Shareholders Go After Elon Musk’s SolarCity Bailout Plan

Four shareholders sue the company, accuse Tesla board members of breaching their fiduciary duties
September 21, 2016 Updated: September 21, 2016

Tesla shareholders are suing the company because of its proposed merger with SolarCity, thus creating a challenge for Elon Musk to save the troubled solar energy company.

Tesla Motors Inc. (TSLA:NASDAQ) announced on Sept. 19 four shareholders filed lawsuits alleging that the Tesla board members “breached their fiduciary duties in connection with the proposed merger.” The shareholders also accuse both companies of unjustly enriching certain individuals through the deal.

“The lawsuits could prevent or delay completion of the merger and result in substantial costs to Tesla and SolarCity,” stated Tesla in a regulatory filing.

The lawsuits were filed by two pension funds (City of Riviera Beach Police Pension Fund and Arkansas Teacher Retirement System) and two individual shareholders (Ellen Prasinos and P. Evan Stephens), according to the filing.

“Other potential plaintiffs may also file additional lawsuits challenging the proposed merger. The outcome of any such litigation is uncertain,” Tesla stated.

In June, Tesla announced its plan to acquire SolarCity Corp. (SCTY:NASDAQ) in an all-stock deal, which valued SolarCity at $2.6 billion as of Aug 1. The merger is controversial, as Elon Musk is the chairman and largest shareholder of both companies and Lyndon Rive, the CEO of SolarCity, is a cousin of Elon Musk.

According to some analysts, the merger doesn’t make financial sense.

“Investors are likely to view this transaction as a bailout for SolarCity and a distraction to Tesla’s production hurdles,” stated Oppenheimer’s analyst Colin Rusch in his report after the merger announcement.

Based in San Mateo, California, SolarCity designs and installs solar panels at residences across the United States. The company sells long-term contracts and it is the market leader.

The company has frequently fallen short of its installation goals. Its operating expenses increased by 55 percent, causing the company to lose $533 million in the first half of 2016.

Tesla's share price performance in the last 1 year. The shares tumbled more than 60 percent since the beginning of this year. (Bloomberg)
Solar City’s share price performance in the last 1 year. The shares tumbled more than 60 percent since the beginning of this year. (Bloomberg)

Stock Decline

The solar company’s stock price has been very volatile since its IPO in 2012, and it tumbled more than 60 percent since the beginning of this year.

Tesla’s filing with the U.S. Securities and Exchange Commission (SEC) on Aug. 31 provided information related to the proposed merger with SolarCity.

The filing as well as SolarCity’s most recent earnings report confirmed the challenging financial situation of the solar company, according to the investment bank Barclays.  

“We believe there is a bit more urgency for the Tesla-SolarCity deal to go through sooner so that SolarCity can get the access to capital that it needs,” stated Barclays in a report.

SolarCity had total debt of $3.2 billion as of June 30. The company generated $308 million in revenue in the first half of 2016.

“Our business may not be able to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures,” the company stated in its June earnings report.

However, the company plans to solve its short-term liquidity problem by reducing its operating expenses, selling assets, restructuring its debt, and raising new funds.

In line with this plan, the company announced on Sept. 12 it raised $305 million in cash through a stock sale. The hedge fund of George Soros, Quantum Strategic Partners Ltd., invested as part of a portfolio of solar projects. The transaction also included an 18-year syndicated loan.

SolarCity shares are trading at a 28 percent discount to the proposed merger price of $25.37 per share. 

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