May 2, 2022

Tesla/Solar City: “We’ll Meet Again, Don’t Know Where, Don’t Know When. . .”

Tesla’s 2016 acquisition of Solar City has been a deal blogger’s paradise for the last 6 years, and I had high hopes that Vice Chancellor Slights’ post-trial opinion in In re Tesla Motors Stockholders Litigation, (Del. Ch.; 4/22), might be a real blockbuster.  Alas, it was not to be. Instead of addressing all of the potentially juicy issues associated with the transaction, the Vice Chancellor found that the deal was “entirely fair,” and therefore ruled in favor of the Tesla board & Elon Musk.

Vice Chancellor Slights will soon retire from the Chancery Court, and I bet he would have liked to pen another landmark opinion in this litigation before his departure. This somewhat rueful excerpt from his opinion – which immediately follows his summary of the case’s provocative factual background – suggests that’s probably a good bet:

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, 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.

Musk & the Tesla board prevailed in the end, but this Goodwin memo points out that the Vice Chancellor thought they could’ve made their lives a lot easier by paying closer attention to the deal process:

The court went out of its way to explain that Musk and Tesla’s board had incurred unnecessary risk and expense by failing to form a special committee and otherwise remove Musk from the process: “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.” Tesla’s directors likely could have prevailed on a motion to dismiss or summary judgment, without the need for an expensive and disruptive trial, had the appropriate measures been followed.

The court not only denied Musk’s requests for attorney’s fees, but also took the unusual step of denying him prevailing party costs — which are routinely awarded in most cases — because he “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.” Accordingly, the decision should serve as a reminder that failing to handle conflicts appropriately can lead to significant risk and expense even when mergers and acquisitions are in the best interest of the company and its shareholders.

The bottom line is despite the deal’s procedural shortcomings, unless the Delaware Supreme Court resurrects the case, we’ll have to bid a fond farewell to the Tesla/Solar City litigation.  But we can take consolation in the fact that Elon Musk seems to churn out fiduciary duty claims at a faster rate than Tesla churns out electric vehicles. This means that although we’ll have to bide our time for now, we can move forward with confidence that, in the haunting words of Vera Lynn:

We’ll meet again
Don’t know where, Don’t know when,
But I know we’ll meet again some sunny day!

John Jenkins