Court rules in favor of Tesla in $2.6 billion shareholder lawsuit

On Behalf of | Jun 30, 2023 | Business Litigation |

In 2016, Tesla Inc. acquired SolarCity for $2.6 billion, a move that SolarCity shareholders decried as unfair.

Shareholders filed an investor lawsuit against Tesla co-founder Elon Musk who, at the time, was chairman of Solar City and the largest shareholder of the company. His cousins ran the company.

Shareholders alleged the deal was overpriced and Musk should have removed himself. Instead, shareholders claimed, Musk improperly influenced and deceived other directors into permitting the acquisition.

Earlier in June, the Delaware Supreme Court issued a ruling in this case that did not work out in the shareholders’ favor.

The Delaware Supreme Court’s ruling in the shareholder lawsuit

The Delaware Supreme Court ruled that because negotiations over the deal were made in good faith, at an “arm’s length,” and under the counsel of independent experts, the negotiations were just and led to a reasonable price. Thus, the shareholders were not successful in disputing the acquisition.

What does it mean to act in good faith in negotiations?

This case brings up interesting questions about what it means for a board member to act in good faith when negotiating mergers and acquisitions.

Directors and officers of a corporation have a fiduciary duty towards shareholders to act in good faith and make decisions that benefit the corporation. This means they cannot intentionally neglect their duties, make decisions that do not benefit the corporation or violate the law.

When a director or office does not act in good faith it can constitute a breach of their duty of care, which can form the basis of a shareholder lawsuit. To prevail in such a suit, shareholders generally need to show the directors’ or officers’ actions rose to the level of gross negligence.

For example, as the case against Musk shows, negotiations of mergers or acquisitions must be made “at arm’s length.” This means both companies act independently and do not improperly influence one another.

Sales prices are determined independently, generally in line with the fair market value of the company being sold, rather than being determined in a way that benefits the personal interests of one or both parties.

It can be challenging for shareholders to prevail in disputes over mergers and acquisitions. Proving gross negligence is a high standard. While some of these shareholder disputes are resolved in the shareholders’ favor, others, like in this recent case against Musk, are not.

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