Elon Musk Is On The Hook For Billions If He Loses Lawsuit Over Tesla’s SolarCity Deal

Elon Musk, then the U.S.’s top solar panel installer, gushed to investors five years back about Tesla’s acquisition of SolarCity. “I am very optimistic about how it will end. It’s quite transformational,” Musk said during November 1, 2016, call with analysts. Musk stated that the deal, worth an estimated $2.2billion, has been well received by the consumers. Musk addressed concerns about SolarCity’s financial health in the same call. “There are quite some naysayers in the financial world, some of the large hedge funds, and whatnot,” said the billionaire.

Musk is scheduled to appear before Delaware’s Court of Chancery on July 12 to defend the deal. The only remaining defendant in the case against Musk, brought by shareholders, alleges that the SolarCity acquisition was a bailout of a troubled business founded by his relatives. He was both the largest investor and chairman. The suit also claimed that Tesla’s board had been guilty of lax corporate governance. Robyn Denholm was the chair of the committee. The board settled for $60million last year and admitted no fault. Musk chose to defend his purchase. He could lose more than $2B, the entire cost of the acquisition. It would be the largest ever judgment against an individual corporate executive. Although large corporations such as Bank of America, BP, and others have received damage awards totaling billions of dollars to participate in events like the mortgage-backed Security Collapse and the catastrophic Deepwater Horizon Oil Spill, these damages are not always borne solely by the executives.

This latest legal development is for the 50-year-old centibillionaire who founded SpaceX, the world’s largest electric vehicle manufacturer and rocket maker. Musk has a large fan base with 58 million tweet followers and a cultlike following. However, his track record in defending himself from comments that could land him in trouble is mixed. In 2018, Musk was removed from his position as Tesla chairman, and he had to pay a $20m fine to SEC for claiming that Tesla would be taken private. The SEC brought an additional case to address Musk’s comments on Twitter about Tesla’s production goals. It ended with no further punishment. Vernon Unsworth brought a defamation lawsuit against him in December 2019. Unsworth was an advisor to Thai rescuers helping a Thai youth soccer team trapped in a cave. Musk called Unsworth “Pedo Guy.”

The SolarCity case is based on deep concerns about why Tesla had to purchase it. Musk claimed it would be a transformative deal that would allow Tesla to dominate the solar industry through low-cost panels and Tesla’s battery storage. It didn’t materialize, and there were concerns about conflict of interests. Musk’s cousins Lyndon Rive (and Peter Rive) founded SolarCity in 2006. Their cousin, a wealthy man, bankrolled it, held 22.2% when Tesla acquired it and was its chairman.

They were supposed to recapitalize the company and give it a new lease of life when they purchased them. Instead, it declined significantly because it wasn’t paying attention, and other things were going on,” Joseph Osha (senior research analyst at Guggenheim Securities), who tracks the solar power sector but doesn’t include Tesla.

SolarCity’s business model was to enlist customers who would pay no up-front cost but sign 20-year agreements to buy electricity generated by the company’s solar panels. It was the world’s largest residential solar installer. In 2016, it posted a record $730 million in revenue and suffered an $820 million net deficit and more than $1.5 Billion of debt.

The company’s rapid growth and its debt were mainly due to its marketing. The Rive brothers had a rapid growth rate for the solar company by heavily advertising and door-to-door sales. In addition, they offered low-cost, long-term leases for their solar power systems. It sought to increase the number of installations, and it was also seeing quarter after quarter of red.

Tesla hosted a big media event at Universal Studios Hollywood just weeks before the acquisition was closed to display solar roofs using high-tech glass shingles. Musk claimed that the product would revolutionize the industry because it would produce clean energy and eliminate the aesthetic issues of traditional photovoltaic panel systems that can irritate Musk, the world’s third-richest man. Musk stated, “The key is that it must be beautiful and affordable as well as seamlessly integrated.”

Tesla eliminated SolarCity’s marketing costs and moved all sales to its website. It ended its partnership with Home Depot. After the finalization of their deal, both the Rive brothers had resigned. “There were some sales channels that we felt were not consistent with Tesla’s brand, such door-to-door knocking on doors. We wanted to change that to Tesla store sales instead. It makes more sense. Musk spoke in a June 2019 interview in an investor lawsuit.

Tesla’s energy unit, which is left of SolarCity’s operations, posted $1.99 Billion in revenue last fiscal year. That’s up from $178 Million in 2016. The rapid growth of Powerwall “Powerwall” batteries, which store electricity from solar panels, has driven this growth. This product was sold by Tesla more than a year before the announcement. SolarCity’s core business panel installations saw a 25% increase in power in 2020, nearly doubling the 803 megawatts generated as a stand-alone entity in 2016.

Tesla reported a jump to 92 megawatts of solar installations in the first quarter but did not specify whether these were commercial or residential projects. It also stated that the solar roofing business grew nine-fold over a year ago but didn’t provide any numbers. Guggenheim’s Osha noted that, despite the gains, Musk’s battery company was still in decline. “Powerwall can sell Powerwalls 24/7 because it is such a great brand.”

Musk claimed that 2017 production difficulties with the Tesla Model 3 electric car led to the redeployment by SolarCity staff and engineers to boost vehicle production. Randall Baron asked Musk questions about his ability to identify the percentage of SolarCity employees transferred to Model 3 production. He also confirmed that the move had not been included in Tesla’s annual reports.

Tesla did not respond when asked about the trial. However, in its most recent annual reports, it stated that they believe the claims challenging SolarCity’s acquisition are without merit. They also intend to defend against them vigorously.

Baron, an attorney representing San Diego-based Robbins Geller Rudman & Dowd in the Musk case, declined to comment.

SolarCity didn’t install any unique solar panel tech. Instead, it relied on standard panels from the best manufacturers. Its business model consisted of installing panels, getting lease payments from customers, and monetizing the energy produced by all the systems it installed.

Tesla’s R&D efforts were responsible for the development of the solar roof program Musk wanted to replace SolarCity’s traditional panels business. Although it has been delivered at a scale similar to Musk’s promise in 2016, it still isn’t on the mass scale Musk promised. The company learned in part that every roof is unique and cannot be mass-produced like cars. More recently, Tesla has ceased to offer to retrofit existing homes and is now focusing on installing solar roofs only for new construction.

The SolarCity acquisition also included purchasing a large-scale factory for solar panels in Buffalo, New York. The company promised that its output would increase to 1 gigawatt per year, in partnership with its long-term industrial partner Panasonic. Panasonic has been the leading supplier of lithium-ion cells throughout the company’s history. Panasonic dropped the project last spring, and it is unknown how many panels or solar roof tiles Tesla currently makes at the facility. Tesla has not provided details about this production in SEC filings.

Despite the media attention Musk and Tesla get for their stories, Sunrun, the largest residential solar power system installer in the U.S. Sunnova, and SunPower are essential players in this industry.

Wedbush analyst Dan Ives said that “The SolarCity purchase was a deal to remember for Tesla investors because it’s a crowded space with little traction since acquisition.” “The Street assigns very little value until they achieve scale and realize their larger vision.

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Adam Collins
Adam writes about technology, business and economics. With master's degree in Economics, he's presented six papers in international conferences. As a solivagant in the constant state of fernweh, curiosity is the main weapon in his arsenal.

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