Delaware Supreme Court Holds that Tesla’s 2016 All-Stock Acquisition of SolarCity Satisfied Exacting Entire Fairness Review, Ruling in Favor of the Sole Remaining Defendant, Elon Musk
In re Tesla Motors, Inc. S’holder Litig., No. 181, 2022 (Del. June 6, 2023) (Valihura, J.)
By Rebecca E. Salko, Christopher D. Renaud, and Charles R. Hallinan, Potter Anderson & Corroon LLP, and Summer Associate Alaiya Kollie, J.D. Candidate, Emory University School of Law
In this unanimous en banc decision, the Delaware Supreme Court affirmed the Court of Chancery’s post-trial opinion finding that the 2016 all-stock acquisition of SolarCity Corporation (“SolarCity”) by Tesla, Inc. (“Tesla”) satisfied the entire fairness standard of review, resulting in a verdict on all claims in favor of the sole remaining defendant: Tesla’s co-founder, CEO, and former chairman, Elon Musk.
In connection with Tesla’s master plan of transitioning to clean energy, the Tesla board of directors (the “Board”) began discussing the possibility of acquiring a solar company in March 2015. SolarCity, founded by two of Musk’s cousins, was a market leader in that space, dedicated to producing and selling solar panels.
In 2015, SolarCity feared it would soon face a major liquidity crisis. Despite SolarCity’s efforts, including “cash equity” transactions, cost cutting, and a focus on cash sales, the company’s financial difficulties continued.
In February 2016, Musk proposed to the Board a possible merger between Tesla and SolarCity. The Board initially declined to move forward, but it engaged independent advisors in March 2016, including Evercore, to consider potential acquisitions. Later in March 2016, after Musk again raised the idea of a possible merger, the Board declined to move forward with SolarCity, and also determined that Musk must recuse himself from any vote related to a potential transaction with SolarCity. The Board, however, permitted Musk to participate in high-level strategic discussions. In June 2016, Evercore determined that SolarCity was Tesla’s best strategic option for a potential solar acquisition target, and the Board thereafter delivered a preliminary nonbinding proposal to acquire SolarCity subject to due diligence, conditioning the sale on the approval of a majority of Tesla’s disinterested stockholders. The Board did not, however, form an independent negotiating committee. The offer was publicly announced later that month.
In July 2016, due diligence revealed the depth of SolarCity’s financial woes, which Evercore discussed with the Board coupled with a recommendation for Tesla to lower its offer price. On July 30, the Board approved—without Musk’s participation—a decreased final offer, and Evercore presented its opinion to the Board that the offer was fair to Tesla. The definitive merger agreement was executed on July 31, pursuant to which Tesla would pay an equity value of approximately $20.35 per share of SolarCity common stock (or approximately $2.1 billion). In November 2016, Tesla’s stockholders voted overwhelmingly in favor of the proposed acquisition. After closing, this stockholder challenge followed.
Following trial, the Court of Chancery determined that the acquisition was entirely fair. The Court assumed, without holding, that Musk was Tesla’s controlling stockholder, and acknowledged Musk was more involved in the deal process than he should have been. Nevertheless, the Court found that the Board—led by an indisputably independent director—effectively neutralized Musk’s attempts to control the sale process. Regarding fair price, the Court found that Musk presented the most persuasive evidence regarding SolarCity’s value and the fairness of the price Tesla paid to acquire it, largely based on market evidence.
On appeal, the appellants did not challenge the Court of Chancery’s factual findings, but rather challenged its application of the entire fairness standard of review. In essence, appellants argued that the trial court placed too great an emphasis on fair price, and particularly on evidence of market price. The Supreme Court largely rejected appellants’ arguments, with one exception, and affirmed the Court of Chancery’s decision.
First, the Supreme Court affirmed the Court of Chancery’s ruling that the acquisition resulted from a fair process, holding that the Court of Chancery’s fair dealing analysis coincided with (despite not expressly applying) the Weinberger factors—how the deal was initiated, timed, structured, negotiated, and approved—and holding that the record showed that each factor supported the process. Despite Musk’s initial interest in the deal, the record showed that the Board—not Musk—initiated the sale process in earnest. Multiple times, the Board declined to explore the transaction, focusing instead on other opportunities. Additionally, the timing of the deal was right for Tesla, as evidenced by the historically low trading price of solar company stocks.
Despite the absence of an independent committee, the Supreme Court recognized that the deal was negotiated by a majority independent board (led by an indisputably independent director and advised by independent legal and financial advisors) that focused on the bona fides of the acquisition and succeeded in obtaining a lower price; the transaction was approved by a majority of the disinterested stockholders; and Musk recused himself from meetings and the ultimate vote on the transaction. In doing so, the Supreme Court continued to encourage the use of special negotiation committees as a “best practice,” but rejected any suggestion that the Board was required to form one.
The Supreme Court next affirmed the Court of Chancery’s holding that the stockholder vote was fully informed. In particular, the Court held the record showed that: (i) Tesla sufficiently disclosed Musk’s involvement; (ii) Musk’s optimistic statements about Tesla’s future commercialization of SolarCity were purely prospective and not created to secure votes; (iii) SolarCity’s undisclosed liquidity risk was generally known by the market and thus was not material; (iv) SolarCity’s credit downgrade was immaterial because, among other reasons, the change left SolarCity’s largest creditor undeterred; and (v) the fact that some of Tesla’s stockholders also held SolarCity stock was immaterial, because most of that group held a larger stake in Tesla than in SolarCity.
Next, the Court held that the Court of Chancery did not reversibly err in ruling that the acquisition price was fair. As an initial matter, the Supreme Court rejected appellants’ argument that the Court of Chancery applied a bifurcated fairness analysis in which fair price alone satisfied entire fairness. The Supreme Court held, however, that the Court of Chancery erred in comparing the purchase price to the unaffected stock price as of the date the acquisition was announced by Tesla, because the stock price on that date did not reflect material, non-public information concerning SolarCity’s liquidity problems and credit downgrade. Nevertheless, the Court held that the record supported the Court of Chancery’s fair price determination because appellants relied solely on an insolvency theory of valuation that lacked credibility. Moreover, the record revealed that (i) Evercore’s fairness opinion supported the purchase price; (ii) using a retained value methodology indicated substantial future cash flows; (iii) the acquisition provided value in the form of non-speculative synergies that reduced costs; and (iv) some market evidence supported the price, such as the efficiency of the market and the overwhelming stockholder approval of the acquisition.
The Court concluded by affirming the Court of Chancery’s decision, finding that Tesla’s acquisition of SolarCity satisfied entire fairness scrutiny, and the transaction was therefore entirely fair.