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Tesla’s SolarCity acquisition could be delayed following shareholder lawsuits

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Elon Musk’s vision could be in danger, thanks to lawsuits from  Tesla shareholders. The company has released a statement today in which it said that its proposed acquisition of SolarCity Corp, could be in for some bumpy waters and may be delayed — following lawsuits from four separate shareholders.

Around 3 months ago, Tesla offered to acquire SolarCity. The acquisition made some sense considering that both the companies were part of the Musk empire and operated in somewhat similar niches. However, it also caused several raised eyebrows because — again — both of them were part of the Musk empire and SolarCity, had been profusely bleeding money in recent times.

SolarCity’s shares were at $50 in December and since then, had slipped down to around $21 at the time the offer was made. What caused even more questions, was the fact that Tesla offered to play a 21-30 percent premium over SolarCity’s market value of around $2 Billion. Why pay a premium to acquire a company that had been losing money anyways? That’s certainly not something you expect from a businessman, unless, as some put it, he/she stands to make a personal profit from the deal.

The Tesla CEO owns 22 percent stakes in SolarCity, and if the acquisition goes through, he stands to make a significant profit — although in all fairness, he has also decided to abstain from the voting process. The profit wouldn’t be all material though. It would also increase Musk’s leverage in Tesla as after the conversion of SolarCity stocks, he could possess up to  23.4 percent of the company — as compared to the 21 percent he owns at present.

Meanwhile, following the announcement of the deal, SolarCity’s share price had bounced up by 20 percent in after-hours trading while Tesla’s share price dropped by 13 percent — a clear indication of what shareholders thought of the deal. However, both the companies decided to go ahead with the merger regardless.

The deal appeared to be on the verge of closing, despite all the voices — albeit subdued — raised in objection. However, close to the completion of the merger, the matter has taken a very interesting turn.

According to Tesla, four lawsuits were filed against the merger, in Delaware between Sept. 1 and Sept. 16. The lawsuits have the potential to lead to an injunction. If that happens, the proposed $2.6 billion merger could be delayed for an uncertain time period, until the courts manage to reach a decision. The lawsuits are aimed towards forcing Tesla to cancel the deal on the grounds that it is not in the best interests of the company. All of them allege that Tesla’s executives and board breached their fiduciary duty by initiating the said merger — considering that Tesla Chairman Elon Musk and other Tesla insiders hold shares in both the companies that are part of the deal.

The lawsuit also seeks to force Tesla to pay damages to the shareholders. Meanwhile, one of them is attempting to establish a class action against Tesla. The shareholders that have initiated lawsuits include the City of Riviera Beach Pension Fund, Arkansas Teacher Retirement System, and individual shareholders P. Evan Stephens and Ellen Prasinos.

A shareholder meeting over the proposed merger is expected to be held this week. A statement regarding the lawsuits can be expected by then as well. Meanwhile, while Tesla stock rose less than 1 percent to $206.75 in early trading Monday, SolarCity continued falling to reach $17.32. A delay could prove to be dangerous for Musk’s dream of consolidating the companies too since the SolarCity shares are likely to keep falling as long as the merger hangs in the air. And the lower they fall, the more untenable would the price being offered by Tesla become.


 

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