The Delaware Court of Chancery denied a motion to dismiss a lawsuit, brought by stockholders of Tesla Motors ("Tesla"), alleging that Tesla's Board of Directors and its Chairman and CEO Elon Musk breached their fiduciary duties by approving the $2.6 billion acquisition of SolarCity (see In re Tesla Motors, Inc. Stockholder Litigation).

As described more fully in a Cadwalader memorandum, the plaintiffs alleged that the acquisition benefited SolarCity stockholders to the detriment of Tesla stockholders. Mr. Musk was the Chairman of the Board, CEO and Chief Product Officer of Tesla, and owned approximately 22.1 percent of Tesla's outstanding common stock. He was also Chairman of the Board of SolarCity and SolarCity's largest stockholder, owning approximately 21.9 percent of SolarCity's outstanding common stock. In denying the motion to dismiss, the Court found that "it is reasonably conceivable that Musk, as a controlling stockholder, controlled the Tesla Board in connection with the acquisition."

The attorneys explained that if it is determined that Mr. Musk controls the Tesla Board, the transaction will be reviewed according to the "entire fairness" standard, as opposed to the deferential business judgment rule. The attorneys further identified several key "takeaways" from the ruling:

  • A stockholder owning less than a majority of outstanding shares may nonetheless be a controlling stockholder;
  • Delaware courts will consider circumstantial evidence, including deal terms, in making controlling stockholder determinations;
  • Delaware courts will examine a stockholder's past behavior and current status at a company when making the control determination;

  • A minority stockholder must actually exercise his or her control over the corporation and/or Board of Directors to be considered a controlling stockholder for purposes of a challenged transaction;

  • The court will consider board-level conflicts in determining whether a board could exercise independent judgment outside of the alleged controlling stockholder's influence; and

  • Public statements made by the company or by the alleged controlling stockholder regarding the stockholder's influence are relevant.

The memorandum was authored by Joshua Apfelroth, Jason Halper, William Mills, James Fee and Winne Chen.

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