
Lyndon had “no impact . . . on what myself or the team or Evercore were doing”).
456
Tr. 2173:23–2174:8 (Denholm) (explaining why she endorsed the Acquisition:
“Because I believed that it was in the best interests of Tesla shareholders to
actually continue the mission of Tesla, which was to accelerate the world towards
sustainable energy. And the best way to do that was to have the solar generation capability
within the four walls of Tesla so that we could continue in terms of the technology journey
that it would take to satisfy the mission, and I believed that it was in the best interests of
all Tesla's shareholders.”).
457
See, e.g., Tr. 2376:18–2378:22 (Buss) (testifying credibly that Elon “never” dictated at
Tesla Board meetings and that he was “not at all” worried about “retribution from Elon if
[he] or the other board members disagreed with him”); Tr. 2280:24–2281:3 (Ehrenpreis)
(“Q. Were you influenced in any way by any fear or concern that Mr. Musk would react
negatively if you didn’t vote in favor of the transaction? A. Absolutely not.”);
Tr. 2219:12–15 (Jurvetson) (“Q. Did Mr. Musk ever suggest in any way that there would
be any repercussions or retribution if you disagreed about this transaction? A. No, not at
all. No hint of that.”).
102
price. Tesla declared that it would enter the solar energy industry long before Elon
proposed the Acquisition; the Tesla Board decided the timing was right to acquire a
solar energy company based on an evaluation of legitimate business considerations;
Evercore did a meaningful industry survey and credibly recommended SolarCity as
the target; and the Tesla Board offered a fair price range and negotiated it down to
well below that range. In other words, despite its assumed conflicts, under
Denholm’s leadership, the Tesla Board meaningfully vetted the Acquisition. In sum,
Elon proved that the process did not “infect” the price. And “[t]he proof lies in the
results.”458
b. Fair Price
Unlike determining fair value in an appraisal case, the fair price component
of an entire fairness analysis “is not itself a remedial calculation.”459 Instead of
picking a single number, the court’s task is “to determine whether the transaction
price falls within a range of fairness.”460 This approach provides flexibility
458
Emerald P’rs, 2003 WL 21003437, at *24.
459
Reis, 28 A.3d at 465; see In re Appraisal of Dell Inc., 2016 WL 3186538, at *25–27
(Del. Ch. May 31, 2016) (distinguishing between the task of determining fair value in an
appraisal action and assessing fair price in a plenary breach of fiduciary duty action), aff’d
in part, rev’d in part sub nom. Dell, Inc. v. Magnetar Glob. Event Driven Master Fund Ltd,
177 A.3d 1 (Del. 2017).
460
In re Dole Foods, 2015 WL 5052214, at *33.
103
“to accommodate the reality that the value of a corporation is not a point on a line,
but a range of reasonable values.’”461
Typically, evaluating the price of a transaction for entire fairness requires the
court to consider whether the transaction was one “that a reasonable seller, under all
of the circumstances, would regard as within a range of fair value; one that such a
seller could reasonably accept.”462 Of course, in this case, the focus is on the other
side of the table; the Court’s task is to determine whether the price the buyer paid
was “a price that is within a range that reasonable men and women with access to
relevant information might [have paid].”463
To determine that range, the Court “assess[es] which [valuation]
methodologies are most appropriate under Delaware law and in light of the particular
461
In re Orchard Enters., 88 A.3d at 30 (internal quotation marks and alterations omitted);
see also Reis, 28 A.3d at 466 (“[A] range of fairness permits a court to give some degree
of deference to fiduciaries who have acted properly; it is not a rigid rule that permits
controllers to impose barely fair transactions.”).
462
Technicolor I, 663 A.2d at 1143.
463
Kahn v. Tremont Corp., 1996 WL 145452, at *1 (Del. Ch. Mar. 21, 1996), rev’d on
other grounds, 694 A.2d 442 (Del. 1997); see also Technicolor I, 663 A.2d at 1143 (“A fair
price does not mean the highest price financeable or the highest price that fiduciary could
afford to pay. At least in the non-self-dealing context, it means a price that is one that a
reasonable seller, under all of the circumstances, would regard as within a range of fair
value; one that such a seller could reasonably accept.”); see also DFC Glob. Corp. v.
Muirfield Value P’rs, L.P., 172 A.3d 346, 370 (Del. 2017) (“[F]air value is just that, ‘fair.’
It does not mean the highest possible price that a company might have sold for had
Warren Buffett negotiated for it on his best day and the Lenape who sold Manhattan on
their worst.’”).
104
circumstances of this case.”464 “Delaware law does not have a rigid hierarchy of
valuation methodologies, nor does it have a settled formula for weighting them.”465
In our adversarial system, the parties and their experts must convince the law-trained
judge of the reliability and persuasiveness of their proffered methodology, consistent
with the other evidence presented at trial.466 In other words, in a plenary breach of
fiduciary duty action, the court’s function when assessing fair value is not to conduct
its own appraisal but to land where the preponderance of the credible and competent
evidence of value takes it.
Here, Elon presented the most persuasive evidence regarding SolarCity’s
value and the fairness of the price Tesla paid to acquire it. The evidence he presented
revealed that: (1) SolarCity was far from insolvent, as Plaintiffs argue;
(2) discounted cash flow (“DCF”) analyses are not helpful here; (3) market evidence
supports the price Tesla paid; (4) SolarCity’s current and future cash flows support
a finding of fair price; (5) Evercore’s fairness opinion and valuation work accurately
464
S. Muoio & Co. LLC v. Hallmark Ent. Invs. Co., 2011 WL 863007, at *16 (Del. Ch.
Mar. 9, 2011), judgment entered, (Del. Ch. 2011), and aff’d, 35 A.3d 419 (Del. 2011).
465
Merion Cap. L.P. v. Lender Processing Servs., Inc., 2016 WL 7324170, at *30 (Del. Ch.
Dec. 16, 2016).
466
Cf. In re Appraisal of Jarden Corp., 2019 WL 3244085, at *1–3, 23 (Del. Ch. July 19,
2019) (observing the unusual nature of appraisal litigation where the court must assess fair
value to reach an “independent appraisal” of the target even if the parties’ proffered
evidence of fair value is deemed unreliable), aff’d sub nom. Fir Tree Value Master
Fund, L.P. v. Jarden Corp., 236 A.3d 313 (Del. 2020).
105
captured SolarCity’s value; and (6) the fair price analysis must account for the
substantial synergies flowing to Tesla from the Acquisition.467
For their part, Plaintiffs went “all in” on insolvency, arguing that SolarCity
was worthless when Tesla acquired it, so any price paid by Tesla was too high.468
More specifically, they rested their fair price case on four arguments: (1) SolarCity
was insolvent and lacked a viable business model; (2) SolarCity’s unaffected stock
price did not reflect non-public information regarding its liquidity issues; (3) Tesla
realized no cognizable synergies from the Acquisition; and (4) Evercore’s fairness
opinion was unreliable.469
With the battle lines drawn, I address the parties’ competing fair price
arguments in turn.
467
See DOB at 43–58.
468
See, e.g., POB at 65 (“Musk’s failure to prove solvency precludes a finding of fair
price.”); Tr. 696:11–17 (Quintero) (concluding that “on a standalone basis, the equity of
SolarCity was worthless”); Tr. 765:4–7 (Quintero) (testifying that SolarCity’s “equity was
worthless” as of the merger date); Tr. 789:1–4 (Quintero) (“Q. Okay. So your opinion is
that on a net liquidation value, SolarCity’s equity was worthless as of the merger
date. Right? A. Yes, sir.”); Tr. 796:10–16 (Quintero) (testifying that SolarCity was
“worthless” on a “going-concern basis”).
469
Id. at 60.
106
i. SolarCity Was Not Insolvent
At trial, Plaintiffs placed their valuation case entirely in Quintero’s hands,470
and Quintero, in turn, relied exclusively on a single valuation theory: insolvency.471
In other words, by Plaintiffs’ lights, SolarCity was “worthless” at the time of the
Acquisition.472 To be sure, Quintero offered valuation opinions as alternatives to his
insolvency opinion, but when pressed by the Court at trial, he doubled down on his
sworn testimony that SolarCity was worth nothing.473 Setting aside whether net
liquidation value is a proper methodology to value SolarCity, a point the parties
dispute,474 “[Quintero]’s conclusion that [SolarCity] is worth [] nothing is incredible
470
Plaintiffs’ other experts did not opine on valuation. DOB at 57; see Tr. 2789:10–12
(Beach) (“Q. And you are not offering any valuation opinions to this Court, correct?
A. Correct.”).
471
See, e.g., JX 2840 at 6 (“Because SolarCity was not a going concern as of the
Merger Date, SolarCity’s value is most appropriately determined based on a net liquidation
value. Based on a net liquidation value, SolarCity’s equity was worthless as of the
Merger Date.”).
472
Id.
473
Tr. 889:17–891:2 (Quintero).
474
Compare DOB at 76 (“Quintero’s net liquidation valuation, which concededly depends
on his insolvency conclusion, should be rejected.”), with POB at 72 (“Plaintiffs produced
a liquidation analysis from a certified distressed business valuation expert who has valued
hundreds of financially troubled and insolvent companies during his career. That analysis
showed SolarCity’s net liquidation value was a negative $1.952 billion.”).
107
on its face.”475 As explained in detail below, the credible evidence persuasively
demonstrated that SolarCity, while cash-strapped to a dangerous degree,476 was
solvent, valuable and never in danger of bankruptcy.477 “In the shadow of
[Quintero’s unequivocal yet unconvincing] testimony [to the contrary], as is often
the case when one swings for the fences, [Quintero] failed to make contact
altogether.”478 By relying so heavily on Quintero, in the eyes of this factfinder,
Plaintiffs undermined the credibility of their fair price case completely.
Aside from Quintero’s testimony and SolarCity’s liquidity issues, Plaintiffs
also point to two pieces of trial evidence to argue SolarCity was worthless—Bilicic’s
testimony that Lazard was “concerned about the company on a stand-alone basis
going forward,”479 and an Ernst & Young (“EY”) report that purportedly stated
475
Bardy Diagnostics, Inc. v. Hill-Rom, Inc., 2021 WL 2886188, at *26 n.244 (Del. Ch.
July 9, 2021).
476
See, e.g., Tr. 207:1–3 (Elon) (testifying that “[b]oth SolarCity and Tesla needed cash”);
Tr. 160:17–19 (Elon) (testifying that he “was aware that liquidity was going to be difficult
in 2016 for SolarCity” and “the same is true of Tesla”).
477
Tr. 1731:22–1734:18, 1737:16–1738:7 (Lyndon); Tr. 997:18–998:9 (Serra);
Tr. 2393:3–2396:2 (Buss); Tr. 1835:5–10 (Peter); Tr. 376:7–15 (Elon).
478
Bardy Diagnostics, 2021 WL 2886188, at *26; see also Trados, 73 A.3d at 68(“[T]he threat of bankruptcy, the viability of the business plan, and the size of
[the company’s] market were all concerns, but the [Plaintiffs]’ portrayal at trial was overly
strident. In evaluating fairness, I have taken these issues into account, but as risks rather
than mortal crises.”).
479
Tr. 429:15–430:1 (Bilicic).
108
SolarCity was not viable as a standalone entity.480 Neither dilutes Elon’s persuasive
evidence to the contrary.481
First, Bilicic’s “concern[]” that a liquidity event could “risk []damaging the
overall business” does not suggest that Lazard thought SolarCity was worthless.482
On the contrary, Lazard made clear its view that SolarCity had significant positive
value that it would transfer to Tesla in the Acquisition.483
Second, as Elon points out, “[t]he draft EY analysis on which Plaintiffs rely—
from January 2017, months after the Acquisition closed—concluded that, if
SolarCity were a standalone entity in 2017 (it was not), it might face a going concern
issue in 2017 (the year after the Acquisition closed)” in the event of certain
contingencies.484 The EY report does not prove insolvency at any time, and certainly
not as of the Acquisition.
480
JX 2398.
481
See, e.g., JX 2420 at 4 (contemporaneous valuation done by KPMG showing SolarCity
was not insolvent); JX 2443 at 76–77 (Tesla’s 10-K reporting an $89 million gain on the
Acquisition); JX 1599 at 9 (Evercore presentation reporting that SolarCity was not
worthless); Tr. 2486:11–16 (Fischel) (testifying that “obviously, the [Tesla] directors
didn’t believe [that SolarCity was worthless]”); Tr. 2497:23–2498:3 (Fischel) (“Q. And
did the market believe SolarCity to be worthless? A. No. Q. Or insolvent? A. No.”).
482
Tr. 429:15–430:1 (Bilicic).
483
JX 2121 at 97–104.
484
DAB at 15 (citing JX 2398).
109
To reiterate, Plaintiffs’ failed attempt to prove insolvency did nothing to dilute
Elon’s persuasive valuation evidence. If anything, it diluted the persuasive force of
their other proffered evidence of fair price.
ii. The DCF Analyses Were Unhelpful
Quintero and Fischel both performed DCF valuations.485 I recognize that, in
certain situations, “[p]roperly conducted DCF analyses can be a useful valuation tool
to ‘corroborate’ market prices and evidence.”486 Here, however, neither expert
persuaded me that a DCF analysis is the proper method by which to value SolarCity
given the facts of this case, and so I decline to rely on the DCFs when analyzing
whether the Acquisition price was fair to Tesla’s stockholders.487 In any event, the
485
Highfields Cap., Ltd. v. AXA Fin., Inc., 939 A.2d 34, 53 (Del. Ch.), judgment entered,
(Del. Ch. 2007) (explaining that a “DCF assigns a value to an enterprise by adding
(1) an estimation of net cash flows that the company will generate over a period of time to
(2) a terminal value equal to the future value, as of the end of the projection period, of the
company’s cash flows beyond the projection period”).
486
DOB at 50 (citing In re Jarden Corp., 2019 WL 4464636, at *4 (Del. Ch. Sept. 16,
2019)).
487
Tr. 868:19–24 (Quintero) (“Q: So to be clear, you regard DCF in this case as an
unreliable valuation approach? A: Yes, sir. Q: Okay. And your opinion is that, in this
case, it is a highly speculative approach? A: Yes, sir.”); Tr. 2516:15–21 (Fischel)
(“Q: Are you relying on a DCF for valuation here? A: I think it's relevant, but I think
there’s enough market evidence, certainly, to reject the claim that SolarCity was insolvent.
As I said, I don’t believe there is any evidence to support that claim.”); Tr. 2579:14–21
(Fischel) (Q: “And you believe your market values in this case are more reliable than your
DCF values; right? A: Again, it depends on which value you’re talking about, but, overall,
yes, I do. I believe the market evidence in this case is more probative, more reliable than
an after-the-fact DCF analysis conducted by me or anybody else.”).
110
parties did not focus on DCF at trial or in their post-trial briefs, so I choose not to
dwell on it further here.488
iii. The Market Evidence of Fair Price
Delaware courts recognize that “[m]arket prices are typically viewed [as]
superior to other valuation techniques because, unlike, e.g., a single person’s
discounted cash flow model, the market price should distill the collective judgment
of the many based on all the publicly available information about a given company
and the value of its shares.”489 Market evidence is a reliable indicator of fair price,
however, only when “the evidence reveals a market value forged in the crucible of
objective market reality.”490
After a careful review of the market-based evidence presented at trial, I am
satisfied that the market was sufficiently informed to reach a reliable assessment of
488
See In re Emerging Commc’ns, Inc. S’holders Litig., 2004 WL 1305745, at *12
(Del. Ch. May 3, 2004) (“This Court views the parties’ virtual non-treatment of the
comparable company valuation as a tacit concession that that alternative valuation is a
‘throwaway’ of no material significance.”); compare DOB at 54 (“Even Plaintiffs’ expert
Quintero, for his now-abandoned ex post DCF analysis, employed a cost of equity below
the midpoint of this range.”), with PAB at 59 (“In his Opening Brief, Musk ignores
Fischel’s abandoned DCF analysis . . . .”).
489
DFC Glob., 172 A.3d at 369–70; see also id. at 366 (“[S]econd-guessing the value
arrived upon by the collective views of many sophisticated parties with a real stake in the
matter is hazardous.”); In re Loral Space & Commc’ns Inc., 2008 WL 42937819, at *27–
32 (Del. Ch. Sept. 19, 2008) (giving “substantial weight to the actual trading price”).
490
In re PetSmart, Inc., 2017 WL 2303599, at *27 (Del. Ch. May 26, 2017) (internal
citation marks omitted).
111
SolarCity’s value. And that evidence also supports Elon’s argument that Tesla paid
a fair price for SolarCity.
The Market for SolarCity Was Efficient. Experts for both parties testified that
SolarCity traded in an “efficient market.”491 Despite that agreement, Plaintiffs
maintain that SolarCity’s stock price cannot be trusted as a proxy for value because
the market lacked information regarding the full extent of SolarCity’s liquidity
crisis.492 I disagree.
The trial evidence reveals that SolarCity accurately disclosed the existence
and terms of its debt covenants, that its covenant compliance margins decreased in
Q1 and Q2 of 2016, the potential consequences of a breach, its quarterly cash
balances and its debt maturities.493 Indeed, Plaintiffs’ expert witnesses, Moessner
and Beach, conceded that market participants were aware of the risk that SolarCity
might breach its Liquidity Covenant.494
491
Tr. 1155:3–5, 2790:10–21 (Beach); Tr. 2653:1–3 (Fischel).
492
POB at 55–57, 66 (arguing that the market did not appreciate how close SolarCity was
to tripping its Liquidity Covenant, that it was deferring accounts payable, that it was
delaying the release of guidance on megawatts deployed and suffering credit downgrades).
493
JX 2121 at 66–79, 83–92, 97–114, 190–92; JX 536 at 4; JX 780 at 64; JX 1072 at 4, 42;
JX 1854 at 4, 50; JX 2268 at 4.
494
See Tr. 686:9–20 (Moessner); Tr. 1146:9–22 (Beach).
112
As for the deferral of accounts payable, Plaintiffs overstate the implications
of deferral on SolarCity’s overall financial health. At trial, Serra credibly testified
that the cash management strategies implemented by SolarCity reflected how
SolarCity “manag[ed] working capital appropriately” in the ordinary course of its
business.495 These strategies included working with vendors to negotiate net
payment terms.496 As always, SolarCity paid its bills.497
Plaintiffs’ argument that the market was not informed of SolarCity’s reduced
MW guidance fails because it is not true. The unrebutted trial evidence establishes
that SolarCity appropriately and timely disclosed guidance reductions consistent
with its internal projections.498
Finally, given the credible evidence presented at trial, SolarCity’s failure to
disclose information related to its credit downgrades was immaterial. After
SolarCity’s credit rating was downgraded, Bank of America (SolarCity’s principal
lender) reacted by not only continuing to transact business with SolarCity but
495
Tr. 1055:5–10, 1058:20–1059:13, 1064:11–1065:7 (Serra).
496
Tr. 1791:1–1792:10 (Lyndon); JX 794.
497
Tr. 1834:15–20 (Peter).
498
Tr. 1692:7–1699:1 (Lyndon); JX 1010 at 5, 23, 29; JX 1858 at 4; JX 3228; Tr. 887:6–
13 (Quintero) (conceding that the guidance reductions were all public before the
stockholder vote).
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seeking to deepen the lender/borrower relationship.499 If SolarCity’s largest lender
was undeterred by the change in credit rating, it is difficult to see how or why the
market would have viewed the information differently.
The Market’s Pre-Acquisition View of SolarCity. When Tesla announced its
Acquisition offer (after the market closed on June 21),500 SolarCity’s stock was
trading at $21.19 per share,501 and SolarCity had a market capitalization of
approximately $2.1 billion.502 As explained above, the market understood that
SolarCity, like many solar companies, was facing a number of headwinds, in
addition to its own liquidity crisis, and yet, despite these issues, SolarCity had value
as a stand-alone entity.503
Ultimately, the exchange ratio for the Acquisition resulted in Tesla acquiring
SolarCity for $20.35 per share of SolarCity common stock—which represents a
discount of 84 cents per share compared to SolarCity’s unaffected stock price.504
499
JX 1355 at 7–8; JX 1430 at 27; Tr. 1235:1–1238:8; 1347:24–1348:24; 1351:19–1352:7
(Van Zijl); Tr. 998:1–9 (Serra).
500
PTO ¶ 159.
501
PTO Ex. C at 11.
502
PTO Ex. D at 14.
503
Tr. 1155:3–5, 2790:10–21 (Beach) (acknowledging SolarCity operated in an efficient
market); Tr. 2653:1–3 (Fischel).
504
JX 2839 ¶ 12. The parties dispute whether rumors that Elon was considering taking
SolarCity private kept SolarCity’s stock price inflated until the Acquisition. Compare POB
114
This means that, even ignoring synergies, Tesla paid no premium for SolarCity as
of closing.505
At best for Plaintiffs, as Fischel persuasively testified, the Acquisition price
offered by Tesla’s Board reflected, at most, a modest premium when measured at
the time of contracting:506
at 18 (“[I]nvestment websites and newspapers reported the potential transaction, causing
SolarCity’s stock price to rise nearly 25%, from $18.01 on March 1 to $22.49 on March 3.
Beach found that this increase was highly statistically significant, no other information
could explain the increase except for the leaks, and SolarCity’s stock price continued to be
affected through June.”), with DAB 36 (“The evidence demonstrated that any increase in
SolarCity’s stock price resulting from those unsubstantiated rumors dissipated over the
more than three months between March 2016 and the June 2016 initial offer. As Fischel
testified, the correct unaffected date for SolarCity is June 21, 2016; between March and
June 2016, there were ‘all kinds of events, but no merger-related announcements.’”) (citing
Tr. 2608:3–2609:4, 2656:2–2656:16 (Fischel)). McBean credibly testified that Evercore
“did not believe that there was a market rumor impacting the stock price in June” because
“the stock price was in decline that entire period.” Tr. 1494:2–1496:2 (McBean). Lazard,
Evercore, Bank of America, J.P. Morgan, Morningstar, Oppenheimer and others used the
June date (as Fischel did) for the unaffected stock price. See Tr. 2743:3–2756:22 (Beach)
(relying on JX 2121 at 94; JX 1264; JX 1311; JX 1270; JX 1272; JX 2237; JX 2249;
JX 3001). I am likewise persuaded that the June date is the appropriate date upon which
to set SolarCity’s unaffected stock price.
505
JX 2249 at 11 (ISS Report) (“These values imply no premium for SCTY at the 0.110
exchange ratio.”); JX 2839 at 17 (“After discounting, the median price target implies a
value for SolarCity stock of $24.55 as of July 31, 2016 . . . .”); id. at 130 (comparing the
announced merger consideration and the actual merger consideration to standalone price
targets by analysts).
506
Fischel credibly established that the premiums implied by his analysis were consistent
with comparable industry transactions and comparable stock transactions. JX 2839 at 20–
21, 141–44.
115
- At the time of contracting (as opposed to closing), the merger
consideration reflected a modest 14% premium to SolarCity’s unaffected
stock price.507
- Analysts covering SolarCity prior to the announcement of definitive
Acquisition terms valued it at a median price target of $24.55 per share
(as discounted to account for forward price targets), a price that effectively
implies no premium to Tesla’s offer.508
- Comparing the actual Acquisition price to estimates of SolarCity’s
standalone value at the time of closing (based on comparable companies
and indexing) shows Tesla paid only a small premium for SolarCity.509
Stockholder Approval Weighs in Favor of Fair Price. Absent a disclosure
violation, this court has found that approval of a merger by disinterested
507
Id. at 21.
508
Id. at 16–17, 129–30.
509
Id. at 16–17, 20–21, 36, 128, 132, 168, 208. Plaintiffs attack Fischel’s stock indexing
methodology, pointing out that “this Court has rejected it” in past opinions. POB at 66
(citing Emerald P’rs, 2003 WL 21003437, at *35–36; Highfields Cap. Ltd. v. AXA Fin.,
Inc., 939 A.2d 34, 58 n.34 (Del. Ch. Aug. 17, 2007)). In Emerald Partners, the court called
the method “counterintuitive” and remarked that “[i]t may be that the approach represents
sound finance theory,” but “Emerald [] made no effort to cite any finance authority” in
which “that theory [was] validated.” Emerald P’rs, 2003 WL 21003437, at *35.
In Highfields Capital, the court remarked that the event study and volume study conducted
by an expert was based on a “highly speculative” assumption and that a competing expert
“testified that such an indexing technique was not commonly relied upon in the financial
community.” Highfields Cap., 939 A.2d at 58. I need not determine whether this court
has definitively rejected Fischel’s stock indexing methodology, as Plaintiffs say, or
whether the decisions cited by Plaintiffs simply rejected the methodology as applied under
the specific facts of those cases, as Elon says, because I have not relied upon stock indexing
to find that the Acquisition price was entirely fair.
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stockholders is “compelling evidence that the price was fair.”510 Here, nearly 85%
of the votes cast by Tesla stockholders—largely extremely sophisticated institutional
investors511—were in favor of the Acquisition.512
Against the backdrop of Plaintiffs’ insolvency hypothesis, Fischel persuasively
testified that the Tesla stockholder vote is “the ultimate market test”: “anybody who
believed that Tesla was purchasing an insolvent company, all they had to do was
reject the offer . . . [a]nd, similarly, for Tesla shareholders who thought that it was a
good deal, they could vote in favor of the offer.”513 Fischel explained that the
affirmative vote of Tesla’s minority stockholders was particularly compelling
evidence of fairness given the extensive pre-vote disclosure regarding SolarCity’s
financial condition (including a “voluminous discussion” of liquidity) and the
robust, mixed public commentary,514 including Glass Lewis’ characterization of the
deal as a “bailout” of SolarCity with a process “steeped in conflicts.”515
510
ACP Master, 2017 WL 3421142, at *29; see also Technicolor II, 663 A.2d at 1176
(stockholder approval constitutes “substantial evidence of fairness”).
511
JX 2237 at 2; Tr. 2529:9–2530:1 (Fischel).
512
JX 2320 at 2.
513
Tr. 2518:12–2519:22 (Fischel).
514
Tr. 2490:7–2491:14, 2494:3–16, 2495:2–14 (Fischel); JX 2839 at 6–7, 26, 162–65;
JX 2852 at 38–50, 59–62.
515
JX 2237 at 4, 7. Here again, I acknowledge Plaintiffs’ arguments regarding the quality
(or not) of the Tesla stockholder vote. Even with these issues in mind, however, I cannot,
117
While Plaintiffs have identified several disclosure deficiencies they say tainted
the Tesla stockholder vote, they seem particularly troubled by the fact that Elon
“made false statements and withheld material information about the Solar Roof.”516
Specifically, Plaintiffs contend Elon “secured stockholder approval with false claims
that the Solar Roof would be deployed at ‘volume’ in less than a year from the
Acquisition.”517 The argument betrays Plaintiffs’ temporal confusion. Elon’s
remark about the Solar Roof, made at a Tesla stockholder meeting, could not have
influenced stockholder approval because he made the remark after the special
election voting polls had closed.518 Tesla filings and press releases regarding the
Solar Roof presentation were qualified with language that made clear the product
was part of Tesla’s “vision for the future”519 and something “the combined company
will be able to create.”520 Elon’s statements, including his tweet, were optimistic—
as factfinder, conclude that such a large majority of Tesla’s stockholders would have voted
to approve a transaction whereby Tesla would acquire an insolvent solar energy company,
as Plaintiffs would have me believe.
516
POB at 58.
517
PAB at 2.
518
JX 2313 at 2, 4 (edited transcript of November 17, 2016 Tesla stockholder meeting).
519
JX 2220 at 2.
520
JX 2128 at 1; JX 2156 at 1.
118
perhaps overly so—but Tesla did, in fact, expect a product launch in mid-2017.521
Importantly, SolarCity had been working on the Solar Roof since late 2015; it was
not a prop created to secure the vote.522 And it is fully functional today.523
iv. SolarCity’s Cash Flows Support a Finding of Fair Price
SolarCity has also provided and will continue to provide valuable cash flows
to Tesla. As noted, part of SolarCity’s value came from the long-term cash flows it
generated.524 The moment Tesla acquired SolarCity, it became the beneficiary of
521
JX 2197 at 6 (“Production to start in mid-2017”); Tr. 1857:15–18 (Peter); JX 2241
(Elon tweet from November 4, 2016: “first solar roof deployments will start next
summer”).
522
Tr. 1848:23–1849:1 (Peter); see also JX 2128 at 1; JX 2156 at 1; JX 2206 at 2, 4, 7;
JX 2220 at 2; JX 2197 at 6; Tr. 342:6–344:24 (Elon).
523
See JX 2899.
524
See, e.g., JX 2853 at 16 (“In exchange for incurring [] upfront costs, SolarCity
received long-term cash flows . . . .”); id. (“SolarCity was consistently financed
through the capital markets in order to continue its growth and to generate long-term
cash flow streams.”). Tr. 930:3–4 (Serra) (testifying that the “cumulative amount of cash
flow would be $2.2 billion value today”; Tr. 964:4–7 (Serra) (“Q. So of that 2.2 billion
that we talked about, how much of that did you think SolarCity could monetize? A. All
of it.”) Tr. 1216:2–1217:1) (Van Zijil) (“Q. So the actual cash flow stream that that equates
to is more than 2.2 billion? A. Yeah. It would probably be upwards of 3 billion by my
reckoning. But I focused on the present value number, which was 2.2. . . . . Q: So by the
time the acquisition closed, had that 2.2 billion retained value been diminished by any
newer transactions? A. Not to my knowledge, no. Q. Was this 2.2 billion encumbered
money? A. My understanding is it was not encumbered in any way. Q. Was it available
for monetization? A. In my judgment, yes.”); Tr. 2844:2–19 (Gracias) (“Look, we were -
- if I remember correctly, it was about $2 billion, a little over $2 billion Tesla paid for the
company. And I knew the financials of SolarCity because I was a director there. They had
about -- assets worth about $3 billion. And on the balance sheet there were leases, solar
leases, that were worth about 3 billion. And Tesla was going to get those leases, plus it
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these cash flows. In fact, Tesla has already realized approximately $1 billion in
nominal cash flows and expects to realize at least $2 billion more from the legacy
SolarCity systems.525 As Elon noted, “even if we shut down the business, the
$3 billion in cash flow is 50 percent higher than the acquisition price that we paid.”526
v. Evercore’s Fairness Opinion Supports a Finding of Fair Price
Evercore credibly opined that the Acquisition was fair to Tesla
stockholders.527 While this court has been understandably skeptical of fairness
opinions in certain circumstances,528 there is no reason to doubt Evercore in this case.
Evercore’s analysis and projections were based on “extensive discussion and
analysis” between Tesla and Evercore, as well as weeks of due diligence.529 Indeed,
if Evercore was beholden to Elon, as Plaintiffs assert, it is difficult to see why it
was going to get all the other infrastructure, the factory in Buffalo, all their assets, and get
the customer base, which was -- remember, this is a 20-year lock-in on the customer base
that we can then integrate with the rest of our business. That struck me as a very good deal
for us, to pay 2-, $2-1/2 billion for a business that, on its face, was going to cash flow to us
3 billion off of leases alone.”).
525
Tr. 349:4–350:23, 404:6–16 (Elon); Tr. 2309:24–2310:4 (Ehrenpreis); JX 2971 at 40,
58; Tr. 2857:2–21 (Gracias).
526
Tr. 349:4–350:1 (Elon).
527
JX 2121 at 83.
POB at 67 (citing Gerber, 67 A.3d at 420; In re El Paso P’rs, L.P. Deriv. Litig., 2015
528
WL 1815846, at *21–22 (Del. Ch. Apr. 20, 2015)).
529
Tr. 1459:12–17, 1461:16–1464:2 (McBean).
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would immediately inform the Tesla Board about SolarCity’s liquidity problems and
recommend lowering Tesla’s offer to below the initial offer range (and the range
endorsed by Elon) before SolarCity had even responded to Tesla’s initial
overtures.530 McBean credibly testified that Evercore and its fairness committee
would “never sign off on a deal or fairness opinion . . . for a fee” because Evercore’s
“reputation . . . is far too important to us.”531 While one would expect any banker to
make that claim, Evercore’s conduct, in this case, backed up that bold assertion. The
fairness opinion is further evidence of fair price.
vi. The Price is Justified by Potential Synergies
“The components of value in an acquisition might be considered to be two:
the going concern value of the firm as currently organized and managed and the
‘synergistic value’ to be created by the changes that the bidder contemplates
(e.g., new management, cost efficiencies, etc.).”532 “This second component will
530
JX 1471; JX 1588 at 28, 30; JX 1619; Tr. 1513:18–1515:24, 1573:6–1575:6, 1592:20–
24 (McBean).
531
Tr. 1466:16–1467:19 (McBean).
532
Technicolor I, 663 A.2d at 1143; see also Weinberger, 457 A.2d at 711 (holding that
“fair price relates to the economic and financial considerations of the proposed merger,
including all relevant factors: assets, market value, earnings, future prospects, and any
other elements that affect the intrinsic or inherent value of a company’s stock”)
(emphasis added).
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vary to some extent among bidders. It is the expectation of such synergies that
allows a rational bidder to pay a premium when he negotiates an acquisition.”533
Plaintiffs assert that “[t]he Court should not consider synergies at all because
they are speculative and Defendant provided no evidence that Tesla has actually
realized any synergies.”534 While I agree that “speculative elements of value” should
not be considered when appraising a company or assessing fair price,535 “Delaware
law is clear that ‘elements of future value, including the nature of the enterprise,
which are known or susceptible of proof as of the date of the merger and not the
product of speculation, may be considered.”536
At trial, Fischel credibly explained that “the relevant economic question in
this case is the value of the purchased assets, what Tesla acquired in the SolarCity
transaction, [and] what the value of those assets were to Tesla.” 537 I agree and am
533
Technicolor I, 663 A.2d at 1143. As McBean credibly testified, paying a premium for
synergies is standard in M&A deals, especially for a high-growth target like SolarCity.
Tr. 1393:2–16 (McBean).
534
POB at 67.
535
Cede & Co. v. Technicolor, Inc., 684 A.2d 289, 299 (Del. 1996) (citing Weinberger,
457 A.2d at 713) (emphasis in original).
536
In re Dole Food, 2015 WL 5052214, at *36 (quoting Del. Open MRI Radiology
Assocs., P.A. v. Kessler, 898 A.2d 290, 314 (Del. Ch. 2006)).
537
Tr. 2483:12–16 (Fischel).
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convinced synergies were a strong rationale for the Acquisition and they are properly
considered in assessing the value of SolarCity in Tesla’s hands.
Plaintiffs argue there is no contemporaneous evidence to support cognizable
synergies.538 On the contrary, synergies were a focus of the Tesla Board from the
very beginning of its consideration, and there is evidence to support them. At trial,
numerous directors testified they were laser-focused on the potential synergies
throughout the deal negotiations.539 Evercore carefully analyzed and discussed
538
POB at 67.
539
JX 1228 at 3; JX 1238 at 1; Tr. 1982:12–1983:9 (Denholm); Tr. 1389:20–1390:6
(McBean) (testifying that the Board did not approve the deal “to bail out SolarCity” but
was “really focused on the strategic rationale and the combination of solar and storage”);
Tr. 485:4–21 (Kimbal) (“Q. SolarCity was acquired by Tesla and is now part of the
company. Do you think that acquisition made strategic sense? A. Yes. Q. Do you think
it made sense for Tesla shareholders? A. Yes, absolutely. Q. Can you explain why?
A. We were, at the time, considered a car company, and we had been telling the world
forever that we are an alternative energy company. And we needed the world to understand
our bigger vision, which we have succeed[ed] at achieving that. But to be honest, the solar
industry is going to be the biggest industry in the world. It is much, much bigger than the
car industry. We never saw ourselves as purely a car company. And the strategic—it made
total strategic sense.”); Tr. 2173:22–2174:11 (Denholm) (“Q. Why did you vote for the
transaction? A. Because I believed that it was in the best interests of Tesla shareholders
to actually continue the mission of Tesla, which was to accelerate the world towards
sustainable energy. And the best way to do that was to have the solar generation capability
within the four walls of Tesla so that we could continue in terms of the technology journey
that it would take to satisfy the mission, and I believed that it was in the best interests of
all Tesla’s shareholders. Q. If you had not believed that, how would you have voted?
A. I would not have voted for the deal.”); Tr. 2399:19–2402:15 (Buss) (testifying that
“the timing was beautiful” for Tesla to “get this really good asset that was part of our long-
term vision really at a great price”); Tr. 2215:14–2217:15 (Jurveston) (testifying that he
“thought it was in the best interests of Tesla shareholders” based on synergies and long-
term strategy); Tr. 2873:7–19 (Gracias) (testifying that he was not worried about the
“very short blip” in integration because, thanks to the Acquisition, Tesla is “disrupting
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potential synergies with the Tesla Board prior to the Acquisition,
contemporaneously projecting $122 million to $235 million in synergies in 2017
alone.540 And prior to the close of the Acquisition, Tesla identified and disclosed to
stockholders three categories of synergies that it expected to realize: (1) cost
synergies (from “[s]ales and marketing efficiencies” and “corporate and overhead
savings”); (2) revenue synergies (from leveraging Tesla’s retail capabilities and the
companies’ overlapping customer bases); and (3) global strategic synergies (by
creating the “world’s only integrated sustainable energy company”).541
Internally, Tesla expected the Acquisition to result in cost synergies of at least
$150 million per year,542 which Fischel confirmed was supported by comparable
industry deals and empirical studies.543 Even if it is not reasonable to assume that
entire industries” and “remaking the way you produce and consume energy in the world”);
Tr. 2262:9–22 (Ehrenpreis) (testifying that because of the Acquisition, Tesla is “uniquely,
a fully integrated, sustainable energy company and really the only one of its kind” which
is “being valued as such”).
540
JX 1735 at 21.
541
JX 2220 at 1, 4–5; Tr. 2542:16–2543:6 (Fischel).
542
Tr. 2483:12–16 (Fischel). Evercore contemporaneously confirmed that the $150 million
estimate was below the middle of a $122–$235 million range of the “most ‘easily
identifiable’” cost synergies. JX 1735 at 21.
543
JX 2839 at 21–24, 145–48.
124
Tesla will enjoy these synergies in perpetuity, the anticipated annual synergies alone
support the relatively modest (if any) premium Tesla paid for SolarCity.544
The combined company has also achieved revenue synergies through cross-
selling its EV, solar and energy storage products. As Reicher testified, the
Acquisition allowed Tesla to “capitalize on the solar company’s customer base and
core competencies in serving those customers.”545 Tesla reported in 2020 that it has
seen “an increase in cross-selling within the energy business as more than 40% of
our residential solar customers opt for at least one Powerwall.”546
Plaintiffs point to facts that demonstrate Tesla and SolarCity have yet to
combine completely and effectively. For example, post-acquisition, Tesla
terminated thousands of its solar employees,547 including the installation
workforce,548 and solar deployments lowered after Elon repurposed former
SolarCity employees to assist with the Model 3 rollout.549 And Tesla still relies on
544
JX 2220 at 4–5.
545
JX 2841 at 8.
546
JX 3182 at 13.
547
JX 2731 at 5.
548
Tr. 660:22–661:23 (Moessner).
549
JX 2863 at 8 (“[F]or about 18 months, almost 2 years, we had to divert a tremendous
amount of resources—well, we had to basically take resources from everywhere else in the
company and apply them to the Model 3 production, fixing the Model 3 production
ramp . . . . So for about 1.5 years, we unfortunately stripped Tesla Energy of engineering
125
other companies to supply certain parts for its solar business.550 All true. 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.551 Nor does it account for SolarCity’s long-term cash
flows that Tesla now collects.
As a final note, while the synergistic effects of the Acquisition are still
unfolding, the astronomic rise in Tesla’s stock price post-Acquisition is noteworthy.
Although the relevant inquiry in an entire fairness analysis is whether the acquisition
target was worth the price paid when the deal was consummated,552 hindsight
suggests that Elon is right when he asserts that, once valued as a car company, Tesla
and other resources and even took the cell production lines that were meant for Powerwall
and Powerpack and redirected them to the car because we didn’t have enough cells.”);
Tr. 347:8–21 (Elon); Tr. 486:12–487:17 (Kimbal).
550
See Straubel Dep. 54:6–24; JX 2147; Tr. 660:19–21, 661:24–662:20 (Moessner).
551
Reicher’s expert report extensively detailed the immense growth potential of the solar
industry in particular. See JX 2841 at 9–28.
552
See, e.g., Ryan v. Tad’s Enters., Inc., 709 A.2d 682, 690 (Del. Ch. 1996) (noting that
“the defendants have failed to carry their burden of demonstrating the entire fairness of the
Asset Sale and Merger at the time the board approved them”) (emphasis added), aff’d, 693
A.2d 1082 (Del. 1997) (TABLE); Oliver, 2006 WL 1064169, at *29 (“The BU Defendants
have failed to demonstrate that the price paid . . . was fair at the time of the merger.”)
(emphasis added).
126
is now valued as “a first-of-its-kind, vertically integrated clean energy company.”553
Whether the Acquisition played a large or small part in Tesla’s impressive growth is
not clear, but there can be no doubt that the combination with SolarCity has allowed
Tesla to become what it has for years told the market and its stockholders it strives
to be––an agent of change that will “accelerate the world’s transition to sustainable
energy” by “help[ing] to expedite the move from a mine-and-burn hydrocarbon
economy towards a solar electric economy.”554
* * * * *
In instances where there are process infirmities, the Court is obliged to study
fair price even more carefully. I have done that here. After careful consideration, I
am persuaded Elon presented credible evidence that Tesla paid a fair price for
SolarCity. Plaintiffs answered by proffering incredible testimony that SolarCity was
insolvent, and then provided some “also ran” theories on value that their experts did
not ultimately endorse, or at least not persuasively so. Given this, I have no credible
basis in the evidence to conclude that a “fairer price” was available, and therefore,
553
DOB at 40. To the extent Plaintiffs are critical of this hindsight look, I note that they
have also looked in the rearview mirror to support their fair price argument as they recount
the post-Acquisition integration challenges discussed above.
554
JX 12 at 1; Tr. 86:18–20 (Elon). As of this writing, Tesla’s market cap was nearly a
trillion dollars. Tesla, Inc. (TSLA), Yahoo! Finance (last accessed Apr. 27, 2022),
https://finance.yahoo.com/quote/TSLA/.
127
no basis to conclude that the price paid was not entirely fair. 555 Indeed, the price
was, in my view, not “near the low end of a range of fairness,”556 but “entirely” fair
in the truest sense of the word. That conclusion is not consistent with a finding that
Elon breached his fiduciary duty.557 Accordingly, I am satisfied he did not.
B. Plaintiffs’ Other Surviving Claims
Plaintiffs’ other surviving claims against Elon include derivative claims for
unjust enrichment and waste. I address them in turn.
555
Conceivably, given the process flaws, a price “near the low end of a range of fairness”
might not have satisfied entire fairness review. In re Nine Sys., 2014 WL 4383127, at *47;
see also In re Dole Food, 2015 WL 5052214, at *2 (holding that stockholders were entitled
not only to a fair price but a “fairer price”). But I need not entertain that possibility here.
With the Tesla Board’s deal process front of mind, and after careful consideration, for the
reasons just explained, Elon’s compelling “evidence on price fairness was ultimately
persuasive,” such that I can conclude the Acquisition was entirely fair. Trados, 73 A.3d
at 66; see also Valean Pharm. Int’l v. Jerney, 921 A.2d 732, 748–49 (Del. Ch. 2007)
(“The court’s finding that ICN’s management and board used an unfair process . . . does
not end the court’s inquiry because it is possible that the pricing terms were so fair as to
render the transaction entirely fair.”) (emphasis added); Oak Hill Cap. P’rs,
2020 WL 2111476, at *36–43 (finding that the transaction was entirely fair despite a
process that “fell short” of being fair).
556
In re Nine Sys., 2014 WL 4383127, at *47.
557
I note that while defense verdicts after an entire fairness review of fiduciary conduct are
not commonplace––hence the advisability of structuring transactions to avoid such scrutiny
as a matter of law––this court and scholars have emphasized that the standard of review is
not necessarily outcome-determinative. See, e.g., Ezcorp Inc. Consulting Agreement
Deriv. Litig., 2016 WL 301245, at *28 (Del. Ch. Jan. 25, 2016) (“[E]xperience . . . has
shown that the application of entire fairness is not outcome-determinative and that
defendants prevail under this standard of review with some degree of frequency.”);
id. at *28 n.21 (collecting extensive case law and commentary).
128
1. Unjust Enrichment
Plaintiffs allege the Acquisition unjustly enriched Elon because the
Acquisition “was specifically intended to bailout SolarCity and spread across all of
Tesla’s stockholders the loss that would otherwise be experienced only by
Defendant[] Elon Musk.”558 The elements of unjust enrichment are: (1) an
enrichment; (2) an impoverishment; (3) a relation between the enrichment and
impoverishment; (4) the absence of justification; and (5) the absence of a remedy
provided by law.559
This claim essentially mirrors Plaintiffs’ breach of fiduciary duty claims.560
Because the Acquisition was entirely fair, there was no underlying impoverishment.
And “[i]f there is no underlying [impoverishment], there is no unjust enrichment.”561
The claim fails.
2. Waste
Plaintiffs also allege the Acquisition is wasteful, or “so one-sided that no
business person of ordinary, sound judgment could conclude that Tesla received
558
Compl. ¶ 304.
559
Cantor Fitzgerald, L.P. v. Cantor, 724 A.2d 571, 585 (Del. Ch. 1998).
560
SJ Opinion at *3 n.11.
561
Tornetta v. Musk, 250 A.3d 793, 813 (Del. Ch. 2019).
129
adequate value in the transaction.”562 To prevail on this claim, Plaintiffs were
obliged to prove that “no person of ordinary sound business judgment could view
the benefits received in the transaction as a fair exchange for the consideration paid
by the corporation.”563 “[I]f there is a good faith judgment that in the circumstances
the transaction is worthwhile, there should be no finding of waste, even if the fact
finder would conclude ex post that the transaction was unreasonably risky.”564
In this case, the Acquisition was entirely fair and therefore cannot be considered
wasteful.565
C. Fees and Costs
“Delaware follows the ‘American Rule,’ which provides that each party is
generally expected to pay its own attorneys’ fees regardless of the outcome of the
562
Compl. ¶ 323.
563
Harbor Fin. P’rs v. Huizenga, 751 A.2d 879, 892 (Del. Ch. 1999) (quoting Michelson
v. Duncan, 407 A.2d 211, 224 (Del. 1979)).
564
Brehm v. Eisner, 746 A.2d 244, 263 (Del. 2000) (quoting Lewis v. Vogelstein, 699 A.2d
327, 336 (Del. Ch. 1997)).
565
See, e.g., Freedman v. Adams, 58 A.3d 414, 417 (Del. 2013) (“To recover on a claim of
corporate waste, the plaintiffs must shoulder the burden of proving that the exchange was
so one sided that no business person of ordinary, sound judgment would conclude that the
corporation has received adequate consideration.”) (quoting In re the Walt Disney Co.
Deriv. Litig., 906 A.2d 27, 74 (Del. 2006)); Quadrant Structured Prods. Co., Ltd. v. Vertin,
102 A.3d 155, 193 (Del. Ch. 2014) (“It is hard to conceive of a situation where the
challenged transactions would not constitute a breach of fiduciary duty, but would
constitute waste.”).
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litigation.”566 While he has asked for his counsel fees to be reimbursed, Elon has
not provided a reason to stray from the American Rule here. Each party will pay
their own attorneys’ fees per the terms of counsels’ engagement. As for costs, as
noted, Elon likely could have avoided the need for judicial review of his conduct as
a Tesla fiduciary had he simply followed the ground rules of good corporate
governance in conflict transactions. He declined to do so. For that reason, I decline
to award him prevailing party costs.567
III. CONCLUSION
For the foregoing reasons, my verdict is for the defense on all claims. A final
order and judgment to this effect will be entered today.
566
Shawe v. Etling, 157 A.3d 142, 149 (Del. 2017).
567
Ct. Ch. R. 54(d) (“Except when express provision therefor is made either in a statute or
in these Rules, costs shall be allowed as of course to the prevailing party unless the Court
otherwise directs.”) (emphasis added); Donovan v. Del. Water and Air Res. Comm’n,
358 A.2d 717, 722–23 (Del. 1976) (“Determining when costs are awarded and when they
are not is, in our judgment, a matter of judicial discretion . . . .”).
131