In re Tesla Motors, Inc. Stockholder Litigation

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE TESLA MOTORS, INC. : Consolidated
STOCKHOLDER LITIGATION : C.A. No. 12711-VCS
MEMORANDUM OPINION
Date Submitted: December 21, 2017
Date Decided: March 28, 2018
Jay W. Eisenhofer, Esquire and James J. Sabella, Esquire of Grant &
Eisenhofer P.A., Wilmington, Delaware; Michael Hanrahan, Esquire, Paul A.
Fioravanti, Jr., Esquire and Samuel L. Closic, Esquire of Prickett, Jones &
Elliott, P.A., Wilmington, Delaware; Ned Weinberger, Esquire, Ryan T. Keating,
Esquire and Thomas Curry, Esquire of Labaton Sucharow LLP, Wilmington,
Delaware; Joel Friedlander, Esquire and Jeffrey M. Gorris, Esquire of Friedlander &
Gorris, P.A., Wilmington, Delaware; Justin S. Brooks, Esquire of Guttman,
Buschner & Brooks PLLC, Wilmington, Delaware; Randall J. Baron, Esquire,
David T. Wissbroecker, Esquire and Maxwell R. Huffman, Esquire of Robbins
Geller Rudman & Dowd LLP, San Diego, California; Lee D. Rudy, Esquire, Eric L.
Zagar, Esquire, Robin Winchester, Esquire and Kristen L. Ross, Esquire of Kessler
Topaz Meltzer & Check, LLP, Radnor, Pennsylvania; and Mark Lebovitch, Esquire
and Jeroen van Kwawegen, Esquire of Bernstein Litowitz Berger &
Grossmann LLP, New York, New York, Attorneys for Plaintiffs.
David E. Ross, Esquire, Garrett B. Moritz, Esquire and Benjamin Z. Grossberg,
Esquire of Ross Aronstam & Moritz LLP, Wilmington, Delaware and William
Savitt, Esquire, Graham W. Meli, Esquire, Steven Winter, Esquire and David E.
Kirk, Esquire of Wachtell, Lipton, Rosen & Katz, New York, New York, Attorneys
for Defendants.
SLIGHTS, Vice Chancellor
The question addressed in this Memorandum Opinion is whether Plaintiffs
have adequately pled that Elon Musk is a controlling stockholder of Tesla, Inc.
(“Tesla” or the “Company”). Tesla acquired SolarCity Corporation (“SolarCity”) in
2016 (the “Acquisition”). Following the announcement of the proposed transaction,
Tesla stockholders filed several derivative and putative class action lawsuits in this
Court alleging that the Tesla board of directors (the “Board”) and Musk as a
conflicted controller breached their fiduciary duties by approving the Acquisition for
the benefit of SolarCity stakeholders and to the detriment of Tesla stockholders.
While it was not required to do so under Delaware law, the Board submitted
the Acquisition to Tesla stockholders for approval. A majority voted in favor of the
transaction. Following the stockholder vote, Defendants moved to dismiss the now-
consolidated complaint under Corwin v. KKR Financial Holdings LLC (“Corwin”).1
Plaintiffs oppose the motion, in part, on the ground that Corwin does not apply
because the Acquisition involved a conflicted controlling stockholder (Musk). 2
Musk, Tesla’s Chairman and Chief Executive Officer, owns less than a majority of
1
125 A.3d 304 (Del. 2015) (holding that director approval of a transaction not subject to
entire fairness review is entitled to pleading stage business judgment deference when the
transaction is later approved by an uncoerced, fully informed majority vote of disinterested
stockholders).
2
In re Merge Healthcare, Inc., 2017 WL 395981, at *6–7 (Del. Ch. Jan. 30, 2017) (holding
that a well-pled complaint supporting a reasonable inference that the transaction either
involved a conflicted controller will defeat a Corwin defense at the pleading stage).
1
Tesla’s outstanding voting stock. According to Defendants, Plaintiffs have failed to
plead facts that would support a reasonable inference that Musk, as a minority
blockholder, exercised either control over Tesla generally or control over Tesla’s
Board during its consideration and approval of the Acquisition. After carefully
reviewing the operative complaint, in a close call, I conclude it is reasonably
conceivable that Musk, as a controlling stockholder, controlled the Tesla Board in
connection with the Acquisition. Accordingly, for the reasons set forth below,
Defendants’ motion to dismiss must be denied.
I. FACTUAL BACKGROUND
I have drawn the facts from well-pled allegations in the Second Amended
Verified Class Action and Derivative Complaint (the “Complaint”) 3 and documents
incorporated by reference or integral to the Complaint.4 Tesla produced documents
to Plaintiffs pursuant to 8 Del. C. § 220 (“Section 220 Documents”).5 The parties
have agreed that all Section 220 Documents shall be deemed incorporated within the
3
Citations to the Complaint are to “Compl. ¶ __.”
4
Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 320 (Del. 2004) (noting that on
a motion to dismiss, the Court may consider documents that are “incorporated by
reference” or “integral” to the complaint).
5
Compl. ¶ 8.
2
Complaint whether or not expressly referenced or incorporated therein. 6 The
following facts, as well-pled in the Complaint, are accepted as true for purposes of
the present motion.7
A. The Parties and Relevant Non-Parties
Plaintiffs are Tesla stockholders and were so at all relevant times.8 They bring
both direct claims on behalf of themselves and a putative class of injured Tesla
stockholders as well as derivative claims on behalf of the Company.
Nominal Defendant Tesla is a public Delaware corporation headquartered in
Palo Alto, California that designs, develops, manufactures and sells electric vehicles
and energy storage products.9 Tesla’s Board comprises seven members: Elon Musk
(“Musk”), Brad W. Buss, Robyn M. Denholm, Ira Ehrenpreis, Antonio J. Gracias,
Stephen T. Jurvetson and Kimbal Musk (“Kimbal”).10
Non-party SolarCity was a public Delaware corporation headquartered in San
Mateo, California that was founded by Musk and his cousins, Peter and Lyndon Rive
6
Compl. 1; Defs.’ Opening Br. in Supp. of Mot. to Dismiss the Second Am. Compl.
(hereinafter “Defs.’ Opening Br.”) 4 n.2; Transmittal Aff. of Garrett B. Moritz in Supp. of
Defs.’ Mot. to Dismiss the Second Am. Compl. (hereinafter “Moritz Aff.”), Ex. 7 ¶ 8.
7
In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 169 (Del. 2006).
8
Compl. ¶¶ 11–18.
9
Compl. ¶ 2.
10
Compl. ¶ 7. I refer to Kimbal Musk by his first name to avoid confusion with Elon Musk.
I intend no disrespect.
3
(“Peter” and “Lyndon”). 11 It principally operated as a solar energy system
installer.12 Its board of directors (the “SolarCity Board”) included Musk, Gracias,
Lyndon, Peter, Nancy Pfund, and John H.N. Fisher.13 Lyndon served as SolarCity’s
CEO and Peter as its Chief Technology Officer (“CTO”).14
Defendant Musk is Tesla’s largest stockholder. 15 At the time of the
Acquisition, Musk owned approximately 22.1% of Tesla’s common stock. 16
He serves as Chairman of the Tesla Board (since April 2004) and as Tesla’s CEO
(since October 2008) and Chief Product Architect.17 He also led Tesla’s pre-initial
public offering (“IPO”) funding rounds.18 Tesla has acknowledged in its Securities
and Exchange Commission filings that Musk is not an independent director.19
11
Compl. ¶¶ 3, 64. I refer to both Peter and Lyndon Rive by their first names to avoid
confusion. Again, no disrespect is intended.
12
See Compl. ¶¶ 3, 65.
13
Compl. ¶¶ 35, 49, 64. Except for Musk and Gracias, none of the SolarCity Board
members are party to this litigation.
14
Compl. ¶ 64.
15
Compl. ¶ 20.
16
Id.
17
Compl. ¶¶ 20, 271.
18
Compl. ¶ 2.
19
Compl. ¶ 20.
4
As Tesla’s Chief Product Architect, Musk plays a key role in the design of all
Tesla products. 20 He also contributes “significantly and actively” to Tesla by
“recruiting executives and engineers, [] raising capital for [the Company] and
bringing investors to and raising public awareness of the Company.” 21 In its SEC
filings, Tesla states that it is “highly dependent on the services of Elon Musk,”22 and
acknowledges that if it were to lose Musk’s services, the loss would “disrupt
[Tesla’s] operations, delay the development and introduction of [its] vehicles and
services, and negatively impact [its] business, prospects and operating results as well
as cause [its] stock price to decline.”23 For his part, Musk has stated publicly that if
he had not assumed the role of CEO “the company wasn’t going to make it.”24 On an
August 1, 2016 conference call (the same day Tesla announced the Acquisition),
Musk repeatedly referred to Tesla as “my company.”25
20
Compl. ¶¶ 2, 60, 271.
21
Compl. ¶ 271.
22
Compl. ¶ 20.
23
Compl. ¶ 274.
24
Compl. ¶ 271.
25
Compl. ¶ 116.
5
Musk also served as the Chairman of the SolarCity Board since its formation
in 2006.26 He was SolarCity’s largest stockholder, holding approximately 21.9% of
the common stock prior to the Acquisition.27 As a result of the Acquisition, Musk’s
SolarCity holdings were converted to over $500 million of Tesla shares. 28 It is
alleged that Musk has publicly maintained that Tesla, SolarCity and SpaceX form a
“pyramid” on top of which he sits, and that it is “important that there not be some
sort of house of cards that crumbles if one element of the pyramid . . . falters.”29
Defendant Buss has been a Tesla Board member since 2009.30 Tesla’s 2015
proxy statement acknowledges that Buss is not an independent director.31 In fiscal
year 2015, Buss earned $4,954,785 as a Tesla director.32 From August 2014 until
February 2016, Buss served as SolarCity’s Chief Financial Officer (“CFO”), for
26
Compl. ¶ 24.
27
Id.
28
Plaintiffs allege facts about a third company, Space Exploration Technologies
Corporation (“SpaceX”), a private aerospace manufacturer and space transport services
company that Musk founded. Compl. ¶ 25. Musk has served as the CEO, CTO and
Chairman of the Board of Directors of SpaceX since 2002. Id.
29
Compl. ¶ 5.
30
Compl. ¶ 26.
31
Compl. ¶ 28; Moritz Aff., Ex. 13, at TESLA00001483.
32
Compl. ¶ 29.
6
which he received total compensation of $32 million.33 After his departure from
SolarCity’s management, Buss remained at SolarCity as either an employee or
consultant through at least December 31, 2016. 34 He beneficially owned 37,277
shares of SolarCity common stock at the time of the Acquisition.35
Defendant Denholm has been a Tesla Board member since August 2014.36
She chairs the Board’s Audit Committee and is a member of its Compensation and
Nominating and Governance Committees.37 As a Tesla director, Denholm earned
$7,181,066 in 2014 and $4,979,785 in 2015.38 From July 2013 until February 2016,
Denholm served as Executive Vice President, CFO and Chief Operations Officer at
Juniper Networks, Inc. (“Juniper”).39 She left Juniper in July 2016 and did not return
to full-time employment until sometime in 2017.40
33
Compl. ¶¶ 27, 29.
34
Id.
35
Compl. ¶ 27.
36
Compl. ¶ 31.
37
Id.
38
Compl. ¶ 33.
39
Compl. ¶ 32.
40
Compl. ¶¶ 32–33.
7
Defendant Ehrenpreis has been a Tesla Board member since May 2007. 41
He chairs the Board’s Compensation and Nominating and Governance
Committees.42 Ehrenpreis is an investor in, and serves on the board of directors of,
Mapbox, Inc., which provides custom online maps.43 Tesla and Mapbox entered
into an agreement in December 2015 pursuant to which Tesla pays Mapbox ongoing
fees, including $5 million over the first twelve months of the agreement.44
Ehrenpreis is also a managing partner and co-owner of a venture capital firm,
DBL Partners, which he co-founded with fellow managing partner and co-owner
Nancy Pfund.45 Pfund was an observer on the Tesla Board from 2006 to 2010.46
She was also a member of the SolarCity Board and one of two members of the
SolarCity Board’s special committee that negotiated and approved the Acquisition.47
Pfund is the managing director and founder of DBL Investors, LLC
(“DBL Investors”), which contributed at least $3.6 million over three of SolarCity’s
41
Compl. ¶ 34.
42
Id.
43
Compl. ¶ 38.
44
Id.
45
Compl. ¶ 35. Plaintiffs allege Ehrenpreis is also a manager of DBL Partners Fund III
(“DBL III”), and that both Ehrenpreis and DBL III are SpaceX investors. Compl. ¶ 39.
46
Id.
47
Id.
8
funding rounds. 48 At the time of the Acquisition, Pfund beneficially owned
1,554,114 shares of SolarCity common stock.49 She is a close friend of Musk’s and
has said that “[h]e’s always been a master of the universe in my mind.”50
Defendant Gracias has served on the Tesla Board since May 2007.51 Gracias
has been Tesla’s Lead Independent Director since September 2010.52 In that role,
Gracias has “broad authority to direct the actions of [Tesla’s] independent
directors.”53 Musk and Gracias are close friends; indeed, Musk gave Gracias the
second Tesla Roadster ever made.54 Gracias also served on SolarCity’s Board at the
time of the Acquisition and beneficially owned 211,854 shares of SolarCity common
stock.55
In addition, Gracias is founder, managing partner, CEO, Chief Investment
Officer, director and sole owner of private equity firm Valor Management Corp.,
48
Compl. ¶ 36. DBL Investors has also invested in SpaceX. Compl. ¶ 39.
49
Compl. ¶ 36. At the deal price of $25.37 per share, this ownership block is worth
approximately $39.4 million.
50
Id.
51
Compl. ¶ 40.
52
Compl. ¶ 46.
53
Id.
54
Compl. ¶ 45.
55
Compl. ¶¶ 42–43. Gracias also served on the board of directors of SpaceX at the time
of the Acquisition. Compl. ¶ 42.
9
which does business as Valor Equity Partners (“Valor”).56 Valor and Gracias have
participated in several pre-IPO funding rounds for Tesla and SolarCity.57 Through
Valor funds, Gracias participated in four Tesla venture funding rounds between 2005
and 2008, as well as a pre-IPO venture debt raise in 2009.58 Prior to Tesla’s IPO,
Valor owned nearly five million Tesla shares.59 Gracias and his Valor funds also
contributed nearly $25 million to SolarCity’s pre-IPO preferred stock financing
round.60 Musk has invested $2 million in each of two Valor funds.61
Defendant Jurvetson has served as a Tesla Board member since June 2009.62
He serves on the Board’s Audit Committee.63 In fiscal year 2015, Jurvetson earned
$6,095,984 as a Tesla director. 64 Musk and Jurvetson are also close friends,
56
Compl. ¶ 41.
57
Compl. ¶ 42. Gracias and Valor also participated in several pre-IPO venture funding
rounds for SpaceX. Id. In fact, Gracias has been a long time investor in Musk’s enterprises,
dating back to PayPal, an online financial services and e-mail payment company that Musk
founded in 1999. Compl. ¶ 42 n.4.
58
Compl. ¶ 42 n.5.
59
Id.
60
Id. Valor funds also participated in two SpaceX funding rounds in 2010 and 2015. Id.
61
Compl. ¶ 44.
62
Compl. ¶ 47.
63
Id.
64
Id.
10
evidenced in part by the fact that Musk gave Jurvetson the first Tesla Model S and
the second Tesla Model X ever made. 65 Jurvetson owned 417,450 shares of
SolarCity common stock at the time of the Acquisition.66
Jurvetson is a managing director of venture capital firm Draper Fisher
Jurvetson (“DFJ”). 67 Between 2006 and 2008, before Tesla’s IPO in 2010, DFJ
invested in three of Tesla’s venture funding rounds, but it has not held Tesla stock
since late 2014 or early 2015.68 DFJ was also invested in SolarCity. After its initial
investment in 2006, between 2006 and 2011, DFJ invested at least $18.9 million in
SolarCity via four venture capital funding rounds.69 At the time of the Acquisition,
funds managed by DFJ beneficially owned 3,308,266 shares of SolarCity common
65
Compl. ¶ 48 n.6.
66
Compl. ¶ 49.
67
Compl. ¶ 48.
68
Id.
69
Compl. ¶ 49 n.7. Additionally, DFJ participated in four early venture funding rounds of
SpaceX between 2009 and 2015. Compl. ¶ 50 n.10. Indeed, according to Tesla’s 2016
annual proxy statement, DFJ is a “significant stockholder” of SpaceX. Compl. ¶ 50.
Jurvetson and two other DFJ managing directors, John H.N. Fisher and Randall S. Glein,
all serve on the board of directors of SpaceX. Id.
11
stock, amounting to approximately 3.3% of the shares outstanding.70 Musk invests
in DFJ and one of Musk’s trusts is a limited partner in a DFJ fund.71
Defendant Kimbal has served on the Tesla Board since April 2004.72 He is
Musk’s brother and cousin of Lyndon and Peter, SolarCity’s co-founders.73 Tesla’s
SEC filings acknowledge that Kimbal is not an independent director.74 In fiscal year
2015, Kimbal earned $4,964,381 as a Tesla director. 75 He owns an unspecified
amount of Tesla shares.76 At the time of the Acquisition, Kimbal also beneficially
owned 147,541 shares of SolarCity common stock. 77 Additionally, Kimbal is a
limited partner in two Valor funds, and Musk has invested in one of those funds.78
70
Compl. ¶ 49. At the Acquisition price of $25.37, this ownership block is worth
approximately $83.9 million.
71
Compl. ¶ 51. Musk and DFJ co-founder Tim Draper have invested in other ventures
together. Compl. ¶ 52. Fisher (as noted, a DFJ managing director) was a SolarCity director
at the time of the Acquisition and owned 452,868 shares of SolarCity stock. Compl. ¶ 49.
72
Compl. ¶ 53.
73
Id. Kimbal is also a director of SpaceX. Compl. ¶ 56.
74
Compl. ¶ 53.
75
Compl. ¶ 55.
76
See Compl. ¶¶ 53–58.
77
Compl. ¶ 54.
78
Compl. ¶ 57.
12
The Company’s SEC filings acknowledge that the “concentration of
ownership among [Tesla’s] existing executive officers, directors and their affiliates
may prevent new investors from influencing significant corporate decisions,”79 and
that “these stockholders will be able to exercise a significant level of control over all
matters requiring stockholder approval, including the election of directors,
amendment of our certificate of incorporation and approval of significant corporate
transactions.”80
B. The Tesla-SolarCity Connections
Martin Eberhard and Marc Tarpenning, two Silicon Valley engineers, founded
Tesla in 2003, with the goal of proving “that electric cars could be better than
gasoline-powered cars.” 81 Tesla initially focused on designing, developing,
manufacturing and selling high-performance fully electric vehicles and advanced
electric vehicle powertrain components.82 In 2013, the Company began producing
and selling home energy storage systems and then entered the commercial and utility
79
Compl. ¶ 275.
80
Id.
81
Compl. ¶ 59.
82
Compl. ¶ 63.
13
energy storage business in 2014.83 Nevertheless, Tesla’s primary source of revenue
remains the sale of its vehicles.84
Musk became involved with Tesla soon after it was formed. In 2004, Musk
led Tesla’s Series A round of financing and became Chairman of the Board pursuant
to a Series A voting agreement.85 Over the next few years, Musk participated in
Tesla’s Series B, C, D and E venture funding rounds.86 Musk led the Series B round
of funding and co-led the Series C round.87 Prior to Tesla’s IPO, Musk had invested
approximately $70 million in the Company.88
“In November 2007, Musk forced founder and then-CEO Eberhard out of the
Company.” 89 He appointed himself CEO in October 2008.90 Around that time,
83
Id.
84
Id.
85
Compl. ¶ 60.
86
Id.
87
Compl. ¶ 269.
88
Compl. ¶ 60.
89
Compl. ¶ 61.
90
Id.
14
Tesla encountered financial trouble.91 Musk personally borrowed $20 million from
SpaceX in early 2009 to help “keep Tesla afloat.”92
Since Tesla’s IPO in 2010, Musk has been the Company’s largest stockholder,
owning between 26.5% and 29% of its outstanding common stock, until he sold
shares in May 2016 that reduced his ownership stake to 22.5%.93 By September
2016, Musk owned 22.1% of Tesla’s outstanding common stock.94
Musk, Lyndon and Peter founded SolarCity in 2006.95 As noted, prior to the
Acquisition, SolarCity was in the business of leasing solar panel equipment to
residential and commercial customers.96 Its primary source of revenue was lease
payments received from its customers. 97 SolarCity took on substantial debt to
91
Id.; Compl. ¶ 269.
92
Compl. ¶ 61. Musk has financially supported Tesla and SolarCity on at least two other
occasions where he extended his personal credit lines to inject capital into both Tesla and
SolarCity. In early 2013, Musk increased his personal credit lines from $85 million to
$300 million secured by substantial shares of Tesla and SolarCity stock. Compl. ¶ 67.
From May 2013 to October 2013, Musk used his increased credit to acquire $100 million
in Tesla stock and $10 million in SolarCity stock. Id. In 2015, Musk further increased his
personal credit lines to $475 million and purchased $20 million in Tesla stock and $17.7
million in SolarCity stock. Compl. ¶ 68.
93
Compl. ¶ 62.
94
Id.
95
Compl. ¶ 64.
96
Compl. ¶ 65.
97
Id.
15
finance its upfront costs associated with equipment and installation.98 It completed
an IPO in December 2012 and since then has suffered losses in every quarter except
three. 99 Musk owned 21.9%, Lyndon owned 3.9% and Peter owned 3.8% of
SolarCity’s outstanding common stock at the time of the Acquisition.100
C. SolarCity’s Liquidity Challenges
During the three years immediately preceding Tesla’s June 2016 offer to
acquire SolarCity, SolarCity’s debt increased thirteen-fold, totaling $3.56 billion as
of June 2016.101 By any measure, SolarCity was in the midst of a liquidity crisis.102
Its revolving credit facility (the “Revolver”) contained a covenant requiring it to
maintain a minimum cash balance of $116 million (exclusive of cash held in fund
accounts), measured monthly.103 Failure to maintain the minimum cash balance was
an event of default, and a Revolver default would likely trigger cross-defaults on
98
Id.
99
Compl. ¶ 66.
100
Id.
101
Compl. ¶ 69.
102
Compl. ¶ 71.
103
Id. (citing TESLA00000740).
16
other debt instruments.104 SolarCity also faced the prospect of defaulting on its non-
recourse debt, which, in turn, could trigger a cross-default under the Revolver.105
In February 2016, a SolarCity Board presentation (the “February 2016
SolarCity Board Presentation”) acknowledged that the company faced “significant
liquidity concerns” and that SolarCity’s cash balance would not meet the Revolver’s
required level at least three times in 2016—in May, August and September.106 To
make matters worse, $1.23 billion of SolarCity’s debt was scheduled to become due
by the end of 2017.107 Musk, Gracias and Buss attended the February 2016 meeting
and were well aware of SolarCity’s “significant liquidity concerns” at the time Musk
brought the proposed acquisition of SolarCity to the Tesla Board.108
The debt and equity markets were effectively closed to SolarCity. It had
already issued nearly 25 million additional shares since its December 2012 IPO, and
its stock had declined in value approximately 64% from February 2015 to February
2016. 109 The credit markets were no more forgiving. SolarCity already held
104
Id.
105
Compl. ¶ 72.
106
Compl. ¶¶ 73, 83 (citing and quoting TESLA00000740).
107
Compl. ¶ 73.
108
Id.
109
Compl. ¶ 82.
17
substantial debt and had recently attempted to raise capital via bond offerings (“Solar
Bonds”).110
In September 2016, SolarCity and its subsidiary, Silevo, Inc., were sued for
allegedly misappropriating trade secrets and intellectual property and engaging in
other violations of law relating to solar cell shingling technology. 111 The plaintiffs
in that litigation sought, inter alia, “a permanent injunction prohibiting SolarCity
and Silevo’s use of the misappropriated information and prosecution of certain
patent applications.”112 The litigation presented particular concerns for SolarCity
(and soon for Tesla) “given Musk’s public statements that Silevo would be the driver
of any synergies in the Acquisition and [is] the gem of SolarCity.”113
D. Musk Persistently Presents the SolarCity Transaction to the Board
The Tesla Board held a special meeting on February 29, 2016. 114 At the
meeting, Musk and Tesla CFO, Jason Wheeler, presented a preliminary plan for
110
Compl. ¶ 76. SpaceX was the largest holder of Solar Bonds. Compl. ¶ 77. In March
2015, SpaceX bought $90 million in Solar Bonds, and then $75 million in June 2015 and
$90 million in March 2016. Id. In November 2015, a Musk-affiliated entity acquired
$10 million in Solar Bonds and Lyndon purchased $3 million. Id. When SolarCity sought
to raise $124 million in an August 2016 bond offering, Musk purchased $65 million of
these Solar Bonds, and Lyndon and Peter each purchased $17.5 million. Compl. ¶ 78.
111
Compl. ¶ 80.
112
Id.
113
Compl. ¶ 81.
114
Compl. ¶ 85 (citing TESLA00001346).
18
Tesla to acquire SolarCity.115 Musk led the presentation.116 The stated purpose of
the proposed transaction was “to complement the Company’s Energy business, grow
the Sales operations of the Company and to create other product, service and
operational synergies through the combination of the companies.” 117 Musk’s focus
was on a potential acquisition of SolarCity; he did not mention and the Board did
not consider other companies in the solar industry or other strategic transactions.118
The Board “decided not to proceed with an offer to SolarCity at [that] time because
of the potential impact on the management team’s time and resources in the near
term.”119
Two weeks passed, and Musk was before the Tesla Board again to propose a
possible acquisition of SolarCity (and only SolarCity) during the Board’s March 15,
2016 meeting.120 And, again, the Board deferred the discussion.121
115
Id. This presentation, perhaps coincidentally, occurred in the same month as the
February 2016 SolarCity Board Presentation.
116
Id.
117
Compl. ¶ 86.
118
Id. Musk ruled out as “unworkable” a joint venture between Tesla and SolarCity in lieu
of an acquisition. Compl. ¶ 87.
119
Compl. ¶ 89 (quoting TESLA00001347).
120
Compl. ¶ 90.
121
Id.
19
Less than three months later, on May 31, 2016, at a regularly scheduled
meeting of the Board, Musk was back to propose (again) a possible acquisition of
SolarCity.122 This time, the Board appeared to share Musk’s view of “the possible
benefits . . . [of] acquiring a solar energy company in the context of the Company’s
strategic plan.”123 The minutes of the meeting reflect that “the Board discussed the
possibility of evaluating an acquisition of SolarCity Corporation . . . as a potential
target of opportunity in the solar energy space.”124 Once again, SolarCity was the
only target on which the Board trained its sight.125
At the conclusion of the May 31 meeting, the Tesla Board authorized Musk
and management to (a) assess a potential acquisition of a solar energy company;
(b) engage an independent financial advisor on behalf of the Tesla Board and the
Company; and (c) instruct the law firm Wachtell, Lipton, Rosen & Katz to undertake
a review of a potential acquisition by Tesla.126 Musk, as CEO, retained Wachtell as
122
Compl. ¶ 91 (citing TESLA00001455–56).
123
Compl. ¶ 92. Tesla’s strategic plan is the “Master Plan” that Musk authored in 2006
and updated in 2016 as “Master Plan, Part Deux.” Compl. ¶¶ 92, 138. The Master Plan
contemplated that Tesla would “provide solar power.” Compl. ¶ 140. In his Master Plan,
Part Deux, Musk emphasized that the phrase “provide solar power” “has literally been on
[Tesla’s] website for 10 years.” Id.
124
Compl. ¶ 92 (quoting TESLA00001455).
125
Id.
126
Compl. ¶ 93 (citing TESLA00001456).
20
legal advisor and Evercore Partners as financial advisor to advise both Tesla’s Board
and Tesla’s management.127 “Despite the Tesla Board members’ obvious conflicts
in considering an acquisition of SolarCity, the Tesla Board did not form a special
committee” to consider the potential acquisition.128
The Tesla Board called a special meeting for June 20, 2016 (the “June 2016
Special Meeting”) “to further explore a potential strategic transaction between the
Company and a participant in the solar energy industry.” 129 Musk opened the
meeting by “remind[ing] the board that the issue [of acquiring SolarCity] had been
raised and discussed but ultimately deferred at previous meetings and review[ing]
some of the strategic considerations that the board had evaluated at those previous
meetings.”130 It is alleged that, as if on cue, the Board heeded Musk’s “tacit order”
and promptly authorized its advisors to make an offer for SolarCity.131
The Board’s first meeting with Evercore occurred during the June 2016
Special Meeting, the same meeting where the Board approved the offer to acquire
127
Compl. ¶ 94.
128
Id.
129
Compl. ¶ 97 (quoting TESLA00001459).
130
Compl. ¶ 98 (quoting TESLA00001459).
131
Id.; Compl. ¶ 102.
21
SolarCity. 132 The meeting minutes reflect that although Evercore’s presentation
included a brief analysis of “various potential targets,” the Board did not discuss
potential acquisitions of any target other than SolarCity.133 This is surprising, to say
the least, given that “Goldman Sachs & Co., which was a co-underwriter in Tesla’s
$2 billion secondary stock offering that was issued just weeks earlier, publicly stated
that SolarCity was the ‘worst positioned’ company in the solar energy sector for
capitalizing on future growth in the industry.”134
Musk and Gracias, both directors of Tesla and SolarCity, recused themselves
from the June 2016 Special Meeting while the remaining members of the Board
voted to approve the offer for SolarCity.135 But both remained for the entirety of the
meeting while the potential acquisition of SolarCity was discussed, and Musk led
most of those discussions.136 When the time came for the vote, the Board approved
and adopted the offer on the same terms discussed when Musk and Gracias were
present.137
132
Compl. ¶¶ 95–96.
133
Compl. ¶ 100.
134
Compl. ¶ 99.
135
Compl. ¶¶ 98, 102.
136
Compl. ¶¶ 98, 100–102. See also Moritz Aff., Ex. 9, at TESLA00001461.
137
Compl. ¶ 102 (citing TESLA00001462–63).
22
E. The Offer for SolarCity
On June 21, 2016, Tesla announced its offer to acquire SolarCity in a stock-
for-stock transaction at an exchange ratio of 0.122x to 0.131x (the “Offer”).138 The
Offer valued SolarCity at $26.50 to $28.50 per share, the equivalent of $2.6 to
$2.8 billion.139 The proposed purchase price reflected a 21% to 30% premium to
SolarCity’s closing price on June 20, 2016.140
Musk was active in his sponsorship and backing of the Offer and the eventual
Acquisition both before and after the announcement of the deal. First, during a
June 22, 2016, call with investors and analysts, one day after Tesla announced the
Offer, Musk stated:
Like the opinion is unanimous for both companies. So, I mean, unless
there’s something discovered that like that I have no idea about or just
that nobody on the board has any idea about, which is extremely
unlikely, then the board would—the independent board members
would recommend in favor of completing a transaction somewhere in
the price range that was mentioned, most likely.141
Then, during the due diligence period, Musk reached out to “certain
institutional investors” to garner support for the Acquisition.142 It is alleged that,
138
Compl. ¶ 103.
139
Id.
140
Id.
141
Compl. ¶ 118.
142
Compl. ¶ 127 (quoting TESLA00001476).
23
“by ensuring an ‘Increasing View of Deal Certainty’ in the market through his public
statements that nothing would be revealed in due diligence that would derail the
Acquisition, as well as conversations with institutional investors, Elon Musk forced
the Tesla Board into a position in which they had no choice but to follow through
with the Acquisition.”143
And finally, one month following the announcement of the Offer, on July 20,
2016, Musk published his “Master Plan, Part Deux” to Tesla’s website. 144 This
“manifesto” of sorts updated the original Master Plan that Musk published in 2006
and detailed Musk’s vision for Tesla’s future.145 The Master Plan, Part Deux, states,
in relevant part:
The first master plan that I wrote 10 years ago is now in the final stages
of completion. It wasn’t all that complicated and basically consisted
of:
1. Create a low volume car, which would necessarily be expensive
2. Use that money to develop a medium volume car at a lower price
3. Use that money to create an affordable, high volume car
And . . .
Provide solar power. No kidding, this has literally been on our website
for 10 years.
...
143
Compl. ¶ 128.
144
Compl. ¶ 138.
145
Id.
24
The point of all this was, and remains, accelerating the advent of
sustainable energy, so that we can imagine far into the future and life is
still good.
. . . Here is what we plan to do to make that day come sooner:
. . . We can’t do this well if Tesla and SolarCity are different companies,
which is why we need to combine and break down the barriers inherent
to being separate companies. That they are separate at all, despite
similar origins and pursuit of the same overarching goal of sustainable
energy, is largely an accident of history. Now that Tesla is ready to
scale Powerwall and SolarCity is ready to provide highly differentiated
solar, the time has come to bring them together.146
The “Master Plan, Part Deux” reflects “that the Acquisition [was] being driven by
Elon Musk, as it has been a component of his strategy for Tesla for at least ten
years.”147
F. Due Diligence Reveals SolarCity’s Liquidity Crisis and Other Issues
In a July 5, 2016 presentation to the Tesla Board, Evercore warned the Board
that SolarCity had $3.164 billion in outstanding debt as of March 31, 2016, and that
significant debt would mature in a three-to-five year window. 148 According to
146
Compl. ¶ 140.
147
Id.
148
Compl. ¶ 129.
25
Evercore, a Tesla-SolarCity combined company would have “58% and 89% of pro
forma debt mature within 3 and 5 years, respectively.”149
At its July 19, 2016 special meeting, the Tesla Board discussed SolarCity’s
liquidity situation. 150 As predicted in the February 2016 SolarCity Board
Presentation, SolarCity was heading towards cash balances below the minimum
level required by the Revolver for the weeks of July 22, August 5 and August 12.151
With this default looming, SolarCity once again offered its Solar Bonds to the
market. As noted, Musk, Lyndon and Peter answered the call by acquiring
$100 million of the bonds between the three of them.152
In more bad news, due diligence revealed issues with SolarCity’s new
manufacturing facility planned for Buffalo, New York (the “Buffalo Factory”).153
SolarCity had planned to shutter its China-based manufacturing facility and move
production to Buffalo, New York.154 As an incentive for the move to Buffalo, the
state of New York offered SolarCity tax credits, a loan to fund the Buffalo Factory
149
Id. (quoting TESLA00000246).
150
Compl. ¶ 121.
151
Compl. ¶ 123 (citing TESLA00000740).
152
Compl. ¶ 130.
153
Compl. ¶ 131.
154
Compl. ¶¶ 131–32.
26
build and a grant worth hundreds of millions of dollars.155 In exchange, SolarCity
was required to invest $5 billion over ten years in total capital and operational
expenditures in New York State and was obligated to employ 5,000 people within
ten years of factory completion. 156 If SolarCity failed to meet certain targets, it
would be liable to New York for $41.2 million per year for each year it failed to
meet any of the milestones.157 As discovered in Tesla’s due diligence, SolarCity’s
Buffalo Factory was behind schedule, its costs were projected to be higher than those
carried in the industry and its “projected installed cost per watt for Silevo modules
[the principal product coming off the line] carried a $0.20 premium above the
industry in 2019 and beyond.”158
G. Evercore’s Discounted Cash Flow Analyses
Evercore performed two discounted cash flow valuation (“DCF”) analyses of
SolarCity as part of its fairness analysis. 159 The first DCF relied on SolarCity
management’s forecasts provided to Evercore in mid-July 2016 (the “SolarCity
155
Compl. ¶ 132.
156
Compl. ¶ 133 (citing TESLA00000738).
157
Compl. ¶ 134 (citing TESLA00000738).
158
Compl. ¶ 135 (citing TESLA00000705). If Tesla abandoned the Buffalo Factory after
the Acquisition, it would potentially be liable for approximately $646 million in
termination fees. Compl. ¶ 136 (citing TESLA00000872–73).
159
Compl. ¶ 170.
27
Unrestricted Liquidity Case”). 160 Tesla’s management, led by Musk, provided
Evercore with adjustments to revise the SolarCity Unrestricted Liquidity Case
downward to create a revised sensitivity case (the “SolarCity Revised Sensitivity
Forecasts.”) 161 The SolarCity Revised Sensitivity Forecasts reduced certain
SolarCity projections, which consequently decreased cash requirements. 162 This
sensitivity case also reduced overhead and research and development costs by ten
percent and increased litigation cost projections.163 Evercore performed a second
DCF analysis using the SolarCity Revised Sensitivity Forecasts. 164 Both DCF
analyses yielded per share value ranges supporting the Acquisition price and
ultimately Evercore’s July 30, 2016 fairness opinion.
Later, in August 2016, SolarCity management provided the Tesla Board and
Evercore with a second forecast that was less optimistic than the mid-July 2016
forecast (the “SolarCity Liquidity Management Case”). 165 SolarCity’s financial
advisor performed DCF analyses using the SolarCity Liquidity Management Case,
160
Id.
161
Compl. ¶ 171 (citing TESLA00001120).
162
Compl. ¶ 172 (citing TESLA00000879).
163
Id.
164
Compl. ¶ 173.
165
Compl. ¶ 174 (citing TESLA00001759–60).
28
which derived per share value ranges for SolarCity below the Acquisition price.166
Initially, SolarCity’s financial advisor calculated a per share equity value reference
range for SolarCity of approximately $6.75 to $19.25. 167 After adjusting for a
“computational error,” the SolarCity DCF analysis yielded values for SolarCity of
$10.50 to $23.25 per share.168
Evercore did not perform an additional DCF analysis using the SolarCity
Liquidity Management Case, nor did Evercore otherwise revise its valuation of
SolarCity.169 The Board did not request that Evercore perform such an analysis.170
At an August 25, 2016 special meeting, Evercore advised the Board, without
analysis, that the SolarCity Liquidity Management Case did not alter its prior
valuation. 171 The Board likewise determined that the new information did not
“change[] its view as to the value of SolarCity.”172
166
Compl. ¶ 175.
167
Id.
168
Id.
169
Compl. ¶ 176.
170
Id.
171
Id.
172
Id.
29
H. Tesla and SolarCity Announce the Merger Agreement
On August 1, 2016, Tesla and SolarCity announced they had executed an
Agreement and Plan of Merger dated July 31, 2016 (the “Merger Agreement”),
pursuant to which Tesla would acquire SolarCity in an all-stock deal.173 The Merger
Agreement provided for each share of SolarCity common stock to be converted to
0.110 shares of Tesla common stock (the “Exchange Ratio”). 174 While this
Exchange Ratio was slightly lower than the 0.122x to 0.131x range that the Tesla
Board approved at the June 2016 Special Meeting, it was within the range initially
proposed without the benefit of any due diligence on SolarCity.175 The Acquisition
price valued SolarCity at approximately $2.6 billion, or $25.37 per share of
SolarCity stock based on the five-day volume weighted average price of Tesla shares
as of July 29, 2016, the last trading day prior to the announcement of the
Acquisition.176
The Complaint alleges the Acquisition was a bailout of SolarCity that
benefited six of the seven members of the Tesla Board and/or their family members,
173
Compl. ¶¶ 4, 142.
174
Compl. ¶ 143.
175
Compl. ¶¶ 144, 145.
176
Compl. ¶ 143. The per share Acquisition price was $25.83 per SolarCity share if based
on Tesla’s closing price as of July 29, 2016, the last trading day prior to the execution of
the Merger Agreement.
30
businesses and business partners. 177 Specifically, the Acquisition benefited:
(a) Musk, Kimbal and their cousins, Peter and Lyndon; (b) Gracias and the
investment fund he manages; (c) Jurvetson, his venture capital firm and his firm’s
managing director; (d) Ehrenpreis’ venture capital partner; and (e) Buss.178
I. The Tesla Stockholders Approve the Acquisition
On November 17, 2016, Tesla stockholders voted to approve the
Acquisition. 179 The Merger Agreement excluded from the vote certain Tesla
stockholders (and their affiliates) who were also directors or executive officers of
SolarCity, including Musk, Gracias and Jeffrey Straubel. 180 Kimbal, Jurvetson,
Ehrenpreis, Buss, Tesla executive officers and any other Tesla stockholders who also
owned stock in SolarCity were not excluded from the vote tally.181 As of the record
date for the stockholder vote, excluding shares held by Musk, Gracias, Straubel and
their affiliates, 118,044,090 shares of Tesla common stock were outstanding and
entitled to vote. Of these, 68,788,787 voted in favor of the Acquisition.182 Thus,
177
Compl. ¶ 7.
178
Id.
179
Compl. ¶¶ 223, 225.
180
Compl. ¶ 223.
181
Compl. ¶ 224.
182
Compl. ¶ 225.
31
according to Tesla, an “overwhelming” majority of Tesla’s disinterested
stockholders voted to approve the Acquisition.183
The Acquisition closed on November 21, 2016.184 Musk, Lyndon and Peter
became executive officers of the surviving SolarCity subsidiary of Tesla.185 And
with the stroke of a pen, Tesla’s debt load nearly doubled.186
J. Procedural Posture
On September 1, 2016, the first of several lawsuits challenging the
Acquisition was filed in this Court.187 Following the presentation of several motions
for the appointment of lead plaintiff and lead counsel, the Court selected a leadership
team that had filed a complaint enhanced by the incorporation of Section 220
183
Defs.’ Opening Br. 1. Plaintiffs contend that institutional stockholders who held equity
positions in both Tesla and SolarCity should have been excluded from the vote tally for
purposes of assessing the results and effect of the allegedly “disinterested” vote.
Compl. ¶¶ 226–28. In doing so, they rely on a document among the Section 220
Documents that purportedly reflects that among Tesla’s top twenty-five institutional
investors, those holding 45.7% of Tesla’s stock (66,658,000 shares) also held SolarCity
stock at the time of the Acquisition. Compl. ¶ 226 (citing TESLA00000243). This issue
may resurface in the event Defendants renew their ratification defense later in these
proceedings.
184
Compl. ¶ 230.
185
Compl. ¶ 150.
186
Compl. ¶ 153. As of June 30, 2016, Tesla’s indebtedness was approximately
$3.7 billion and SolarCity’s was approximately $3.3 billion. Id.
187
See Dkt. 1.
32
Documents. 188 That complaint did not allege any disclosure violations. Once
selected, lead counsel informed the Court that Plaintiffs were foregoing expedition
and would not seek to enjoin the transaction, including on disclosure grounds,
presumably to reserve their disclosure claims as bases to resist an anticipated Corwin
ratification defense.189 Defendants raised that defense in their motion to dismiss the
first amended complaint on January 27, 2017.190 Plaintiffs opted to amend the first
amended complaint with the operative Complaint on March 9, 2017. 191 That
Complaint included what the first amended complaint omitted—allegations of
inadequate pre-vote disclosures in support of a post-vote disclosure claim.
Defendants moved to dismiss the Complaint on March 17, 2017.192
The Complaint asserts seven claims: four derivative claims and three direct
claims on behalf of Plaintiffs and a putative class of Tesla stockholders.193 The
derivative claims are: Count I, a derivative claim for breach of fiduciary duty against
188
Dkt. 93.
189
Dkt. 91 at 47–48; Dkt. 89.
190
Dkt. 97, 98.
191
Dkt. 102.
192
Dkt. 104.
193
Compl. ¶¶ 294–330. Defendants do not move to dismiss under Court of Chancery
Rule 23.1. See Dkt. 104; Dkt. 110. Accordingly, I need not address the Complaint’s
demand futility allegations. See Compl. ¶¶ 231–82.
33
Musk as Tesla’s controlling stockholder for using “his control over the corporate
machinery to, among other things, orchestrate Board approval of the Acquisition”194;
Count II, a derivative claim for breach of the duty of loyalty against the Board for
“causing and/or allowing Tesla to enter into the self-dealing” Acquisition 195 ;
Count III, a derivative claim for unjust enrichment against Musk, Kimbal, Gracias,
Buss and Jurvetson, based on their ownership of SolarCity stock at the time of the
Acquisition and the fact that the Acquisition “bail[ed] out” SolarCity thereby
“spread[ing] across all of Tesla’s stockholders the loss that would otherwise be
experienced only by” these five individuals196; and Count VI, a derivative claim for
waste against the Board for causing Tesla to acquire SolarCity.197
The direct individual and class claims are: Count V, a direct claim against
Musk for breach of fiduciary duty as Tesla’s controlling stockholder by “causing
Tesla to enter into the self-dealing Acquisition at a price that is unfair to the
Company in order to unduly benefit himself . . . through the improper transfer of
economic and voting power” from the other stockholders to himself198; Count IV, a
194
Compl. ¶ 296.
195
Compl. ¶ 301.
196
Compl. ¶ 304.
197
Compl. ¶ 322.
198
Compl. ¶ 316.
34
direct claim against the Board for breach of the fiduciary duties of loyalty and care
by approving and executing the Acquisition, which “unduly benefit[ted] controlling
stockholder Elon Musk . . . through the improper transfer of economic and voting
power from the other stockholders” to Musk199; and Count VII, a direct claim against
the Board for breach of the duty of disclosure for failure to make accurate and non-
misleading disclosures to Tesla’s stockholders in connection with the Acquisition
and any stockholder vote, including regarding the circumstances surrounding the
Acquisition.200
The parties presented argument on Defendants’ motion to dismiss on
December 12, 2017.201 On December 20 and 21, 2017, the parties submitted post-
argument letters addressing a recent Delaware Supreme Court decision relating to
the controlling stockholder issue.202 This is the Court’s decision on Defendants’
motion to dismiss the Complaint.
199
Compl. ¶ 310.
200
Compl. ¶ 328–29.
201
Dkt. 124.
202
Dkt. 125; Dkt. 126. The parties addressed the Supreme Court’s analysis in Dell, Inc. v.
Magnetar Global Event Driven Master Fund Ltd, 177 A.3d 1 (Del. 2017) of the trial court’s
findings regarding whether Michael Dell was a controlling stockholder.
35
II. ANALYSIS
Under Court of Chancery Rule 12(b)(6), a complaint must be dismissed if the
plaintiff would be unable to recover under “any reasonably conceivable set of
circumstances susceptible of proof” based on the facts as pled in the complaint.203
In considering a motion to dismiss, the court must accept as true all well-pled
allegations in the complaint and draw all reasonable inferences from those facts in
plaintiff’s favor.204 The court need not accept, however, conclusory allegations that
lack factual support or “accept every strained interpretation of the allegations
proposed by the plaintiff.”205
Defendants’ showcase defense rests on Corwin. Although Tesla stockholder
approval of the Acquisition was not required by the Delaware General Corporation
Law, the Tesla Board submitted the Acquisition for stockholder approval anyway.
Defendants maintain that the fully informed, uncoerced vote of the disinterested
stockholders mandates business judgment review of Plaintiffs’ breach of fiduciary
203
Gen. Motors, 897 A.2d at 168.
204
Id. See also Malpiede v. Townson, 780 A.2d 1075, 1083 (Del. 2001) (stating the court
is required to accept “reasonable inferences that logically flow” from the non-conclusory
facts pled); In re Morton’s Rest. Gp., Inc. S’holders Litig., 74 A.3d 656, 659–60 (Del. Ch.
2013) (same).
205
Id.
36
duty claims and dismissal of the Complaint. 206 Plaintiffs disagree on several
grounds; first among them, Plaintiffs maintain that, as a matter of law, Corwin does
not apply because the Acquisition benefited Tesla’s controlling stockholder,
Musk. 207 Because I agree the Complaint pleads facts that allow reasonable
inferences that Musk was a controlling stockholder and that Plaintiffs’ claims against
all Defendants are subject to entire fairness review, I begin and end my analysis of
the motion to dismiss there.
A. The Controlling Stockholder Inquiry
In the seminal Kahn v. Lynch Communications Systems, Inc., the Supreme
Court observed that Delaware courts will deem a stockholder a controlling
stockholder when the stockholder: (1) owns more than 50% of the voting power of
a corporation or (2) owns less than 50% of the voting power of the corporation but
“exercises control over the business affairs of the corporation.”208 Plaintiffs do not
206
Singh v. Attenborough, 137 A.3d 151, 151–52 (Del. 2016) (noting that dismissal is
typically the result when pleading stage business judgment deference applies “because the
vestigial waste exception has long had little real-world relevance”).
207
See Merge Healthcare, 2017 WL 395981, at *6 (clarifying that Corwin does not apply
in controlling stockholder transactions); In re Solera Hldgs., Inc. S’holder Litig., 2017
WL 57839, at *6 n.28 (Del. Ch. Jan. 5, 2017) (“[T]he only transactions that are subject to
entire fairness that cannot be cleansed by proper stockholder approval are those involving
a controlling stockholder”) (quoting Larkin v. Shah, 2016 WL 4485447, at *10 (Del. Ch.
Aug. 25, 2016)).
208
638 A.2d 1110, 1113–14 (Del. 1994) (emphasis in original).
37
dispute that Musk holds only 22.1% of the voting power in Tesla. Thus, the
operative question is whether Musk, as a minority blockholder, “exercises control
over the business affairs of [Tesla].”209 Further refined, the inquiry is whether Musk
“exercised actual domination and control over . . . [the] directors.” 210 In this regard,
his power must have been “so potent that independent directors . . . [could not] freely
exercise their judgment.”211
209
Id.
210
Morton’s Rest. Gp., 74 A.3d at 665 (stating the complaint must support the reasonable
inference that the minority stockholder “exercised actual domination and control over . . .
[the] directors”) (internal quotation marks omitted) (citing In re Sea-Land Corp. S’holders
Litig., 1988 WL 49126, at *3 (Del. Ch. May 13, 1988)).
211
Id. See also Corwin, 125 A.3d at 307 (“[T]he Court of Chancery, consistent with the
instructions of this Court, looked for a combination of potent voting power and
management control such that the stockholder could be deemed to have effective control
of the board without actually owning a majority of stock.”) (internal citations omitted);
Larkin, 2016 WL 4485447, at *13 (“Making the showing [that the alleged controller wields
such formidable voting and managerial power] is no easy task, as the minority
blockholder’s power must be so potent that it triggers the traditional Lynch concern that
independent directors’ free exercise of judgment has been compromised.”); In re PNB
Hldgs. Co. S’holders Litig., 2006 WL 2403999, at *9 (Del. Ch. Aug. 18, 2006)
(“[S]tockholders with very potent clout have been deemed, in thoughtful decisions, to fall
short of the mark.”).
38
“The requisite degree of control can be shown to exist generally or ‘with
regard to the particular transaction that is being challenged.’” 212 Stated differently,
when pleading that a minority blockholder is a controlling stockholder, the plaintiff
may plead either (or both) of the following: (1) that the minority blockholder actually
dominated and controlled the corporation, its board or the deciding committee with
respect to the challenged transaction or (2) that the minority blockholder actually
dominated and controlled the majority of the board generally.213 “[W]hether a large
blockholder is so powerful as to have obtained the status of a ‘controlling
stockholder’ is intensely factual [and] it is a difficult [question] to resolve on the
212
Carsanaro v. Bloodhound Techs., Inc., 65 A.3d 618, 659 (Del. Ch. 2013) (quoting
Williamson v. Cox Commc’ns Inc., 2006 WL 1586375, at *4 (Del. Ch. June 5, 2006)).
See also In re Crimson Exploration Inc. S’holder Litig., 2014 WL 5449419, at *12 (Del.
Ch. Oct. 24, 2014) (“These cases show that a large blockholder will not be considered a
controlling stockholder unless they actually control the board’s decisions about the
challenged transaction.”); In re Primedia Inc. Deriv. Litig., 910 A.2d 248, 257 (Del. Ch.
2006) (“However, the plaintiffs need not demonstrate that KKR oversaw the day-to-day
operations of Primedia. Allegations of control over the particular transaction at issue are
enough.”); Superior Vision Servs., Inc. v. ReliaStar Life Ins. Co., 2006 WL 2521426, at *4
(Del. Ch. Aug. 25, 2006) (“In order to append the label of ‘controlling shareholder,’
pervasive control over the corporation’s actions is not required; indeed, a plaintiff ‘can
survive the motion to dismiss by alleging actual control with regard to the particular
transaction that is being challenged.’”) (quoting Williamson, 2006 WL 1586375, at *4).
213
In re Rouse Props., Inc. Fiduciary Litig., 2018 WL 1226015, at *12 (Del. Ch. Mar. 9,
2018).
39
pleadings.”214 Plaintiffs’ burden now is to “show it is reasonably conceivable that
[Musk] controlled [Tesla].”215
B. It Is Reasonably Conceivable That Musk Is Tesla’s Controlling
Stockholder
The parties proffer several factors to inform the Court’s determination of
whether the Complaint adequately pleads Musk’s controller status. They include:
(1) Musk’s ability to influence the stockholder vote to effect significant change at
Tesla, including the removal of Board members; (2) Musk’s influence over the
Board as Tesla’s visionary, CEO and Chairman of the Board; (3) Musk’s strong
connections with members of the Tesla Board and the fact that a majority of the
214
In re Cysive, Inc. S’holders Litig., 836 A.2d 531, 550–51 (Del. Ch. 2003). See also
Calesa Assocs., L.P. v. Am. Capital, Ltd., 2016 WL 770251, at *11 (Del. Ch. Feb. 29, 2016)
(“[T]here is no magic formula to find control; rather, it is a highly fact specific inquiry.”)
(citing Crimson Exploration, 2014 WL 5449419, at *10); In re Zhongpin Inc. S’holders
Litig., 2014 WL 6735457, at *6–7 (Del. Ch. Nov. 26, 2014) (noting the inquiry of “whether
or not a stockholder’s voting power and managerial authority, when combined, enable him
to control the corporation [ ] is not a formulaic endeavor and depends on the particular
circumstances of a given case”), rev’d on other grounds sub nom., In re Cornerstone
Therapeutics Inc, S’holder Litig., 115 A.3d 1173 (Del. 2015); Zhongpin, 2014
WL 6735457, at *9 n.33 (“Whether or not a particular CEO and sizeable stockholder holds
more practical power than is typical should not be decided at the motion to dismiss stage
if a plaintiff pleads facts sufficient to raise the inference of control.”); Williamson, 2006
WL 1586375, at *6 (“The question whether a shareholder is a controlling one is highly
contextualized and is difficult to resolve based solely on the complaint.”).
215
Crimson Exploration, 2014 WL 5449419, at *17 (emphasis added). See also Zhongpin,
2014 WL 6735457, at *7 (“Here, Plaintiffs do not need to prove that [the alleged controller]
was a controlling stockholder in order to withstand the motions to dismiss. Rather,
Plaintiffs must plead facts raising the inference that [the alleged controller] could control
[the company].”) (emphasis added)).
40
Tesla Board was “interested,” as that term is defined in our law, in the Acquisition;
and (4) Tesla’s and Musk’s acknowledgement of Musk’s control in its public filings.
The parties’ focus on these considerations is well-placed, as each is tied directly to
our controlling stockholder jurisprudence. Accordingly, I address each in turn
below.
1. Musk’s Control of the Vote
Musk is a 22.1% stockholder. In the controlling stockholder context, this
ownership stake is “relatively low” reflecting a “small block.” 216 Even so, “there is
no absolute percentage of voting power that is required in order for there to be a
finding that a controlling stockholder exists.” 217 Indeed, “[a]ctual control over
business affairs may stem from sources extraneous to stock ownership.” 218 As
illustrated in Crimson Exploration’s thorough study of significant cases where the
parties disputed whether a minority stockholder was a controlling stockholder, there
Defs.’ Opening Br. 15 (citing PNB Hldgs., 2006 WL 2403999, at *10 and Larkin, 2016
216
WL 4485447, at *14).
217
PNB Hldgs., 2006 WL 2403999, at *9; Zhongpin, 2014 WL 6735457, at *6 (citing PNB
Hldgs., 2006 WL 2403999, at *9). Compare Zhongpin, 2014 WL 6735457, at *1, 12
(finding it reasonably conceivable that a 17.3% stockholder was a controller), with Crimson
Exploration, 2014 WL 5449419, at *15 (observing that to find a stockholder with a 33.7%
ownership stake was a controller would be “aggressive”). See also In re Alloy, Inc., 2011
WL 4863716, at *8 (Del. Ch. Oct. 13, 2011) (declining to rule out that a mere 15%
stockholder could ever be considered a controller, but concluding that “collective stock
ownership of 15% do[es] not, without specific allegations of domination, create an
inference that [a stockholder] controlled the board”).
218
Zhongpin, 2014 WL 6735457, at *8.
41
is no “linear, sliding scale approach whereby a larger share percentage makes it
substantially more likely that the court will find the stockholder was a controlling
stockholder.” 219 The absence of a discernable pattern remains true in our post-
Crimson Exploration controller decisions.220
Defendants view the controlling stockholder question as turning on the
minority blockholder’s ability to control the outcome of a contested election and the
resulting perception of members of the board of directors that their future on the
board rests in the alleged controller’s hands. 221 According to Defendants, since
Musk’s 22.1% voting power is inadequate to dominate a contested election, he
cannot be deemed a controlling stockholder. 222 Stated differently, Defendants’
219
Crimson Exploration, 2014 WL 5449419, at *10.
220
Larkin, 2016 WL 4485447, at *2 (finding 23.1% minority stockholder was not a
controlling stockholder); Calesa, 2016 WL 770251, at *11 (holding it was reasonably
inferable that a 26% stockholder was a controlling stockholder); In re KKR Fin.
Hldgs. LLC S’holder Litig., 101 A.3d 980, 994 (Del. Ch. 2014) (granting motion to dismiss
where the court could not reasonably infer that a 1% minority stockholder was a controlling
stockholder), aff’d sub nom. Corwin, 125 A.3d 304; Zhongpin, 2014 WL 6735457, at *7–
8 (finding it was reasonably conceivable that a 17.3% (26% if accounting for an alleged
control group) blockholder wielded actual control).
221
Defs.’ Opening Br. 14–16 (citing Cysive, 836 A.2d at 551–52, Morton’s Rest. Gp.,
74 A.3d at 665 and KKR Fin., 101 A.3d at 994 and arguing “[a] ‘minority blockholder’ like
Musk is not considered to be a controlling stockholder unless [he] exercises such
formidable voting and managerial power that, as a practical matter, [he] is no differently
situated than if [he] had majority voting control’”) (quoting Morton’s Rest. Gp., 74 A.3d
at 664–65).
222
Plaintiffs have not attempted to allege or argue that Musk is part of a control group.
42
argument appears to be that the delta between Musk’s 22.1% ownership stake and
actual majority voting control is too great, regardless of other circumstances, for the
Court reasonably to infer that Musk possessed dominating voting power. By
Defendants’ lights, this ends the inquiry. I disagree.
The ability of an alleged controller to influence a contested election is a
significant consideration in the controlling stockholder analysis. That proposition
cannot credibly be challenged.223 But alleged control of the ballot box is not always
dispositive of the controlling stockholder inquiry in the minority stockholder
context. Indeed, our courts have considered “many factors . . . in analyzing whether
a shareholder is controlling.”224 “[T]he focus of the [controller] inquiry [is] on the
de facto power of a significant (but less than majority) shareholder, which, when
coupled with other factors, gives that shareholder the ability to dominate the
corporate decision-making process.” 225 As discussed below, while Plaintiffs
acknowledge that Musk’s minority block is “relatively low,” their Complaint pleads
223
See Cysive, 836 A.2d at 551–52; Morton’s Rest. Gp., 74 A.3d at 665; KKR Fin.,
101 A.3d at 994.
224
Williamson, 2006 WL 1586375, at *4. See also Zhongpin, 2014 WL 6735457, at *8
(“[T]he Court does not take an unduly restrictive view of the avenues through which a
controller obtains corporate influence.”); Superior Vision Servs., 2006 WL 2521426, at *4
n.38 (noting that “the reference to the ‘business and affairs’ of the corporation [in the
controller context] suggests something broader than one corporate act, such as the payment
of a dividend”).
225
Superior Vision Servs., 2006 WL 2521426, at *4 (emphasis added).
43
facts that allow a reasonable inference that “other factors” contributed to his ability
“to dominate the corporate decision-making process,” particularly with respect to
the Acquisition.226
Before turning to the “other factors,” it is appropriate to dilate for a moment
on Defendants’ position that Musk’s relatively “small block” causes the controller
analysis to break clearly in their favor. There is no question that the 28% delta
between Musk’s ownership stake and a voting majority is quite wide. Even so, it is
perhaps conceivable that, of all people, Musk might be the minority blockholder who
could rally other stockholders to bridge that gap, particularly if one accepts
Plaintiffs’ allegation that the public investments in Tesla actually reflect investments
in Musk and his vision for Tesla’s future.227 With that said, I agree with Defendants
that this dynamic alone, even if true, would not be enough to carry Plaintiffs’
controller argument across the “reasonably conceivable” threshold.
But there is more. Plaintiffs allege that Musk has demonstrated a willingness
to facilitate the ouster of senior management when displeased, as evidenced by the
fact that he “forced founder and then-CEO Eberhard out of the Company [and
226
PNB Hldgs., 2006 WL 2403999, at *10; Superior Vision Servs., 2006 WL 2521426,
at *4.
227
See Compl. ¶¶ 270–272.
44
thereafter] appointed himself CEO.”228 This history conceivably was not lost on
members of the Tesla Board when they considered Musk’s proposal that Tesla
acquire SolarCity. Plaintiffs also point out that:
Tesla’s bylaws contain several supermajority voting requirements. For
example, any changes at Tesla, including certain mergers, acquisitions,
or changes to the Board’s compensation or bylaws concerning the
Board’s composition must be approved by 66 2/3 percent of total voting
power of outstanding Tesla voting securities. This supermajority
standard allows Elon Musk significant control over corporate matters
while only owning approximately 22% of Tesla’s common stock.229
All tallied, the facts pled regarding Musk’s ability to exercise the equivalent
of majority voting control extend beyond mere conclusory statements that he could
control the vote.230 Nevertheless, I need not decide whether these allegations alone
are enough to survive Defendants’ dismissal motion because there is more alleged
in the Complaint relevant to the controller analysis.
228
Compl. ¶ 61.
229
Compl. ¶ 22. Defendants argue that Plaintiffs fail to explain how this requirement
supports their claim that Musk is a controlling stockholder. Defs.’ Opening Br. 21 n.8.
Here again, I disagree. Plaintiffs clearly recite the supermajority voting requirement as
evidence of Musk’s ability to utilize his 22% stake as a blocking position on significant
matters that may well directly affect members of the Tesla Board.
230
See In re Shoe-Town, Inc. S’holders Litig., 1990 WL 13475, at *6 (Del. Ch. Feb. 12,
1990) (observing that plaintiffs must do more to plead that a minority stockholder is a
controller than simply say he is a controller).
45
2. Musk’s Control Over Tesla’s Board
That Musk is the “face of Tesla” cannot meaningfully be disputed.231 This
fact alone, however, is not dispositive of the controller question. Indeed, just
recently, in Dell, our Supreme Court relied on this Court’s post-trial fact findings to
conclude that a management buyout of Dell, Inc. led by Dell’s founder and CEO,
Michael Dell, was not a controlling stockholder transaction. 232 In reaching that
conclusion, however, this Court emphasized that after Mr. Dell announced his intent
to pursue the MBO: (1) he immediately advised Dell’s board he “did not want to
proceed further without approval of the Board, and that he would not engage a
financial advisor without first informing the Board” 233 ; (2) the board formed an
independent committee to negotiate with Mr. Dell and Mr. Dell did not participate
in any of the board level discussions regarding a sale of the company 234; (3) the
committee actively explored alternatives to Mr. Dell’s MBO proposal and Mr. Dell
committed to work with any competing bidders235; (4) Mr. Dell agreed to “to join up
231
Compl. ¶ 271 (“Elon Musk is the clear public face of Tesla and he is viewed, both within
the Company and by much of the public, as a visionary business leader who is, to a
significant degree, personally responsible for Tesla’s success.”).
232
177 A.3d at 25.
233
In re Appraisal of Dell Inc., 2016 WL 3186538, at *2 (Del. Ch. May 31, 2016), aff’d in
pertinent part sub nom., Dell, 177 A.3d 1 (Del. 2017).
234
Id. at *2–3.
235
Id. at *5, 13–14.
46
with whoever” in the event a superior proposal emerged236; (5) when the negotiations
reached an impasse over price, Mr. Dell agreed to roll over his shares at a lower price
than the deal price to resolve the stalemate237; and (6) importantly, Mr. Dell entered
into a voting agreement that required him and his affiliates to vote their shares “in
the same proportion as the number of [s]hares voted by the [u]naffiliated
[s]tockholders . . . that are voted in favor of the adoption” of either (i) the MBO
merger agreement or (ii) a superior proposal.238 These facts, and perhaps others,
allowed the trial court to determine that, at least with respect to the transaction at
issue, Mr. Dell did not “dominate the corporate decision-making process.”239 They
also provided a basis for the court to resist the instinctive appeal of the “face of the
company” argument when engaging in the controlling stockholder analysis.
According to the well-pled facts in the Complaint, there were practically no
steps taken to separate Musk from the Board’s consideration of the Acquisition. He
236
Id. at *8.
237
Id. at *11.
238
Id. at *12.
239
Superior Vision Servs., 2006 WL 2521426, at *4. See also Appraisal of Dell, 2016
WL 3186538, at *28 (“In this case, the Company’s process easily would sail through if
reviewed under enhanced scrutiny.”); Dell, 177 A.3d at 25 (finding “the record shows
that . . . this was not a buyout led by a controlling stockholder”).
47
brought the proposal to the Board not once, not twice, but three times. 240 He then
led the Board’s discussions regarding the Acquisition throughout its laser focus on
SolarCity and was responsible for engaging the Board’s advisors. 241 According to
the Complaint, the Board never considered forming a committee of disinterested,
independent directors to consider the bona fides of the Acquisition. It took that role
upon itself, notwithstanding the obvious conflicts of its members (discussed below).
Under these circumstances, it is appropriate to consider whether Musk brought with
him into the boardroom the kind of influence that would support a reasonable
inference that he dominated the Board’s decision-making with regard to the
Acquisition.242
When Musk rather insistently brought the proposed acquisition to the Board
for consideration, the Board was well aware of Musk’s singularly important role in
240
Compl. ¶ 85 (citing TESLA00001346); Compl. ¶ 90 (citing TESLA00001348–49);
Compl. ¶ 91 (citing TESLA00001455–56).
241
Compl. ¶¶ 85–86, 90, 92–94, 99–100.
242
This Court recently determined that a 33.5% blockholder was not a controller in
connection with an alleged squeeze-out merger after finding that the pled facts
acknowledged the alleged controller did not dominate the management of the target, did
not participate in or interfere with board discussions of the acquisition proposal, and did
not interfere with the independent committee’s search for alternatives (with the advice of
independent legal and financial advisors). See Rouse, 2018 WL 1226015, at *4–5, 7.
Simply stated, Rouse is easily distinguishable because the alleged controller was not
involved in the management of the target company, much less its day-to-day management,
and the Rouse board took meaningful steps to insulate itself from the alleged controller
during its consideration of the proposed transaction.
48
sustaining Tesla in hard times and providing the vision for the Company’s success.243
“As Tesla has acknowledged, ‘[i]n addition to serving as the CEO since October
2008, Mr. Musk has contributed significantly and actively to us since our earliest
days in April 2004 by recruiting executives and engineers, contributing to the Tesla
Roadster’s engineering and design, raising capital for us and bringing investors to
us, and raising public awareness of the Company.’” 244 When Tesla was on the ropes,
Musk infused his own capital into the Company to keep it afloat. 245 His “Master
Plans,” parts one and “deux,” apparently the products of his mind alone, provide the
architecture by which the Company has been and will be operated, right down to the
acquisition of a solar energy company. 246 Thus, setting aside Musk’s and the
Company’s public acknowledgments of Musk’s substantial influence (discussed
below), and the obvious conflicts at the Board level (also discussed below), the pled
243
I acknowledge Defendants’ argument that Musk should not be deemed a controlling
stockholder with concomitant fiduciary duties simply because he is a hands-on CEO with
a clear vision for the Company and its future. Defs.’ Opening Br. 17. If that is all Plaintiffs
alleged, then their pleading of Musk’s controller status would certainly be deficient. But,
as discussed here, there is much more to this Complaint’s pleading of control than
conclusory allegations that Musk is an effective and dynamic CEO.
244
Compl. ¶ 271.
245
Compl. ¶¶ 61, 67, 269.
246
Compl. ¶¶ 138, 140, 270.
49
facts reveal many of the markers that have been important to our courts when
determining whether a minority blockholder is a controlling stockholder.247
3. The Board Level Conflicts
The question of whether a board is comprised of independent or disinterested
directors is relevant to the controlling stockholder inquiry because the answer, in
turn, will inform the court’s determination of whether the board was free of the
controller’s influence such that it could exercise independent judgment in its
decision-making.248 Even an independent, disinterested director can be dominated
in his decision-making by a controlling stockholder.249 A director is even less likely
to offer principled resistance when the matter under consideration will benefit him
or a controller to whom he is beholden.250
247
See Calesa, 2016 WL 770251, at *11 (finding alleged controller brought the challenged
transaction to a board comprised of members that were either not independent of the
alleged controller or interested in the transaction); Zhongpin, 2014 WL 6735457, at *8
(finding alleged controller was an active CEO and company visionary who was conflicted
in the proposed transaction); Cysive, 836 A.2d at 553 (finding alleged controller was the
founder of the company and was a long-time, active CEO who brought the conflicted
transaction to the company).
248
See KKR Fin., 101 A.3d at 995 (“Here, there are no well-pled facts from which it is
reasonable to infer that KKR could prevent the KFN board from freely exercising its
independent judgment in considering the proposed merger . . .”).
249
Kahn, 638 A.2d at 1116–17.
250
Cf. Morton’s Rest. Gp., 74 A.3d at 665 n.47 (Del. 1984) (“There must be coupled with
the allegation of control such facts as would demonstrate that through personal or other
relationships the directors are beholden to the controlling person.”) (citing Aronson v.
Lewis, 473 A.2d 805, 815 (Del. 1984)).
50
In this case, the Board did not form a special committee to consider the
transaction, and it is reasonably conceivable that a majority of the five Board
members who voted to approve the Offer and Acquisition (Musk and Gracias
recused themselves) were interested in the Acquisition or not independent of
Musk. 251 Tesla’s SEC filings concede Buss and Kimbal are not independent
directors.252 Jurvetson has served on Tesla’s Board for nearly a decade. 253 The
Complaint’s well-pled facts allow a reasonable inference that he and Musk are
acquainted beyond mere membership on the Board, as evidenced by Musk gifting to
Jurvetson the first Tesla Model S and the second Tesla Model X ever made. 254
DFJ, Jurvetson’s venture capital firm, has invested in Tesla three times between
2006 and 2008, and held Tesla stock as recently as late 2014.255 DFJ also owned
251
See Compl. ¶¶ 250–67, 276. Having found the Complaint supports a reasonable
inference that three out of the five Board members who voted in favor of the Acquisition
are not independent, I need not address the independence of Ehrenpreis and Denholm in
this analysis.
252
Compl. ¶¶ 28, 53; Moritz Aff., Ex. 13, at TESLA00001483. Both were also likely
interested in the Acquisition given their close affiliations with SolarCity. See Compl.
¶¶ 27–29, 54–55.
253
Compl. ¶ 47.
254
Compl. ¶ 48 n.6.
255
Compl. ¶ 48.
51
approximately 3.3% of SolarCity’s outstanding common stock. 256 And Jurvetson
himself owned 417,450 shares of SolarCity common stock as of the Acquisition.257
Jurvetson also has substantial connections with the third entity in Musk’s
“pyramid,” SpaceX. He serves as a member of the board of directors of SpaceX.258
And between 2009 and 2015, DFJ participated in four early venture funding rounds
for SpaceX and remains a “significant stockholder.”259
Musk, in turn, is a frequent investing partner with DFJ principals, including
Jurvetson and DFJ co-founder, Tim Draper, and is invested in DFJ itself. 260
“Although the actual extent of these relationships is not altogether clear at this point
in the litigation, the existence of these interests and relationships is enough” to allow
a reasonable inference that Jurvetson is beholden to Musk and may not have acted
independently in voting to approve the Acquisition.261
256
Compl. ¶ 49.
257
Id.
258
Compl. ¶ 50.
259
Compl. ¶ 50 & n.10.
260
Compl. ¶¶ 48–52.
261
In re New Valley Corp. Deriv. Litig., 2001 WL 50212, at *8 (Del. Ch. Jan. 11, 2001)
(denying motion to dismiss for failure to make a demand and explaining the complaint
“pleads with particularity facts that give this Court some reason to believe that a majority
of [the company’s] current Board is not disinterested or independent” because “[t]he facts
alleged in the complaint show that all the members of the current Board have current or
past business, personal, and employment relationships with each other and the entities
52
In addition to the Board level conflicts, Plaintiffs urge me to consider the well-
pled facts regarding the “bail-out” of SolarCity that Musk was able to accomplish at
Tesla’s expense as further evidence supporting a reasonable inference of his control
over the Board. Based on Tesla’s stock price at the time of the Acquisition, the
Company paid approximately $2.6 billion in Tesla stock to acquire SolarCity, a
severely distressed company on the brink of bankruptcy but for the Acquisition.262
According to Plaintiffs, “[s]uch a price is ‘so one-sided’ that no fiduciary ‘acting in
good faith pursuant to [Tesla’s] interests could have approved the terms,’” further
revealing that the Board was dominated by Musk when voting to approve the
Acquisition.263
involved”). Moreover, DFJ’s and Jurvetson’s significant SolarCity stock holdings suggest
that Jurvetson was interested in the Acquisition as well.
262
Compl. ¶¶ 4–7. As noted, Evercore warned the Tesla Board that SolarCity had $3.164
billion in outstanding debt as of March 31, 2016, and that significant debt would mature in
a three-to-five year window. Compl. ¶ 129. See also Compl. ¶¶ 121–24, 129–37 (detailing
additional troubling facts about SolarCity uncovered during due diligence). Indeed,
following the Acquisition, Tesla’s debt load nearly doubled. Compl. ¶ 153. And yet,
according to Plaintiffs, the Board charged forward, approving the Acquisition within a
month of its May 31, 2016 meeting where the Board first authorized Musk and his
management team to put in motion certain steps for considering a potential acquisition.
Compl. ¶¶ 91, 93–94, 102.
263
Pls.’ Answering Br. in Opp’n to Defs.’ Mot. to Dismiss the Second Am. Compl. 3–4
(citing In re Ezcorp Inc. Consulting Agmt. Deriv. Litig., 2016 WL 301245, at *31 (Del. Ch.
Jan. 25, 2016) (internal citations omitted). Plaintiffs also point to the ever-fluctuating DCF
analyses, SolarCity’s substantial liability exposure in intellectual property litigation and
the difficulties confronting SolarCity at its Buffalo Factory as further evidence that the
Board’s singular focus on SolarCity can only be explained by Musk’s dominating
influence.
53
4. Musk and Tesla Acknowledge Musk’s Influence
In Zhongpin, the company’s public filings disclosed that it “rel[ies]
substantially on [Zhu], and our Executive Vice President [Ben], to manage our
operations. . . . The loss of any one of [our key personnel], in particular Mr. Zhu or
Mr. Ben, would have a material adverse effect on our business and operations.”264
Additionally, the company’s public filings acknowledged:
Our largest shareholder has significant influence over our management
and affairs and could exercise this influence against your best interests.
At March 11, 2013, Mr. Xianfu Zhu, our founder, Chairman and Chief
Executive Officer and our largest shareholder, beneficially owned
approximately 17.3% of our outstanding shares of common stock, and
other executive officers and directors collectively beneficially owned
an additional 4.2% of our outstanding stock. As a result, pursuant to
our By-laws and applicable laws and regulations, our controlling
shareholder [Zhu] and our other executive officers and directors are
able to exercise significant influence over our company . . .265
Relying principally upon Zhongpin, Plaintiffs argue that Tesla and Musk himself
have made similar concessions of Musk’s powerful influence over the Company and
its Board. As for the Company, its public filings disclose:
 In addition to serving as the CEO since October 2008, Mr. Musk has
contributed significantly and actively to us since our earliest days in
April 2004 by recruiting executives and engineers, contributing to
the Tesla Roadster’s engineering and design, raising capital for us
264
Zhongpin, 2014 WL 6735457, at *8.
265
Id. (emphasis added).
54
and bringing investors to us, and raising public awareness of the
Company.266
 Mr. Musk spends significant time with Tesla and is highly active in
[Tesla’s] management.267
 [Tesla is] highly dependent on the services of Elon Musk, [who is]
highly active in [the Company’s] management, [and if Tesla were to
lose his services, it could] disrupt our operations, delay the
development and introduction of our vehicles and services, and
negatively impact our business, prospects and operating results as
well as cause our stock price to decline.268
 The concentration of ownership among [Tesla’s] existing executive
officers, directors and their affiliates may prevent new investors
from influencing significant corporate decisions, [such that] these
stockholders will be able to exercise a significant level of control
over all matters requiring stockholder approval, including the
election of directors, amendment of our certificate of incorporation
and approval of significant corporate transactions.269
Musk himself has publically stated that: (1) Tesla, SolarCity and SpaceX form a
“pyramid” on top of which he sits, and that it is “important that there not be some
sort of house of cards that crumbles if one element of the pyramid . . . falters”270; and
(2) Tesla is “his company.”271
266
Compl. ¶ 271.
267
Compl. ¶ 21.
268
Compl. ¶ 274.
269
Compl. ¶ 275.
270
Compl. ¶ 5.
271
Compl. ¶ 116.
55
Unlike Zhongpin, neither Tesla nor Musk have expressly conceded that Musk
is a controlling stockholder. Indeed, if the public disclosures were all that Plaintiffs
could point to as evidence of Musk’s control, the pleading likely would come up
short.272 The public acknowledgements of Musk’s substantially outsized influence,
however, do bear on the controlling stockholder inquiry when coupled with the other
well-pled allegations of Musk’s control over the Company and its Board.
******
Whether Musk has regularly exercised control over Tesla’s Board, or whether
he did so only with respect to the Acquisition, is not entirely clear from the
Complaint. For purposes of my decision on the motion, however, that distinction
does not matter. At the very least, the Complaint pleads sufficient facts to support a
reasonable inference that Musk exercised his influence as a controlling stockholder
with respect to the Acquisition. Specifically, the combination of well-pled facts
relating to Musk’s voting influence, his domination of the Board during the process
leading up to the Acquisition against the backdrop of his extraordinary influence
within the Company generally, the Board level conflicts that diminished the Board’s
resistance to Musk’s influence, and the Company’s and Musk’s own
272
See Rouse, 2018 WL 1226015, at *19 (distinguishing Zhongpin on the ground that the
disclosure by Rouse’s board did not concede that the minority blockholder was Rouse’s
controlling stockholder).
56
acknowledgements of his outsized influence, all told, satisfy Plaintiffs’ burden to
plead that Musk’s status as a Tesla controlling stockholder is reasonably
conceivable. The facts developed in discovery may well demonstrate otherwise.273
But Plaintiffs have secured a right to pursue that discovery by adequately pleading
their breach of fiduciary duty claims and the ab initio inapplicability of Corwin.
C. The Exculpatory Charter Provision
Tesla’s certificate of incorporation contains an exculpation provision as
authorized by 8 Del. C. § 102(b)(7).274 Under Cornerstone, Plaintiffs “must plead a
non-exculpated claim for breach of fiduciary duty against an independent director
protected by an exculpatory charter provision, or that director will be entitled to be
dismissed from the litigation. That rule applies regardless of the underlying standard
of review for the transaction.” 275 Defendants have not raised an exculpation
argument, except as to the disclosure claim. And that “argument” consists of a
passing reference in a footnote in their Opening Brief.276 Issues not properly briefed
273
See, e.g., In re W. Nat’l Corp. S’holders Litig., 2000 WL 710192 (Del. Ch. May 22,
2000) (determining the controlling stockholder issue at summary judgment); Cysive, 836
A.2d at 552 (determining the controlling stockholder issue post-trial).
274
Moritz Aff., Ex. 19 § 8.1.
275
115 A.3d at 1179.
276
See Defs.’ Opening Br. 50 n.29.
57
are deemed waived.277 And failure to raise a legal issue in the above-the-line text of
a brief generally constitutes waiver of that issue.278 Accordingly, I deem the issue
of exculpation waived for purposes of this motion and decline to decide whether
each director is entitled to exculpation at this time.279 Defendants may raise the issue
in summary judgment motion practice should the undisputed facts support a finding
of exculpation.
III. CONCLUSION
For the foregoing reasons, Defendants’ motion to dismiss is DENIED.
IT IS SO ORDERED.
277
Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999); Thor Merritt Square, LLC v.
Bayview Malls LLC, 2010 WL 972776, at *5 (Del. Ch. Mar. 5, 2010) (“The failure to raise
a legal issue in an opening brief generally constitutes a waiver of the ability to raise that
issue in connection with a matter under submission to the court.”).
278
Murphy v. State, 632 A.2d 1150, 1152 (Del. 1993); Wimbledon Fund LP-Absolute
Return Fund Series v. SV Special Situations Fund LP., 2011 WL 6820362, at *3 n.15 (Del.
Ch. Dec. 22, 2011) (citing Murphy, 632 A.2d at 1152).
279
115 A.3d 1173.
58