In re Tesla Motors, Inc. S’holder Litig., C.A. No. 12711-VCS (Del. Ch. Feb. 4, 2020).
The Delaware Court of Chancery denied plaintiffs’ and defendants’ (including Elon Musk’s) motions for summary judgment on the grounds that genuine issues of material fact still remain to be determined at trial. The plaintiffs brought the action based on the allegation that Musk improperly influenced the Tesla board of directors to approve Tesla’s acquisition of SolarCity, another entity owned partially by Musk that was purportedly on the verge of insolvency.
The defendants asserted that the acquisition of SolarCity was approved by a fully informed and uncoerced vote of the minority stockholders, and therefore subject to business judgment review under Corwin. After discovery, defendants argued that there was no evidence that Musk, who controlled only a minority (22.1%) of Tesla’s voting power, had actually coerced Tesla’s other stockholders into approving the transaction, and on that basis sought summary judgment. The Court reasoned, however, that if Musk was found to be a controller and had the ability to exercise control over the vote, regardless of whether he actually did so, the transaction would remain subject to entire fairness review. In that regard, the Court explained that Delaware law recognizes that a controller can exert “inherent” coercion over shareholders facing a vote to approve a transaction. As articulated by the Court: “That conflicted controller transactions are inherently coercive … is a fixture of our law endorsed by our highest court and re-emphasized in numerous decisions of this Court.”
The Court acknowledged that leading Delaware jurists, through scholarly articles, have questioned why concerns about “inherent coercion” should justify imposing entire fairness review upon a transaction that rational investors have approved by a fully informed vote. Yet the Court also reasoned that Delaware Supreme Court precedent recognized the doctrine, which was dispositive. Accordingly, if Musk were a controller at the time of this acquisition, his status as such would result in a presumption of “inherent coercion” that prevents Corwin from securing business judgment review.
The Court found it could not, on the current record, determine whether Musk was a controller. Nor could it determine whether or not the stockholder vote was fully informed, or whether a majority of the board was independent when it approved the acquisition. Accordingly, the case will continue to trial, and should Musk be determined to be a controller, the transaction will be reviewed under an entire fairness standard.
