On August 17, Judge Joseph Slights III approved a $60 million settlement in a lawsuit filed by SolarCity shareholders. Filed in Delaware’s Court of Chancery, The lawsuit contests Tesla’s $2 billion acquisition of the solar-panel manufacturing company in 2016.
Prior to its acquisition by Tesla, SolarCity was founded by Elon Musk’s cousins Lyndon and Peter Rive.
What is the Delaware Court of Chancery?
The court specializes in resolving the “internal affairs […] of Delaware corporations and other business entities”.
According to SolarCity’s registration documents with the SEC, the company was incorporated in the state of Delaware.
As a result, the lawsuit is within the Court of Chancery’s jurisdiction. Last but not least, the Court allows companies to resolve disputes quickly with a judge rather than a jury.
Why the State of Delaware and not California?
More than 50% of publicly-traded companies in the U.S. and more than 60% of Fortune 500 companies are incorporated in Delaware. This applies to both Tesla and SolarCity, even though they are/were headquartered in California.
The state of Delaware offers many advantages for companies:
- There is no state corporate income tax for companies that are formed in Delaware but do not do business there.
- Shareholders, directors and managers of the corporation do not need to be Delaware residents.
- Shares owned by persons outside Delaware are not subject to Delaware taxes.
- There is no personal income tax for non-Delaware residents.
Long story short, Delaware is a legal corporate tax haven that enables companies to reduce their tax bills.
Why a Lawsuit was Filed by SolarCity’s Shareholders?
The lawsuit alleged that Tesla directors at the time breached their fiduciary duties to shareholders. Prior to the acquisition, Tesla CEO Elon Musk was also the Chairman of SolarCity.
Shareholders claim that Musk duped them into approving Tesla’s $2 billion buyout. The former believe that the acquisition was basically a bailout of SolarCity as it was struggling to release viable products.
Musk was SolarCity’s largest shareholder, and the plaintiffs argued that the buyout essentially benefitted the Tesla CEO and his cousins. They also allege that the acquisition benefited Tesla’s directors who were also shareholders in SolarCity.
What are the Details Surrounding the Settlement?
Apart from the $60 million settlement, Judge Slights awarded the plaintiffs an additional $16.8 in legal fees and expenses.
More importantly, the settlement resolves claims against Tesla’s directors, with the exception of CEO Elon Musk.
Musk is set to appear as a standalone defendant in March 2021. The Tesla CEO was initially due to appear for his SolarCity-related case last March. Due to the outbreak of COVID-19, however, the trial was postponed until next year.
Elon Musk has maintained his innocence regarding Tesla’s buyout of SolarCity. Musk stated that the shareholders’ lawyers are simply “barking up the wrong tree”.