What is the Tesla-SolarCity court case about?

ELON MUSK is not known for being self-effacing. The self-appointed “technoking” of Tesla, the world’s most valuable carmaker, has cultivated a punchy public image and seemed to court controversy. So intertwined is his identity with that of the maker of electric cars that he has been known to sleep on the factory floor. In his waking hours, he is its prominent public face. How ironic, then, that in a court case concerning Tesla’s takeover of another of his start-ups, he is energetically seeking to rebut the notion that he controls Tesla. What is going on?

The case revolves around Tesla’s controversial move, in 2016, to buy SolarCity, an installer of rooftop solar panels, for $2.6bn. Mr Musk, at the time chairman of both companies, portrayed this as a means of building an integrated sustainable-energy company. But SolarCity was heavily indebted. The day the merger was announced Tesla’s shares shed $3bn in value. SolarCity’s sales tumbled and thousands of its workers were laid off. Today, the SolarCity brand no longer exists. It is hard to portray the acquisition as a raging success.

A group of Tesla’s institutional investors at the time now demand that Mr Musk repay the cost of the ill-starred deal and return the profits from his SolarCity shares. They claim in the proceedings that he used his influence over other directors to gain the board’s approval and persuaded shareholders to back him, as more than 85% of them did, without providing enough detail for them to make an informed decision. The acquisition amounted, they argue, to a bail-out by one of his start-ups (Tesla) of another one (SolarCity), which damaged the former—and thus their investments.

The court hearing, which is scheduled to last for two weeks, got off to a spirited start on July 12th (having been long delayed by the pandemic). Unlike fellow Tesla directors who, while denying wrongdoing, settled for $60m last year, Mr Musk rejects the plaintiffs’ claims and is taking the fight to them. He tussled for hours with their lawyer, at one point calling him “a bad human being”. Tesla’s chief executive was back in court again on July 13th.

More theatrics seem inevitable. When it comes to points of substance, the first thing the court must decide is whether Mr Musk controlled Tesla at the time of the SolarCity deal. As the presiding judge notes, according to the law in Delaware, where the court is based, controlling shareholders have “inherently coercive” sway over other investors. Mr Musk’s stake of 22% would not normally be large enough to constitute control; he rubbishes the idea that he can boss around big institutional investors. But some legal experts give the plaintiffs a decent chance of clearing this first hurdle, so deeply intertwined is Mr Musk with the company and its board of directors.

The second question is whether the process that led to the deal, and the price itself, were fair. The technoking says he recused himself from talks over the deal; the plaintiffs call this move “superficial”. Another question is whether the severity of SolarCity’s financial distress was made clear enough to shareholders. And plaintiffs will want to highlight possible conflicts of interest among Tesla board members, some of whom directly or indirectly owned SolarCity stock.

It could be months before the court makes its ruling. If it decides against Mr Musk, his ego might suffer more than his wallet (his net worth is almost $170bn). For Tesla, the main effect might be to make its board think twice about buying companies beyond its core industry. Until now, Mr Musk’s attention-seeking has arguably helped to pump up the firm’s value; further bad publicity for him is unlikely to change this dynamic.

The implications might be greater for founder-owners in general. They are common at tech companies and, as this case illustrates, can pose a particular problem for the courts given their often outsized influence. If Mr Musk were to lose it would send a signal to them, and to their prospective business partners, that they might be on the hook when investments go wrong. A lower-key style might even become fashionable among tech entrepreneurs.