Does Elon Musk own Tesla, or is it the other way around? Now that the entrepreneur is embroiled in a $2.6 billion lawsuit with a contingent of company shareholders, observers are wondering why such a contentious legal battle between Tesla and its shareholders is happening and how it will pan out.
What the big-bucks lawsuit is all about
Led by the San Diego-based law firm of Robbins Geller Rudman & Dowd, the most recent lawsuit against Elon Musk alleges that he and other Tesla directors bailed out the alternative energy company SolarCity in a manner that went against the best interests of Tesla shareholders. SolarCity was a dominant force in the United States clean energy market at the time of the bailout, but it was running dangerously low on funds.
The suit alleges that SolarCity was perilously close to bankruptcy, that Tesla CEO Elon Musk improperly used stock to acquire the clean energy company, and that Musk, along with his cousins Peter and Lyndon Rive, directly benefited from the transaction. Plaintiffs also allege that Musk was the direct force behind negotiating the shady transaction and that, during negotiations, he encouraged Tesla’s board of directors to raise, not lower, the amount of money paid to acquire his family-owned solar power company, Automotive News reported.
Attorneys for the plaintiff testified in court that SolarCity “had consistently failed to turn a profit, had mounting debt, and was burning through cash at an unsustainable rate.” They added that the solar energy outfit had accumulated more than $3 billion in debt over the course of its 10-year history and that half of that sum was due for repayment before the end of the 2017 fiscal year.
Lawyers speaking on behalf of the plaintiffs allege that Musk, who owned more than 20 percent of Tesla stock when the 2016 bailout of SolarCity occurred, was a controlling stockholder who also happened to hold a majority stake in his own Palo Alto-based car company while serving as chairman of the board of SolarCity. At the time, Musk also held 22 percent of SolarCity stock, TechCrunch reported.
The non-jury trial, heard by Vice-Chancellor Joseph Slights III in the Court of Chancery in Wilmington, Delaware, is expected to last two weeks.
Not the first time Tesla shareholders have sued Elon Musk
In 2016, Tesla shareholders filed a lawsuit to stop the SolarCity buyout, alleging Musk and family members wanted to acquire the company to protect their reputations and personal financial interests. According to Silicon Valley Business Journal, the 2016 lawsuit stated:
“Tesla’s proposed acquisition of SolarCity represents Musk’s latest attempt to ensure his legacy to change the world, while saving the financial interests of himself, and his family and friends, even though this action directly conflicts with Tesla’s and its stockholders’ best interests.”
Musk settled that lawsuit in 2020, paying some $60 million to shareholders without admitting guilt, CNBC reported. Two years earlier, Musk settled a lawsuit brought by the U.S. Securities and Exchange Commission for around $20 million.
If Musk loses this case
If Tesla’s unhappy investors win their shareholder derivative action against Musk, the world’s second-wealthiest individual might be required to repay Tesla Inc. every penny of the $2.6 billion he used to bail out his cousin’s company.
Even if Musk is forced to pay back almost $3 billion, it likely won’t cause a dent in his bank account. Whether or not losing the lawsuit will affect Tesla sales remains to be seen.