Back when Tesla Motors [NASDAQ:TSLA] first announced its intent to acquire fellow California company SolarCity [NASDAQ:SCTY] in a deal worth $2.6 billion, Tesla CEO Elon Musk wrote to Tesla shareholders explaining that he felt the merger would be good for both companies. As well as give the cash-strapped SolarCity a claimed improved financial stability through its connection with Tesla, Musk told investors that Tesla needed SolarCity’s experience in photovoltaic solar panels to enable it to transition from being an automaker to being a vertically stacked energy company.
While a great many Tesla fans and investors seemed excited by the prospect of the potential merger, many on Wall Street disagreed, questioning if the merger — coming at a time where Tesla is already stretching its finances to the limit in order to bring the Gigafactory on line and make good on its promise of a late 2017 launch for Model 3 — would do more damage to the company than good. Some even suggested the merger was nothing more than a bailout of the floundering SolarCity, a company which Tesla CEO Elon Musk is chairman of and his cousins Lyndon and Peter Rive happened to have founded.
Regardless of the concerns expressed by some, preparation for the merger has gone ahead. So far Tesla and SolarCity have finalized their proposed merger agreement pending approval from shareholders and gained regulatory approval from the Securities and Exchanges Commission for the deal to go ahead. On paper, all that remains is for Tesla and SolarCity shareholders to vote on the merger, something which those close to the deal had originally hoped would happen in the next month.
But those plans now look to be in shreds after Tesla has been served with a total of four different lawsuits from shareholders unhappy about the merger. And although litigation from unhappy shareholders is part and parcel of any large corporate merger, the closeness of the two companies — and their executives — means that any court proceedings will involve extra scrutiny as judges try to evaluate the real implications of the deal going ahead.
News of the pending litigation against Tesla hit the news on Monday when it made a regulatory filing detailing the four cases it is currently fighting in Delaware, the state in which both Tesla Motors and SolarCity are incorporated. In each, the allegations are the same: namely that Tesla board members breached their fiduciary duties in connection with the proposed merger. They also name specific individuals of the board — those who have shares in both Tesla Motors and SolarCity — as having aided and abetted breaches of fiduciary duties, noting that as some of them would be unjustly enriched by the proposed merger.
Tesla, which says it believes the claims are “without merit,” is of course eager to fight all of the pending cases as swiftly and as cleanly as possible, since every day that goes by without the merger is another day that it can’t move forward on its long-term goal of becoming a one-stop shop for all a customer’s zero emission energy needs.
The claimants — the City of Riviera Beach Police Pension Fund, the Arkansas Teacher Retirement System, Ellen Prasinos and P. Evan Stephens — are concerned that the merger will negatively affect Tesla’s share price and consequently, the value of their investment in the California automaker. But while they claim that Tesla’s board of directors did not carry out their fiduciary duties properly in proposing the merger, it’s worth noting that many members of the board — including Tesla CEO Elon Musk, Tesla CTO J.B. Straubel, and SolarCity founders Lyndon and Peter Rive — have all excused themselves from voting on the merger due to having major shareholdings in both companies.
Whether that was enough to ensure that the shareholders in question had no influence on the merger or not remains a matter for the courts.
With a preliminary date of October 18th set for the court hearings, Tesla’s merger with SolarCity is likely to be delayed a little while longer. And while that’s fine for investors, it may be bad news for both companies. Earlier this year in its Q2 earnings call, SolarCity admitted that it was getting close to defaulting on its existing debt, having ended a half year that saw it spent $1.3 billion on operations and investments in its business, which Bloomberg notes is twice the money spent on the same by Tesla.
If it defaults before the merger takes place, it could extend the estimated $5.2 billion of post-merger debt of Tesla even further, which would cause a whole new set of problems for the company.
Do you think the merger between Tesla and SolarCity should go ahead? Or are you just as worried as the plaintiffs in the four cases above are? Leave us your thoughts in the Comments below.
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