• The Delaware Supreme Court affirms the Court of Chancery’s determination that Tesla’s acquisition of SolarCity was the result of fair dealing, reflected a fair price, and was entirely fair—even when the process was imperfect.
• Supreme Court recognizes that a board of directors may have legitimate reasons not to employ the “best practice” of MFW protections in a conflicted, controlling stockholder transaction.

The Delaware Supreme Court issued its decision in In re Tesla Motors, Inc. Stockholders Litigation,¹ affirming the 2022 post-trial decision of the Court of Chancery that Tesla CEO Elon Musk did not breach his fiduciary duties to Tesla stockholders in connection with Tesla’s 2016 acquisition of SolarCity Corporation (the “Acquisition”). The Supreme Court’s decision makes clear that, where a board of directors’ process was independent and uncoerced (albeit flawed) and resulted in a fair price, that transaction will survive the highest scrutiny in Delaware law as being entirely fair to stockholders.

The Supreme Court’s Analysis²

The Acquisition Was the Product of Fair Dealing

The Supreme Court held that the undisputed facts supported a finding that the Acquisition was a result of fair dealing, even if the process itself was imperfect.³ Indeed, because the plaintiff stockholders of Tesla (“Appellants”) did not challenge these factual findings on appeal, these findings were entitled to deference from the Court.⁴

In particular, the Court highlighted the following facts as indicating fair dealing:

• The Board Refused Musk’s Wishes: Contrary to Appellants’ contention that Musk exploited his “inherently coercive status” at Tesla to interfere improperly in the Acquisition process, the record contained “several instances where the Tesla Board simply refused to follow [Musk’s] wishes.”⁵ For example, the Board initially declined to explore an acquisition of SolarCity when Musk originally requested it, and rejected Musk’s wish to include a bridge loan in any offer.⁶
• The Board’s Timing of the Acquisition: While Appellants argued that Musk “bailed out SolarCity on a schedule that worked for him,” unchallenged findings of fact supported that the Board timed the Acquisition when it was right for Tesla.⁷ The Tesla Board thus did not pursue the Acquisition until, “due to macroeconomic headwinds in the industry, solar company stocks were trading at historic lows.”⁸ The Board also delayed initiating the Acquisition process until Tesla rolled out its Model X vehicle.⁹
• Majority-of-the-Minority Condition: The Supreme Court gave credence to a majority-of-the-minority stockholder approval provision in Tesla’s final offer for the Acquisition as a “strong indicator of fair dealing.”¹⁰ Indeed, the Court held that “a non-waivable ‘majority of the minority’ provision is an indicator at trial of fairness because it disables the power of the majority stockholder to both initiate and approve the merger.”¹¹
• Arms-Length Bargaining: Tesla’s negotiation team was led by an independent director supported by indisputably independent expert advisors.¹² As a result, they were able to negotiate a final Acquisition price below the original offer range.¹³ And even though Musk was in frequent communication with the due diligence team, Tesla’s advisors worked to insulate Musk from the process to a meaningful extent.¹⁴ Accordingly, the “vigorous and spirited” negotiation indicated fair dealing.¹⁵
• Approval of the Acquisition: The Supreme Court likewise deferred to the Court of Chancery’s “heavily fact-and-credibility-laden determination that the directors” were not dominated or controlled by Musk when they approved the Acquisition.¹⁶ The Court likewise gave credence to the vote approving the Merger by fully informed stockholders, who had the opportunity to consider Musk’s involvement in the Acquisition process and the potential impact of his crossholdings of SolarCity and Tesla stock on the outcome, as well as additional information.¹⁷

Taken together, the Supreme Court held that these factors supported the Court of Chancery’s finding of fair dealing.

An Important Digression on the Requirements of “MFW”

In the course of its fair dealing analysis, the Supreme Court addressed arguments from Appellants and a group of amici that Tesla’s failure to employ MFW protections—i.e., conditioning the Acquisition at the outset on approval by an independent negotiating committee and a majority of the minority stockholders—effectively required a finding of liability.¹⁸ The Court disagreed.¹⁹ While acknowledging that the Tesla Board and Musk “invited much risk” by not forming a special committee, nothing in Delaware law required them to do so.²⁰ Indeed, the Court recognized that a board may have legitimate reasons not to employ MFW protections—for example, to protect against transaction-execution risk or to maintain access to the expertise and perspectives of the controller.²¹

Fair Price

The Supreme Court also affirmed the Court of Chancery’s finding that the Acquisition price was fair.²²

Indeed, the Supreme Court agreed that Musk had “presented the most persuasive evidence”—including expert valuation analyses, SolarCity’s cash flow records, synergies between Tesla and SolarCity, the stockholders’ overwhelming vote to approve the Acquisition, and certain market evidence—“regarding SolarCity’s value and the fairness of the price Tesla paid to acquire it.”²³ In contrast, at trial, Appellants had pressed only the theory that SolarCity was insolvent.²⁴ Musk’s task was made easier because, as the Court of Chancery had found, Appellants had “doubled down” on their theory that SolarCity was insolvent “to such a degree that, when weighed against the evidence put forth by Musk’s experts, Appellants ‘undermined the credibility of their fair price case completely.’”²⁵

The Supreme Court, however, did levy some criticism at the Court of Chancery’s analysis. First, the Supreme Court held that the trial court erred in analyzing fair price by comparing the SolarCity stock price on June 21, 2016, the day the Acquisition was announced, to the ultimate exchange ratio for the Acquisition.²⁶ The Court agreed with Appellants that the June 21 stock price was not an appropriate proxy for SolarCity’s value because it failed to account for non-public information regarding SolarCity’s liquidity and credit problems that Tesla uncovered during due diligence.²⁷ Second, the Court held that the Court of Chancery erred in failing to explain how it weighed the June 21 stock price against other valuation methodologies and fair price evidence.²⁸ Despite these critiques, the Court affirmed that the Court of Chancery’s finding of fair price was amply supported by the record.²⁹

Conclusion

The Delaware Supreme Court’s decision affirms that while the entire fairness standard is the highest level of judicial review under Delaware law, its application to defendant directors and controlling stockholders is not fatal for the defendants. A well-developed factual record showing a board’s thoughtful adherence to an independent process emulating arms-length negotiations and an ultimately fair price can overcome a less-than-perfect process. Importantly, the case demonstrates that while MFW serves as a carrot to encourage “best practices” for a pleading stage dismissal under business judgment rule review, the absence of MFW does not establish a concomitant stick of automatic liability.

Footnotes

1. No. 181, 2022 (Del. June 6, 2023).
2. We previously wrote on the Court of Chancery’s decision, and refer the reader to our earlier OnPoint for additional details about that decision and the transaction.
3. Slip Op. at 48.
4. Id. at 51.
5. Id. at 50-51 (citing Trial Op. at 97) (alteration in original).
6. Id. at 51.
7. Id. at 51-52 (internal citation omitted).
8. Id. at 52.
9. Id.
10. Id. at 53.
11. Id. (quoting Gesoff v. IIC Indus., Inc., 902 A.3d 1130, 1148 (Del. Ch. 2006)).
12. Id. at 61-62.
13. Id. at 62.
14. Id. at 62-63.
15. Id. at 64.
16. Id. at 65.
17. Id. at 66-70.
18. Id. at 53 (citing Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014)).Id. at 53, 58. MFW established that a conflicted transaction involving a controlling stockholder is subject to the business judgment rule if the transaction was conditioned at the outset on approval from both an independent special committee and a majority of the minority stockholders. 88 A.3d at 645.
19. Slip Op. at 58.
20. Id. at 59-60.
21. Id. at 59.
22. Id. at 74.
23. Id. at 83-96.
24. Id. at 77.
25. Id. at 81 (citing Trial Op. at 108).
26. See id. at 96.
27. Id. at 97-98.
28. Id. at 99.
29. Id. at 103.