The Delaware Supreme Court recently affirmed the Delaware Court of Chancery’s 2022 post-trial decision that Tesla’s 2016 all-stock acquisition of SolarCity Corp. satisfied the entire fairness standard of review, and thus did not involve breaches of fiduciary duty. See In re Tesla Motors Stockholders’ Litigation, ___ A.3d ___, 2023 WL 3854008 (Del. Jun. 6, 2023). The stockholder-plaintiffs argued on appeal that the Court of Chancery erred in its application of the entire fairness standard. Writing for the court en banc, Justice Karen L. Valihura explained why the stockholder-plaintiffs’ arguments did not undermine the Court of Chancery’s conclusions as to either “fair dealing” or “fair price.”
The Delaware Supreme Court’s Decision
Due to Elon Musk’s large stock ownership and board and management positions at both the acquirer (Tesla) and the target (SolarCity), the Court of Chancery assumed without deciding that the transaction should be reviewed under the Delaware’s most stringent standard of review, i.e., the entire fairness standard. The Supreme Court proceeded similarly.
With respect to fair-dealing, the Supreme Court indicated that the stockholder-plaintiffs’ arguments on appeal, as a general matter, asked the court to “re-weigh the evidence regarding the acquisition’s deal process and to reach the opposite conclusion: namely, that the factual findings demand a finding of unfair dealing.” Primarily, the stockholder-plaintiffs argued the failure to delegate consideration of the transaction to a committee of independent directors, when combined with certain other facts concerning Mr. Musk’s involvement in and public support for the transaction, mandated a finding of unfair dealing. The Supreme Court disagreed, reasoning that, while the use of a special committee could have led to deferential business judgment review under MFW and its progeny, the failure to use a special committee and have the conflicted party abstain from the process completely does not mandate a finding of unfair dealing.
The Supreme Court pointed to significant record evidence supporting the Court of Chancery’s conclusion that Musk did not in fact dominate or control the board’s deliberative process. When Musk raised the idea of an acquisition, the board did not move forward initially because it preferred to prioritize other Tesla business matters. When Tesla did move forward, it did so at a time when, due to industrywide macroeconomic conditions, stock in solar companies was trading at historic lows. Musk was involved in the deliberations, but directors testified that they thought it would be better for Tesla to have the benefit of his expertise, rather than excluding him entirely. Importantly, the negotiations with SolarCity were led on Tesla’s behalf by a lead independent director, whom the Court of Chancery found to be effective in the negotiations, and credible at trial. Tesla’s board used information obtained in due diligence to negotiate down the acquisition price. Tesla’s directors were advised by independent counsel, as well as independent financial advisors who opined that the transaction was fair. Tesla’s stockholders who were not affiliated with Musk, a group that included some of the most sophisticated institutions in the world, also overwhelmingly voted in favor of the acquisition.
The Supreme Court also affirmed the Court of Chancery’s conclusions as to fair price, because significant record evidence supported that the price Tesla paid was within a range of fairness.
The stockholder-plaintiffs tried the case on the theory that SolarCity was in fact insolvent, which they argued required assessing its net liquidation value. The defendants provided credible expert testimony that it was proper to value SolarCity as a going concern, which was consistent with analysts’ contemporary views. In addition, the board’s financial advisors worked from reliable information, and they concluded that the price was fair to Tesla. The stockholder-plaintiffs also failed to undermine contemporaneous estimates of the magnitude of SolarCity’s potential future cash flows, and the potential synergies from the transaction. The Court of Chancery also properly considered the decisions by Tesla’s stockholders to approve the transaction as another market indicator of its fairness. Tesla’s outside advisors regarded SolarCity as bringing substantial net value to Tesla, which caused Tesla to book a roughly $89 million gain from the acquisition. While the Supreme Court agreed with stockholder-plaintiffs that the Court of Chancery should not have relied upon SolarCity’s unaffected trading price, which failed to reflect material nonpublic information concerning SolarCity’s liquidity challenges, it reasoned that the Court of Chancery had many other valid reasons explained in its decision for concluding that the transaction was entirely fair to Tesla.
Accordingly, the Supreme Court affirmed the Court of Chancery’s decision that the SolarCity acquisition was entirely fair.