Tesla CEO Elon Musk began testifying in a Wilmington, Delaware, court on Monday for lawsuit that could ultimately cost him billions of dollars if it doesn’t go his way. A group of shareholders brought the lawsuit against the carmaker’s board of directors over their decision to acquire SolarCity, a solar panel company, in 2016. All of the directors besides Musk settled the suit last year for $60 million without admitting any wrongdoing; the Tesla CEO, however, refused to settle and decided to move ahead with a trial. The court proceedings, which were delayed until now because of the pandemic, are expected to last for two weeks—and are already off to a typically colorful start that involves accusations of nepotism, dashed business promises, and Musk insulting the plaintiffs’ lawyer in open court. What strange series of events brought us here? Some answers.
Why are Tesla’s shareholders suing?
Five investment funds and an individual investor with large holdings in Tesla filed the lawsuit in 2017 alleging that the acquisition of SolarCity essentially amounted to a bailout, one rife with conflicts of interest. SolarCity was founded by Musk’s cousins Lyndon and Peter Rive. Musk himself was SolarCity’s chairman and had a 22 percent stake in the company, which was about to go belly-up before Tesla stepped in to buy it for $2.6 billion. In addition, Tesla’s board at the time included a SolarCity director, a former SolarCity CFO, and venture capitalists who also had seats on SolarCity’s board. These intertwining interests and familial ties led investors to accuse Musk and his fellow executives of self-dealing, as they financially benefitted from the merger. Moreover, the plaintiffs in the suit allege that Musk was improperly pressuring Tesla’s board to go through with the deal, pushing the company to pay more for the sale, and deceiving investors about SolarCity’s finances. Musk had said that SolarCity would be cash-flow positive within six months of the acquisition. Tesla’s solar-panel division, which absorbed SolarCity, still wasn’t profitable by the first quarter of 2021.
Why was the SolarCity acquisition a flop?
Musk originally introduced the Tesla solar roof, which uses SolarCity’s technology, on a former Desperate Housewives set in 2016. The pitch was that consumers could easily replace the shingles on their roofs with solar panels that would feed energy into the battery system that Tesla sells, the Powerwall. They could then charge their Tesla cars using the Powerwall and thus become less reliant on fossil fuels. This vision had the potential to accelerate the adoption of solar panels and electric cars in homes across the country, but it didn’t quite pan out. The solar-roof project has been plagued by continuing delays, and a major installation rollout didn’t start until this year. In an April earnings call, Musk admitted that Tesla had made “significant mistakes” with the solar roof, which has yet to be released to the wider public. The CEO said that company was running into issues with the variability of roof structures, which at times are not able to support the solar panels or have odd shapes that don’t easily accommodate attachments. Customers who got early access to the solar roof have also complained that they’ve been blindsided by installation prices that are astronomically higher than the initial estimates, making it likely that the product would only really be attractive to the wealthy.
What’s Tesla’s defense?
Despite the setbacks with the product, Tesla has maintained that there was nothing improper about the SolarCity acquisition. The company has pointed out that 85 percent of shareholders voted in favor of the deal and that Musk recused himself from the board’s discussions about SolarCity.
How did Musk’s testimony go?
At first, well. Musk echoed his company’s arguments on the stand on Monday morning, attempting to refute portrayals of him as a domineering leader with overwhelming power over Tesla’s decisions. He instead tried to paint Tesla’s board as an effective check on his power that is “rigorous in acting on behalf of shareholders.” The CEO denied having any influence over the sale price of SolarCity or over appointments to Tesla’s board. (Tesla’s board notably includes Elon Musk’s brother, Kimbal.) Musk additionally characterized the purchase of SolarCity not as a bailout, but as part of an ambitious long-term plan to make Tesla both a car and energy company. As my former colleague Will Oremus of the Washington Post reported from the trial, Musk blamed the Tesla solar division’s flagging performance on production issues with the Model 3 sedan and then on the coronavirus. He claimed, though, that Tesla’s solar business is on the brink of success, with the pandemic abating.
Musk did get testy with the plaintiffs’ lawyer, Randall Baron, who played clips in the courtroom of the CEO insulting him in previous depositions. In response to the clips, Musk told Baron, “I think you are a bad human being,” and stood by the insults.
How could the trial turn out?
If the judge finds that the deal was unfair, Musk may have to reimburse either the shareholders or Tesla using his personal wealth. He could be on the hook for about $2 billion at most, though the judge could end up lowering the amount. Yet even given the most extreme penalty, Musk does a net worth of about $163 billion, so he’d have plenty of money to keep buying tickets for Richard Branson’s spaceship.