Tesla-SolarCity Deal May Face Delay From Suits as Cash Burns

  • Executives and directors breached duty, four lawsuits allege
  • Any delay may hurt as Tesla and SolarCity deal with finances

A worker for SolarCity carries a solar panel during an install at a home in Kendall Park, N.J.

Photographer: Michael Nagle/Bloomberg

Tesla Motors Inc. faces a potential delay in its acquisition of SolarCity Corp. from four shareholder lawsuits, creating added urgency as both companies use up cash. 

The suits by four different shareholders, outlined in a regulatory filing Monday, all allege that Tesla’s executives and board breached their fiduciary duty by entering into the pact because Chairman Elon Musk and other Tesla insiders hold shares in both companies. One plaintiff seeks an injunction to stop the transaction, potentially holding up a deal until a hearing on Oct. 18 at the earliest. The cases are without merit, Tesla said in the filing.

While shareholder litigation is common in deals and Delaware courts tend to side with management, the companies’ entwined nature may bring greater scrutiny. That could be troublesome for both firms: Tesla plans to raise cash later this year both to further develop electric cars and to fund the merged company’s operations, and SolarCity disclosed after its second-quarter earnings that it was getting close to default on its existing debt.

“It will be very difficult for the courts to blow this off,” said James Cox, a professor at the Duke University School of Law. “It’s a high-profile case, it’s a self-dealing case. This gets a much deeper look than most others would.”

Tesla will oppose the lawsuits, the company said in an e-mailed statement. “Simply because someone uses litigation to try to delay an acquisition does not mean it will be successful,” the statement said. “At this point, it is not yet known if anyone will even end up pursuing such a request.”

Need for Cash

Both companies are unprofitable and need cash. In this year’s first half, SolarCity spent $1.3 billion on operations and investments in its business, about twice what Tesla spent. The combined company will have about $5.2 billion in debt, according to pro forma financial statements in the regulatory filings.

“There is a bit more urgency for the Tesla-SolarCity deal to go through sooner so that SolarCity can get the access to capital that it needs," Barclays analyst Brian Johnson wrote in an Aug. 31 research note. Shareholder votes were possible by early to mid-October, he wrote at the time.

Four Lawsuits

The lawsuits were filed by the City of Riviera Beach Pension Fund, Arkansas Teacher Retirement System, and individual shareholders P. Evan Stephens and Ellen Prasinos. They seek to force Tesla to rescind the merger proposal and pay damages to the shareholders, and one seeks to establish a class action against Tesla.

According to the filing, the Delaware Chancery Court set a schedule on Sept. 16 to consolidate the actions and determine a leadership structure for the plaintiffs.

In court documents, Tesla argued that there is no need to hold up the deal because the plaintiffs could seek damages from the merged company later. The plaintiff in the Prasinos case countered that shareholders would sustain irreparable harm if the deal goes through as planned in the fourth quarter and asked the judge to expedite the case.

The merger proposal initially met resistance in part because Musk owns more than 20 percent of both companies and his cousins Lyndon Rive and Peter Rive are SolarCity’s chief executive officer and chief technical officer, respectively. Tesla shares, which had fallen 10 percent the first trading day after the deal was proposed, rose 1.2 percent to $207.85 at 11:20 a.m. in New York.

SolarCity announced a week ago that it raised $305 million through two deals. The first was selling future cash flows from SolarCity developments to Quantum Strategic Partners Ltd., a fund advised by the billionaire George Soros; the second was an 18-year-loan from a syndicate of five lenders.

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