In a unanimous en banc decision, the Delaware Supreme Court upheld the Court of Chancery’s ruling that Tesla’s acquisition of SolarCity in 2016 satisfied the entire fairness standard of review. This resulted in a verdict favoring Tesla’s co-founder and CEO, Elon Musk, who was the remaining defendant.
The Board initially declined Musk’s proposed merger but ultimately approved it after financial advisors recommended SolarCity as the best strategic solar acquisition target. Despite SolarCity’s financial issues, due diligence and a lowered offer led to a merger agreement at an equity value of approximately $2.1 billion. The acquisition was approved by 85% of Tesla’s voting stockholders.
After the trial, the Court of Chancery deemed the acquisition entirely fair, assuming without holding, that Musk was Tesla’s controlling stockholder. They noted his excessive involvement but concluded that the Board effectively neutralized Musk’s attempts to control the sale process. The court found the most persuasive evidence regarding SolarCity’s value in Musk’s presentation.
On appeal, appellants didn’t contest the factual findings but challenged the application of the entire fairness standard of review. They argued the trial court overemphasized fair price, particularly market price evidence. The Supreme Court largely rejected these arguments but affirmed the Court of Chancery’s decision.
The Supreme Court also agreed that the acquisition resulted from a fair process, the stockholder vote was fully informed, and the acquisition price was fair. Despite no independent committee, the Court recognized the negotiation led by a majority independent board and approved by disinterested stockholders. The court upheld the fair price, even though it found the Court of Chancery erred in comparing the purchase price to SolarCity’s stock price on the acquisition announcement day, which did not account for its liquidity issues and credit downgrade. However, appellants’ insolvency theory of valuation lacked credibility, and market evidence, including the stockholder approval, supported the price.