Musk’s SolarCity trial wraps up with $2B at stake

Elon Musk was acting as a proper chief executive officer as Tesla Inc. weighed the purchase of power provider SolarCity in 2016, his longtime ally and fellow Tesla Inc. director Antonio Gracias told a judge.

A two-week trial over the billionaire CEO’s role in the $2 billion transaction wrapped up Monday, and now Judge Joseph Slights III must decide whether Musk -- who was the solar company’s chairman and largest shareholder at the time -- properly removed himself from the deal to avoid conflicts of interest.

Gracias, the last witness, was questioned by Musk’s attorney about the 50-year-old chief’s role in the acquisition. He emphasized that Musk removed himself from the deal’s pricing and from voting on the acquisition but had a legitimate part to play.

“He’s recused from the deal, but not from doing his job,” Gracias testified under questioning by Daniel Slifkin. He said he and Musk made themselves “available” to Tesla’s board for any questions on the purchase.

The shareholders who sued Musk say the purchase was tainted by his influence with his board and his ties to the solar company. In addition to his own role there, its CEO was Lyndon Rive, his cousin.

Gracias, head of tech investment firm Valor Equity Partners, was one of the early investors in Tesla and also owned SolarCity stock and served on the solar company’s board. Under questioning by Christine Mackintosh, a lawyer for pension funds suing over the deal, he said he had to decide which side of the deal to work on and chose Tesla over SolarCity.

At one point Mackintosh said board minutes showed both Musk and Gracias were present when other directors were discussing how much to pay for SolarCity.

“If that’s what the minutes say, that’s correct,” said Gracias, who is set to leave Tesla’s board in October. He said he didn’t pay attention to the pricing discussion since, like Musk, he was recused from considering the issue.

The judge, who heard the complex case in Delaware Chancery Court without a jury, may take months to decide whether to make Musk dig into his pocket and return the money Tesla paid for SolarCity. So far Slights has homed in on Musk’s recusal, questioning Tesla’s chair, Robyn Denholm, at length last month about her knowledge of Musk’s activities as board members gathered information on the deal.

“It appears from the evidence there were some discussions occurring between Mr. Elon Musk and Mr. Rive outside the board process,” Slights said, according to a transcript of the trial.

“I’m not surprised, to be honest,” Denholm replied, “but I know it didn’t affect what the negotiation was, because Elon never spoke to me about what he thought we should -- you know, whether we should take something into account or not take something into account.”

Denholm testified that Musk and Gracias were “excused from the votes, in terms of the board” but added that “actually we welcomed them, in terms of input, into some deliberations.”

Musk, who was on the stand for two days and was the first witness, denied playing a substantial role in the SolarCity buyout and noted that Denholm, as the lead Tesla director on the deal, set the price and the terms.

“I was active in providing materials to the board necessary to make a decision,” he told the court. “I believed that would be my duty.”

As the world’s richest person, with a net worth of roughly $195 billion, Musk will still be in pretty good shape if he loses the case and must hand back hundreds of millions, or even the full $2 billion, to the electric vehicle maker. And an adverse ruling isn’t likely to transform the way he operates, said Larry Hamermesh, a University of Pennsylvania law professor and expert on Delaware corporate law.

“I don’t think a loss in this case is going to immediately change Elon Musk’s personality or his approach to corporate governance issues,” Hamermesh said. “People break fiduciary duties all the time and have to pay for it. For some people, it’s just a cost of doing business.”

Slights has already said Musk, despite holding far less than a majority stake in Tesla, currently at 17 percent, used his “visionary” persona and ties to other Tesla directors to smooth the deal’s path. One central question the judge must resolve is whether, as Tesla’s largest shareholder, Musk so dominated the board that final approval was a foregone conclusion.

In a colorful and sometimes irreverent stint on the witness stand, Musk testified that he tried to be helpful to the board as it weighed the deal but never sought to steamroll it.

“To be honest, I don’t want to be the boss of anything,” he told Slights. “I don’t want to be CEO. I tried not to be CEO of Tesla, but I had to or it would die. I rather hate being a boss. I’m an engineer.”

Perception of influence

Musk acknowledged helping hire lawyers to shepherd the acquisition through board confirmation and holding weekly meetings to light a fire under the due-diligence process. In addition, he said the solar company was on solid financial footing but wrote internally that it needed to solve its “liquidity crisis.” It turned out SolarCity was hemorrhaging cash and in danger of defaulting on its debt.

But he dismissed claims of impropriety, having recused himself from deliberations over the deal and been barred from the Tesla directors’ final approval vote.

That may not have been enough, said Charles Elson, a University of Delaware professor who studies board behavior and is director of the school’s Weinberg Center for Corporate Governance. Conflicted directors need to step all the way out of a deal to free it from even a hint of influence, he said.

“When you have a controller like Mr. Musk involved in organizing an acquisition, and putting together the information the board will use to approve it, you raise very serious questions about the independence of the whole process,” Elson said.

Nature of recusal

It’s those questions the plaintiffs raised, pointing to a 2020 Chancery Court ruling criticizing recused directors for not removing themselves completely from the acquisition process.

Among the judge’s questions for Denholm was whether she had a “clear sense of how the recusal was to work” in the SolarCity deal. The former Australian telecom executive said she had barred Musk and Gracias from any vote “in terms of the transaction happening or not happening, and also the price.”

Many of the meetings were by phone, Denholm testified, “but when we would get to the point where we had discussed the matters we needed input from Elon or Antonio on the technical side or anything like that, then we would ask them to leave.”