June 7, 2023

Entire Fairness: Del. Supreme Court Upholds Chancery’s Decision in Solar City

Yesterday, in In re Tesla Motors Stockholders Litigation, (Del. 6/23), the Delaware Supreme Court unanimously affirmed former Vice Chancellor Slights’ decision finding that Tesla’s 2016 acquisition of Solar City was “entirely fair” to Tesla’s stockholders.  Justice Valihura’s 105-page opinion provides a primer on the fair process and fair price components of the entire fairness standard and illustrates how even imperfect transactions may nevertheless satisfy that standard.

The appellants in this case challenged almost every aspect of the Chancery Court’s fact-intensive decision, and as a result, there’s so much going on in the Supreme Court’s opinion that it’s futile to try and summarize it in a blog, Instead, I’m just going to throw out a handful of the key points raised by Justice Valihura:

Elon Musk didn’t exploit his “inherently coercive” position as a controlling stockholder: “The court’s overarching determination that Musk did not exploit any inherent coercion was adequately supported by numerous factual findings, which relate to other aspects of the fair dealing inquiry. For example, the trial court concluded that there were “several instances where the Tesla Board simply refused to follow [Musk’s] wishes.” It noted that the Tesla Board rejected Musk’s wish to include a bridge loan in any offer; the Tesla Board insisted on having a walkaway right in the Final Offer should SolarCity breach the Liquidity Covenant; and the Tesla Board conducted significant due diligence, resulting in a lower deal price.”

Contrary to the appellants’ assertions, the timing of the deal was a process strength: “[R]ather than proceed with a SolarCity deal when Musk originally pitched it in February 2016, the Tesla Board decided to wait and first address the company’s rollout of the Model X. The trial court’s assessment of the industry conditions at the time support its finding of fair dealing, as the Tesla Board did not acquiesce in Musk’s proposed timing.”

MFW is a best practice, but there are legitimate reasons why a board might not want to take advantge of its safe harbor: “Although the Vice Chancellor aptly observed that perhaps the Tesla Board subjected itself to “unnecessary peril,” we also recognize that there may be reasons why a board decides not to employ such devices, including transaction execution risk. Also, a board may wish to maintain some flexibility in the process, as the Tesla Board did here, by having the ability to access the technical expertise and strategic vision and perspectives of the controller.

The Chancery Court’s factual determination that the directors weren’t dominated by Musk was entitled to deference: “Appellants’ contention on appeal that “[t]he negotiation was handled by a conflicted Board that failed to supervise Musk” is directly refuted by fact and credibility findings that they do not challenge. We find no error in the trial court’s heavily fact-and-credibility-laden determination that the directors, following a rigorous negotiation process led by Denholm, were not “dominated” or “controlled” by Musk when they voted to approve the Acquisition.”

A single disclosure problem may not be enough to conclude that a stockholder vote wasn’t fully informed: “We agree that the trial court must evaluate an alleged disclosure violation in the context of the evidence as a whole. It is possible a single disclosure violation could, in certain circumstances, indicate larger issues with the deal process. It is equally possible that a single disclosure violation would not affect the total mix provided to stockholders.”

The entire fairness standard isn’t bifurcated, but sometimes price is more important than process: “Though the entire fairness test is a unitary one, we have long recognized that, sometimes, a fair price is the most important showing. “Evidence of fair dealing has significant probative value to demonstrate the fairness of the price obtained. The paramount consideration, however, is whether the price was a fair one.”

In making this last point about the importance of a fair price to the analysis, Justice Valihura stressed that the Court was not intending to say that controllers can shirk fiduciary duties and hide behind the price they pay: “[T]he range of fairness is not a safe-harbor that permits controllers to extract barely fair transactions.” Here, given the process flaws as found by the trial court, the court had to conclude that those flaws did not infect the price in order to find that the price was fair. That is what it did, finding that, ultimately, the process did not impact the price, which was “not near the low end of a range of fairness[.]”

I could go on like this for a while, because there are plenty of other noteworthy comments in Justice Valihura’s opinion, but I’ll just mention one more, which relates to the implications of the deal’s potential synergies on the fairness analysis.  The appellants claimed that the Chancery Court should not have relied on synergies as evidence of fairness, but the Supreme Court disagreed. Justice Valihura noted that “synergistic values are a relevant input for a court to consider in assessing the entire fairness of an acquisition” because – as in this transaction – they are often a prime motivator for a buyer.

John Jenkins