PhotoBack in November, we reported that Tesla shareholders had greenlighted the acquisition of SolarCity. At the time, CEO Elon Musk promised that the deal would add $1 billion in revenue by 2017, even though some experts questioned the move based on SolarCity’s past earnings.

Now, two shareholders have filed a lawsuit against Musk and certain Tesla officials, stating that the financial statements they were given before the vote were false and misleading, according to Courthouse News.

“To make SolarCity look more attractive, Tesla’s officers and directors manipulated the valuation analyses of both Tesla and SolarCity, failed to disclose numerous significant facts regarding SolarCity’s operations and the full extent of SolarCity’s cash drain and the effect it would have on Tesla after the acquisition, and many other material facts concerning the acquisition,” the suit claims.

A bad deal

The plaintiffs, Francis Freeman Jr. and Marnie Walski McMahon, call attention to SolarCity’s bleak financial history before its acquisition by Tesla, saying that the high purchase price did not coincide with the amount that the company should have paid.

“SolarCity had consistently failed to turn a profit, had mounting debt, and was burning through cash at an unsustainable rate. During its ten-year history, SolarCity had accumulated over $3 billion in debt, nearly $1.5 billion of which was scheduled to become due before the end of 2017. Despite SolarCity’s bleak future, on June 21, 2016, Tesla announced an offer to acquire SolarCity at a significant premium,” the complaint states.

So, why did Tesla make such a bad deal? The plaintiffs claim that company officials, and especially Musk, benefitted from the deal by effectively trading bad SolarCity stock for more valuable Tesla common stock. The suit also claims that Musk’s brother and cousins benefitted from the deal due to their close ties to both companies.

“The Acquisition benefitted Elon Musk and the other Indiviual Defendants to the detriment of Tesla and its shareholders not affiliated with the defendants by salvaging their significant investments in SolarCity,” the suit claims.

“On the surface, it would seem that a transaction that would be harmful to Tesla would generally be most damaging to Elon Musk, as he is Tesla’s largest stockholder with approximately 18.4% of the Company’s outstanding shares. . . However, that is inaccurate here because any dilution of his Tesla stock was offset by the rescue of SolarCity stock and bonds he owns. Indeed, the Acquisition resulted in a net increase in Elon Musk’s ownership of Tesla common stock.”

The suit goes on to claim that Musk will have even more opportunities to increase his ownership interests due to the nature of the deal.

Misleading and false information

Freeman and McMahon have filed the suit on behalf of Tesla and shareholders other than Musk and the company directors. They say that the misleading information they were given was meant to secure approval of the acquisition and came at the expense of Tesla and its investors.

"Defendants’ violations of law caused significant damages to Tesla by causing Tesla to significantly overpay for SolarCity and acquire a company that was not a strategic fit for Tesla and which had significant debt,” the complaint says.

The plaintiffs charge the defendants with breaching their fiduciary duties, insider trading and misappropriation of information, unjust enrichment, and corporate waste. They are seeking damages, relief for the costs related to the suit, and any other judgment that court deems appropriate. 


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