Elon Musk had a frenzied plan to merge Tesla, SolarCity, new filings show

  • Tes­la share­hold­ers filed a law­suit against the in 2016, alleg­ing that CEO Elon Musk pushed the com­pa­ny to buy SolarCi­ty to enrich him­self. They said it was a breach of fidu­cia­ry duty.
  • On Thurs­day, sev­er­al depo­si­tions (includ­ing one of Musk) and doc­u­ments includ­ed in the suit were pub­lished on the web­site Plain­Site, an orga­ni­za­tion focused on trans­paren­cy in the US judi­cial sys­tem. The Think Com­put­er Foun­da­tion orig­i­nal­ly obtained the doc­u­ments. 
  • Some doc­u­ments showed that SolarCi­ty was fac­ing a liq­uid­i­ty cri­sis when Tes­la bought it, and that some Tes­la board mem­bers had a lot to per­son­al­ly if the deal did­n’t go through. The doc­u­ments also showed that the Tes­la solar-roof-tile prod­uct, which was unveiled to the pub­lic just before the acqui­si­tion was approved by the board, did­n’t
  • An email from Musk includ­ed in the law­suit showed that he pushed to move up the pre­sen­ta­tion of the solar tile to con­vince the board to approve the SolarCi­ty acqui­si­tion.
  • “Lat­est feed­back from major investors is very neg­a­tive on SolarCi­ty,” Musk said in an email to Peter Rive, SolarCi­ty’s cofounder, on Sep­tem­ber 16, 2016. “We need to show them what the inte­grat­ed prod­uct looks like. They just don’t get it. Needs to hap­pen before the vote, so maybe aim for Octo­ber 28th for a joint solar roof and Pow­er­wall 2 unveil­ing.”
  • Musk’s lawyers have argued he did­n’t con­trol the process for buy­ing SolarCi­ty because he did­n’t vote on the deal, and that the stock­hold­ers who vot­ed on the deal were ful­ly informed of what was going on at the two com­pa­nies.
  • Tes­la did not respond to mul­ti­ple requests for com­ments for this sto­ry. 

In 2016, the empire that Elon Musk built to con­quer earth and was in per­il, but Musk stepped in with a poten­tial­ly ille­gal plot to save it all and stick Tes­la share­hold­ers with the bill, share­hold­ers said in a law­suit filed against Tes­la. 

The law­suit, filed in 2016, alleged Tes­la’s 2016 acqui­si­tion of SolarCi­ty — which sad­dled Tes­la with bil­lions of dol­lars in debt and lia­bil­i­ties — was a breach of fidu­cia­ry duty on the part of Musk, the elec­tric-car mak­er’s CEO, and the com­pa­ny’s board of direc­tors. The plain­tiffs also alleged that Musk and oth­er mem­bers of the board did all of this in order to enrich them­selves and save SolarCi­ty while hid­ing the com­pa­ny’s des­per­ate finan­cial con­di­tion. They were major share­hold­ers, and SolarCi­ty was helmed by Musk’s cousin Lyn­don Rive.

Musk’s lawyers have argued that he did­n’t real­ly con­trol the process for buy­ing SolarCi­ty because he did­n’t vote on the deal, and that the stock­hold­ers who vot­ed on the deal were ful­ly informed of what was going on at the two com­pa­nies. Tes­la did not respond to mul­ti­ple requests for com­ment on this mat­ter.

On Thurs­day, a bunch of the law­suit­’s fil­ings became pub­lic, includ­ing depo­si­tions of Musk, Tes­la’s then- Finan­cial Offi­cer Jason Wheel­er, and oth­er play­ers in the deal. The data dump also includes things like min­utes of Tes­la’s board-of-direc­tors meet­ings, inter­nal emails, and pre­sen­ta­tions that the bankers advis­ing the deal gave out­lin­ing issues with SolarCi­ty and the poten­tial for syn­er­gy between the two com­pa­nies.

Accord­ing to these doc­u­ments, the merg­er that Musk called a “no-brain­er” appeared to be any­thing but. No oth­er com­pa­ny was bid­ding to buy SolarCi­ty, and accord­ing to inter­nal emails, it was also strug­gling to find financ­ing for a $200 mil­lion bridge loan that it need­ed imme­di­ate­ly.

“They claim oth­er banks want into the SolarCi­ty bridge,” Bank of Amer­i­ca’s Ray Wood said in a July 2016 inter­nal email, “but we have no vis­i­bil­i­ty … the real­i­ty of the prob­lem is dawn­ing on Elon.” (Tes­la announced its inten­tion to do the SolarCi­ty deal in June.)

Here’s why things were look­ing so bad for SolarCi­ty: In order to main­tain the terms of its revolv­ing loan, the com­pa­ny had to have $116 mil­lion in cash on hand at the end of every month. But as ear­ly as Sep­tem­ber 2015, there was an aware­ness that the com­pa­ny was going through a cash cri­sis, with its bal­ance drop­ping to as low as $35 mil­lion in Novem­ber, accord­ing to inter­nal emails. At the same time, SolarCi­ty also had a ton of cap­i­tal expen­di­tures, most crit­i­cal­ly at its Buf­fa­lo, New York, plant, it had to spend a cer­tain amount or pay the state of New York over $600 mil­lion.

By July 2016, after the deal was announced, the sit­u­a­tion appeared more des­per­ate. In one email to an unnamed per­son on July 9, Rive described the com­pa­ny as “super low on cash” and said he was wor­ried about the “domi­no effect” if the com­pa­ny did not get the mon­ey it need­ed. 

Lyndon rive email




Plain­Site



Musk was also very aware of the cash sit­u­a­tion before the acqui­si­tion. In an email dat­ed Sep­tem­ber 18, 2016, Musk sent a mes­sage to Brad Buss, the for­mer finance chief at SolarCi­ty, in which he said that one of the things SolarCi­ty need­ed to do to per­suade investors about a merg­er with Tes­la was solve the solar com­pa­ny’s liq­uid­i­ty cri­sis. 

Dominoes

SolarCi­ty’s prob­lems did­n’t just mat­ter to Musk because he was a share­hold­er and a board mem­ber of SolarCi­ty, it mat­tered because the com­pa­ny’s fate was tied to SpaceX, a piece of his empire, accord­ing to the law­suit.

SpaceX, Musk’s rock­et com­pa­ny, had giv­en SolarCi­ty $165 mil­lion at the begin­ning of 2015, accord­ing to inter­nal SolarCi­ty emails filed as part of the law­suit, and it was hold­ing 77% of SolarCi­ty’s bonds. In short, if SolarCi­ty went down, it could take SpaceX with it. Tes­la did not respond to a request for com­ment on the state of SolarCi­ty’s finances at the time.

None of SolarCi­ty’s prob­lems had any­thing to do with Tes­la share­hold­ers, though. Aside from Musk, his broth­er Kim­bal, and a few mem­bers of the board of direc­tors who owned SolarCi­ty stock, Tes­la share­hold­ers had to wor­ry only about mak­ing cars. That’s why inside of Tes­la, the board of direc­tors and the C‑suite knew it could be an uphill bat­tle to get share­hold­ers to approve the deal. Board mem­bers were tasked with per­son­al­ly reach­ing out to peo­ple from big-time share­hold­ers like Fideli­ty to sway them, accord­ing to emails. 

But that did­n’t seem like it was work­ing by fall 2016, accord­ing to doc­u­ments includ­ed in the law­suit. Major investors like T. Rowe Price were still not back­ing the deal. 

In an inter­nal email dat­ed Sep­tem­ber 14, 2016, Todd Maron, Tes­la’s for­mer gen­er­al coun­sel, described a con­ver­sa­tion he had with T. Rowe Price about its doubts regard­ing the deal.

“They (T‑Rowe) said what Tes­la is try­ing to accom­plish in the auto­mo­tive space is very com­plex and to add SolarCi­ty to the mix the oper­a­tional and finan­cial risk pro­file of the com­pa­ny, espe­cial­ly giv­en SolarCi­ty’s finan­cial chal­lenges as a com­pa­ny,” Maron said in the email. 

So Musk gave them and oth­er doubt­ful share­hold­ers a rea­son to get on board.

In Octo­ber 2016, Musk host­ed a mas­sive show on a Hol­ly­wood TV set, unveil­ing a prod­uct that did­n’t yet exist — Tes­la’s solar-roof tile.

“Lat­est feed­back from major investors is very neg­a­tive on SolarCi­ty,” he said in an email to Peter Rive on Sep­tem­ber 16, 2016. “We need to show them what the inte­grat­ed prod­uct looks like. They just don’t get it. Needs to hap­pen before the vote, so maybe aim for Octo­ber 28th for a joint solar roof and Pow­er­wall 2 unveil­ing.”

JB Straubel, Tes­la’s chief tech­ni­cal offi­cer at the time, was also includ­ed on this email. Tes­la did not respond to Insid­er’s request for com­ment on its con­tents.

After see­ing the solar tile, Tes­la share­hold­ers approved the deal in Novem­ber 2016.

A lot to lose, a lot to gain

Inside SolarCi­ty as ear­ly as fall 2015, there was an acknowl­edg­ment that 2016 would not be kind to the com­pa­ny’s busi­ness mod­el. In an email to the com­pa­ny’s C‑suite, Tan­guy Ser­ra, SolarCi­ty’s pres­i­dent at the time, laid it out pret­ty clear­ly. 

“Next year we are fac­ing Sil­veo [SolarCi­ty’s man­u­fac­tur­ing plant], more com­mer­cial mix — so on a like for like basis it won’t be bet­ter,” he wrote. 

That is part of why in June 2016, the time of this deal’s announce­ment, Wall Street was scratch­ing its head try­ing to under­stand exact­ly how it would do Tes­la any good.

“We are strug­gling to see brand, cus­tomer, chan­nel, prod­uct or tech­nol­o­gy syn­er­gies,” ana­lysts at JPMor­gan wrote at the time. “We do acknowl­edge that the acquir­er’s easy access to cap­i­tal mar­kets might pro­vide a low cost of cap­i­tal option … but we don’t see anoth­er cost syn­er­gies that weren’t already avail­able to SolarCi­ty via the close part­ner­ship.”

This quote was includ­ed in a pre­sen­ta­tion Ever­core gave to Tes­la’s board of direc­tors in July.

The board was not yet sold then, in part because there were still many ques­tions about how much SolarCi­ty would cost. Accord­ing to emails between Ever­core bankers and Tes­la, filed as part of the law­suit, Ever­core founder Roger Alt­man said Tes­la was pric­ing too gen­er­ous­ly and, in a July 2 email, said direct­ly: “Tes­la share­hold­ers might not like this.” Mean­while, Tes­la’s board of direc­tors want­ed to see if there would be any oth­er bid­ders for SolarCi­ty. But there were none.

By Octo­ber 2016, though, Tes­la’s board was singing a dif­fer­ent tune. In an Octo­ber pre­sen­ta­tion by Tes­la to proxy firms includ­ed in the law­suit, it claimed the deal would cre­ate $150 mil­lion worth of cost-sav­ing syn­er­gies with­in the first year of the acqui­si­tion.

Five Tes­la board mem­bers had a clear finan­cial inter­est in get­ting this deal past the fin­ish line, the law­suit alleged. They not only stood to lose a lot if SolarCi­ty went under, but they also had a lot to gain if it were saved at a pre­mi­um (as it was), the suit alleged. 

From the fil­ings:

Tesla board members with solarcity stock


Tes­la investor law­suit


In 2015 and 2016, Kim­bal Musk used his SolarCi­ty shares as col­lat­er­al on his per­son­al loans, accord­ing to his depo­si­tion. If SolarCi­ty had gone bust, this would be a prob­lem for him. But he tes­ti­fied that his per­son­al loans had noth­ing to do with his sup­port for the deal to have Tes­la acquire SolarCi­ty.

Lawyers for the defen­dants argued, accord­ing to the fil­ing, that per­son­al issues like this did­n’t pose any kind of con­flict of inter­est because the defen­dants are so rich. 

Raise the roof

Accord­ing to mul­ti­ple depo­si­tions, the solar-roof tile that Elon Musk pre­sent­ed in order to wow Tes­la’s share­hold­ers was­n’t actu­al­ly a work­ing prod­uct when it was unveiled. In Wheel­er’s depo­si­tion, he was asked about that direct­ly:

Q: So I get a sense of tim­ing — I know you knew it was a future nascent prod­uct by the time it was incor­po­rat­ed. Were you of that view before the merg­er agree­ment was signed, that … there was no real project to mod­el.

A: Yes, I think before it was signed that’s what I was think­ing. 

In his depo­si­tion, Toby Corey, SolarCi­ty’s pres­i­dent of sales, said the roof Tes­la unveiled in its pre­sen­ta­tion was not con­nect­ed to a grid of any kind while it was being pre­sent­ed. He also said he could­n’t remem­ber if Tes­la ever sold a roof either.

“I don’t recall sell­ing any,” he said, though he added he recalled that some roof tiles were being installed after the pre­sen­ta­tion.

“More than five,” the attor­ney ques­tion­ing him asked.

“I hon­est­ly could­n’t tell you,” Corey respond­ed. “It was­n’t a lot but I recall hear­ing of instal­la­tions that were occur­ring. I know that Elon got his sys­tem installed … I believe there were oth­ers I don’t remem­ber the exact num­ber.” 

Tes­la did not respond to Busi­ness Insid­er’s request for com­ment on Corey’s depo­si­tion on how many solar-roof tiles have been sold, or on how many have been installed since the pre­sen­ta­tion.

You can place an order for the third ver­sion from Tes­la’s web­site if you want, but Bethany McLean report­ed in Van­i­ty Fair last month that some peo­ple have done that before only to have their deposits sit at Tes­la as their roofs nev­er mate­ri­al­ized.

On Fri­day, a day after the doc­u­ments relat­ed to this law­suit went pub­lic, Tes­la held a phone call announc­ing it had devel­oped the third ver­sion of the prod­uct and that it would work beau­ti­ful­ly. The call, how­ev­er, was light on details, and it was not a live event like the unveil­ing of the first solar-roof tile — no Hol­ly­wood set. Tes­la did not respond to Busi­ness Insid­er’s request for com­ment on whether or not the prod­uct was ready for use.

Get the lat­est Tes­la stock price here.

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Tes­la
Elon Musk
SolarCi­ty

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