In House - The FindLaw Corporate Counsel Blog

Lawsuit Over Tesla's Purchase of SolarCity to Proceed

Elon Musk is known as a visionary leader of technologically advanced companies, and it is exactly that reputation, plus a few potential conflicts of interest, that have landed him, and Tesla, in hot water with investors.

In short, Tesla's litigious shareholders are blaming Musk's incredibly strong influence on the Tesla board for unduly influencing the vote to purchase SolarCity, which was owned by Musk's cousins. The Tesla investors allege that Musk had a conflict of interest due to these relationships, and other close relationships with other board members. Also, the investors claim that Musk's reputation as a visionary played a part in unduly influencing the board to purchase SolarCity.

Musk We Really?

Given Musk's recent actions of launching a Tesla Roadster into space without much purpose, investors might want to call for a mental health checkup for the so-called visionary, because his visions are starting to sound more like hallucinations. With this act, Musk has set the bar rather high for wasting time, money, and resources.

Interestingly, a recent Ninth Circuit decision explained that SolarCity's historic stock tumble was the result of a "mismanaged organization in need of closer financial oversight." Before Tesla purchased the forward thinking company for $2.6 billion, investors in SolarCity sued after the stock dropped by over 25% due to the company's own accounting errors. And while Tesla investors may not be thrilled to add SolarCity to their profiles, the action filed against Musk likely wouldn't reverse the deal.

Although Musk does not own a majority of the shares of Tesla, he is arguably a controlling shareholder, holding 22%, as well as the public's imagination. But as the court noted in the shareholder lawsuit, "actual control over business affairs may stem from sources extraneous to stock ownership." And while 22% is a large block, it does not automatically equate to controlling shareholder status. Unfortunately for Musk, this is where is larger than life persona doesn't do him any favors.

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