September 14, 2016

Tesla’s S-4 “Background” Disclosure: Staving Off Liability?

While I was on vaca, Tesla filed this Form S-4 for its acquisition of Solar City. The “Background” section contains this disclosure – which appears to be an attempt to ensure that approval by a majority of SolarCity’s disinterested stockholders is fully informed resulting in the irrebutable presumption of the business judgment rule:

On August 18, 2016, Lazard became aware of a computational error, which double-counted certain amounts of SolarCity’s projected outstanding indebtedness, in certain SolarCity spreadsheets setting forth SolarCity’s financial information that Lazard used in its discounted cash flow valuation analyses, more fully described in the section entitled “-Opinion of Financial Advisor to the SolarCity Special Committee” beginning on page 86. Tesla and Evercore subsequently confirmed that the computational error was not included in Tesla’s or Evercore’s valuation analysis. At the Special Committee’s request, Lazard recalculated its discounted cash flow analyses after correcting the computational error. On August 24, 2016 and August 26, 2016, the Special Committee and SolarCity Board, with Mr. Gracias absent, respectively, met with representatives of Lazard in attendance. Representatives of Lazard reviewed with the Special Committee and the SolarCity board, respectively, its recalculated discounted cash flow analyses as of July 29, 2016, and the differences in Lazard’s discounted cash flow analyses that resulted from the computational error described above.

Representatives of Lazard confirmed to the Special Committee and the SolarCity Board, respectively, that, based upon economic, monetary, market and other conditions as in effect on, and the information made available to Lazard (other than with respect to the computational error noted above) as of, July 29, 2016, and subject to the assumptions, limitations, qualifications and conditions set forth in Lazard’s opinion dated as of July 29, 2016, the recalculated discounted cash flow analyses would not have changed the conclusion set forth in Lazard’s opinion as of the date it was delivered. Following receipt of Lazard’s confirmation, the Special Committee on August 24, 2016 and those SolarCity Board members present on August 26, 2016 unanimously affirmed their recommendations that the stockholders of SolarCity vote to approve the merger proposal.

On August 25, 2016, the Tesla Board held a special meeting with Messrs. Elon Musk and Antonio Gracias absent, having recused themselves, at which members of Tesla management, Evercore and Wachtell Lipton were present. Evercore and Tesla management discussed new information that it had received relating to Lazard’s valuation of SolarCity, including the computational error discussed above, as well as additional projections that SolarCity management had prepared prior to the execution of the Merger Agreement (as described in the section entitled “The Merger-Certain Tesla and SolarCity Unaudited Prospective Financial Information” beginning on page 97) but had not previously shared with Tesla or its representatives. Evercore explained why none of these factors changed its prior valuation analysis, and after discussion, the Tesla Board determined that none of the factors changed its view as to the value of SolarCity.

Broc Romanek