In re Tesla Motors, Inc. Stockholder Litigation

Court of Chancery of Delaware
2018 WL 1560393 (2018)

ELI5:

Rule of Law:

A minority stockholder may be deemed a controlling stockholder if a complaint pleads sufficient facts to support a reasonable inference that the stockholder exercised actual control over the business and affairs of the corporation, particularly with respect to the transaction being challenged. Such a pleading, if successful, will subject the transaction to an entire fairness review and preclude dismissal under the Corwin doctrine at the pleading stage.

Facts:

Elon Musk was the Chairman, CEO, and 22.1% owner of Tesla, an electric vehicle company. He was also the co-founder, Chairman, and 21.9% owner of SolarCity, a solar energy company founded by his cousins.
By early 2016, SolarCity was facing a severe liquidity crisis, with over $3 billion in debt and a high risk of defaulting on its credit covenants.
On three separate occasions in February, March, and May 2016, Musk presented a proposal for Tesla to acquire SolarCity to the Tesla board.
A majority of Tesla's board members had significant conflicts of interest, including Musk's brother (Kimbal Musk), and others who had substantial investments in SolarCity or close personal and business relationships with Musk.
Despite its conflicts, the Tesla board did not form a special committee of independent directors. It focused exclusively on acquiring SolarCity, even though due diligence revealed significant issues with SolarCity's debt, its manufacturing facilities, and its projected costs.
Musk publicly championed the deal, describing it as a critical part of his long-term "Master Plan, Part Deux" for Tesla, and engaged with institutional investors to garner support.
The Tesla board, with Musk and Antonio Gracias recusing themselves from the final vote, approved the acquisition of SolarCity for approximately $2.6 billion in an all-stock transaction.
Following the acquisition, Tesla's debt load nearly doubled.

Procedural Posture:

Tesla stockholders filed several derivative and putative class action lawsuits in the Delaware Court of Chancery challenging the acquisition of SolarCity.
The court consolidated the various lawsuits into a single action and appointed lead counsel.
Defendants, including Elon Musk and the Tesla board, filed a motion to dismiss the consolidated complaint.
Defendants argued for dismissal under the Corwin doctrine, asserting that the transaction was cleansed by a fully informed, uncoerced vote of a majority of disinterested Tesla stockholders.
Plaintiffs opposed the motion, arguing that Corwin is inapplicable because the acquisition was a conflicted transaction involving Elon Musk as a controlling stockholder.

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Issue:

Does a complaint plead sufficient facts to support a reasonable inference that a 22.1% stockholder is a controlling stockholder, thereby triggering entire fairness review, when it alleges the stockholder was the CEO and Chairman, persistently pushed for the acquisition of a financially distressed company in which he also had a substantial interest, and the board that approved the transaction was dominated by directors with significant personal and financial ties to him?

Opinions:

Majority - Slights, Vice Chancellor

Yes, it is reasonably conceivable that Musk, as a controlling stockholder, controlled the Tesla Board in connection with the Acquisition. A stockholder can be deemed a controller by owning less than 50% of the voting power if they exercise actual control over the business affairs of the corporation. The court found it reasonably conceivable that Musk was a controller based on a combination of factors: his 22.1% stock ownership, his singularly important role as Tesla's visionary CEO and Chairman, his persistent and dominant role in the acquisition process, the board's lack of independence due to extensive conflicts of interest, and Tesla's own public filings acknowledging Musk's outsized influence and importance. Because the complaint adequately pleads that Musk was a controller, the transaction is subject to entire fairness review, and the defendants' motion to dismiss under Corwin must be denied, allowing the case to proceed to discovery.

Analysis:

This opinion is significant for clarifying the pleading standard required to overcome a Corwin defense by alleging the presence of a conflicted controlling stockholder. It demonstrates that courts will conduct a holistic, intensely factual inquiry into 'de facto' control, looking beyond mere voting percentages. The decision emphasizes that a combination of a powerful executive's influence, a conflicted board, and a flawed process can be sufficient to trigger the stringent entire fairness standard of review, making it more difficult for defendants in such cases to obtain an early dismissal.

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