Tesla founder Elon Musk will avoid paying over $2 billion in a shareholder lawsuit over the acquisition of former top residential installer SolarCity.
“The Tesla Board meaningfully vetted the Acquisition, and Elon did not stand in its way, “said Delaware court Vice Chancellor Joseph Slights, who decided the case.
The suit alleged that the Tesla purchase of major installer SolarCity was an attempt to bail out Musk’s cousin’s struggling company, of which Musk was the largest investor and chairman. The shareholders’ suit also accused Tesla’s board of having a lax approach to corporate governance.
Much of this lawsuit revolved around why SolarCity was purchased to begin with. Peter and Lyndon Rive founded SolarCity in 2006 with encouragement from their cousin, Elon Musk. By the time Tesla purchased the company, Musk owned 22.2% and was chair of the board. Though it had grown to be the largest US installer in 2016, earning record revenues of $730 million, losses were mounting, with $820 million in net losses that year. The company had accumulated more than $1.5 billion in debt by the year of the purchase.
SolarCity’s business model relied on marketing, spending heavily on advertising and door-to-door sales, all while offering low-priced, no-upfront cost long-term leases. Post-purchase, the strategy changed, as Tesla began to slash marketing costs, moving sales to direct-from-website and in-store sales. Musk noted in a 2019 deposition on the lawsuit that the door-to-door and other sales channel strategies did not match Tesla’s brand.
Musk said in the deposition that problems with the Tesla Model 3 caused the company to reassign much of its SolarCity workforce to bolster its vehicle production operations. He could not confirm exactly what portion of the workforce was reassigned. In his testimony, Musk argued that SolarCity could not have raised capital if it had not been acquired by Tesla. There is no doubt that Tesla’s shareholder value has increased impressively since the acquisition.
The development of Tesla’s solar roof program has taken things in a different direction than SolarCity’s model. SolarCity installed panels and equipment from top manufacturers and focused on getting customers signed to long-term leases. Tesla’s solar program now focuses on direct sales and uses proprietary solar tiles in their “solar roof” installations.
“Tesla continued to rely on other solar companies to manufacture, produce, install and sell parts of its solar products. In other words, the synergistic integration that Tesla hoped for is still a work in progress. Despite these challenges, Tesla’s value has massively increased following the Acquisition,” said Slights.
Tesla’s power division is now mostly focused on the home energy storage system, PowerWall. The product accounted for the largest portion of the power division’s $1.99 billion in revenue last year. Meanwhile, solar installations have fallen behind, with 205 MW installed in 2020, a fraction of the 803 MW SolarCity deployed in 2016. Recently, Tesla fell out of the top three ranking for residential solar installers, being squeezed out by Freedom Forever, a company that posted an impressive 80% installation volume growth in 2021.
Also included in the purchase of SolarCity was a Buffalo, NY panel manufacturing plant. Tesla aimed for a 1 GW a year of solar production, but its partner, Panasonic, has since walked away from the project. It is now unclear what volume of panels or roof tiles Tesla currently produces at the facility.
Musk’s victory means he avoided paying over $2 billion in the shareholder suit, something that may be of relief as he attempts to buy social media platform Twitter for an estimated $44 billion.
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I own a Tesla Solar Glass Roof installed in 2020. it not only provided all the electricity I needed but also allowed me to replace the natural Gas fired furnace with all electric heating and still ended up a “net producer” at my utilities’ annual “True-up”. Shifting from “Solar leases” to “homeowner purchases” with their own financing, was the right move since solar panels and solar roofing tiles have been coming down in prices and the profit in labor and installations have held up. Solar with storage is the future if you want to have daytime power transferred at night to your Electric Vehicle without paying the overpriced “Time of Day” utility rates being charged at night from 4:00 PM to 9:00 PM when you drive home and plug in. I agree with the court, it was the correct move at the correct time for Solar City to upgrade to Tesla. I do not work for Tesla or own Tesla Stock.