Steven Davidoff Solomon thinks the proposed Tesla Solar City deal is a bad one that amounts to Elon Musk bailing out Solar City:
Solar City is a maker of solar energy products, basically home and business solar panels. Tesla is a maker of battery-powered cars, though some view the company’s battery-making component as its bigger future.
To Elon Musk, the chairman of SolarCity and the chief executive of Tesla, putting together these two different businesses is “blindingly obvious” and a “no-brainer.” A blog post on the Tesla website explained the reasons:
We would be the world’s only vertically integrated energy company offering end-to-end clean energy products to our customers. This would start with the car that you drive and the energy that you use to charge it, and would extend to how everything else in your home or business is powered.
In other words, the deal makes sense because people who buy Tesla’s cars also want solar power. In a combined company, they can get it in the same place.
The market is not buying it.
To investors, it is as if the Walt Disney Company bought a birthing center business to offer “end-to-end” service for its parent customers. It’s not clear that Tesla owners will really want to buy solar panels, or that if they did, it would be in sufficient number.
I don't think the deal is as bad as all that. I happen to be one of those people who thinks Tesla's future is at least as much in the power generation storage domain as the car space. I have no immediate plans to trade in my Jeep on a Tesla, but I do toy with the idea of adding solar power to the roof of my house. If I do so, I'm pretty sure I'll also get the Tesla Powerwall battery system to store excess solar power-generated electricity for use at night or whenever conditions are suboptimal. Not being able to store solar power for use at night has always struck me as a major downside to solar. If that's right, then integrating panel and battery production may well make business sense.
Having said that, Musk has a pattern of moving money around his various imperial domains seemingly at will (see, e.g., the SpaceX bond matter) and otherwise engaging in conflict of interest transactions. Given that track record, if I were Musk's lawyer, I'd want him to dot all the legal Is and cross all the legal Ts to a fare thee well.
Davidoff Solomon apparently is viewing this deal as essentially an interested director transaction subject to DGCL 144(a):
Tesla did announce some procedures to deal with this conflict. Mr. Musk recused himself from the deliberations at Tesla and Mr. Rive said the same thing at SolarCity. In addition, Tesla said that any deal would be subject to approval by a majority of its disinterested shareholders.
This is part of the standard procedure in conflict situations. The general idea is that each company forms a committee of independent directors with its own advisers and legal counsel. This would ensure approval of the disinterested directors. Then any deal itself would be subject to approval of the disinterested shareholders. The State of Delaware, where a majority of American companies are incorporated, technically requires only that either the disinterested directors or disinterested shareholders approve the deal, but the standard practice is to do both.
In contrast, I would view this deal as being akin to a freeze-out merger by a controlling shareholder (it's not exactly that but I think the analogy works). As such, if I were advising Musk, I'd advise him to adopt the full panoply of prophylactic measures approved by the Delaware Supreme Court in Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014):
To summarize our holding, in controller buyouts, the business judgment standard of review will be applied if and only if: (i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.
If those conditions are not met, the burden of proof would be on Musk to show that the transaction was entirely fair to the minority shareholders. Trust me, you do not want to be a defendant with the burden of entire fairness in a conflict of interest case. Granted, the choice between the business judgment rule and entire fairness standards of review "is not outcome-determinative and ... defendants prevail under [the fairness] standard of review with some degree of frequency." In re Ezcorp Inc. Consulting Agreement Derivative Litig., No. CV 9962-VCL, 2016 WL 301245, at *28 (Del. Ch. Jan. 25, 2016), reconsideration granted in part, (Del. Ch. Feb. 23, 2016), and appeal refused sub nom. MS Pawn Corp. v. Treppel, 133 A.3d 560 (Del. 2016), and appeal refused sub nom. Roberts v. Treppel, 133 A.3d 560 (Del. 2016). But even so the entire fairness standard is "the most exacting form of review." In re Cysive, Inc. Shareholders Litig., 836 A.2d 531, 557 n.40 (Del. Ch. 2003). "The burden of establishing entire fairness has been perceived as extremely difficult to meet." 6 No. 10 M & A Law. 9 (2003).
