Delaware Court Of Chancery Denies Corwin Motion To Dismiss, Finding Allegations Of Control Adequately Pleaded As To 22% Stockholder
04/03/2018On March 28, 2018, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion to dismiss several derivative and class action claims brought by stockholders of Tesla, Inc. (“Tesla”) asserting that its directors breached their fiduciary duties in connection with its acquisition of SolarCity. In re Tesla Motors, Inc. Stockholder Litigation, C.A. No. 12711-VCS (Del. Ch. Mar. 28, 2018). Plaintiffs claimed the acquisition was an effort to rescue a distressed SolarCity to the detriment of Tesla stockholders, allegedly at the direction of Elon Musk, Tesla’s Chairman and CEO, who held 22.1% of Tesla’s common stock and was also SolarCity’s Chairman and largest stockholder. Defendants contended that the claims were subject to dismissal pursuant to Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), in light of the approval of the deal by a majority of Tesla’s disinterested stockholders. Plaintiffs argued that Corwin was inapplicable because the acquisition allegedly involved a conflicted controlling stockholder. Declining to dismiss the claims, the Court explained that, notwithstanding his minority stake, the allegations demonstrated “extraordinary influence” and the complaint adequately pleaded that Musk “exercised his influence as a controlling stockholder with respect to the [a]cquisition.”
According to the complaint, beginning in early 2016, Musk repeatedly proposed to the Tesla board a plan to acquire SolarCity. Musk co-founded SolarCity, served as its Chairman, and held approximately 21.9% of its common stock. In June 2016, Tesla’s board voted to approve an offer to acquire SolarCity, while Musk and another director recused themselves from the vote, and the two companies announced their entry into a merger agreement in August 2016. The deal was submitted to a stockholder vote in November 2016, in which approximately 58% of Tesla shares were voted in favor (excluding the shares held by Musk and certain other Tesla stockholders who were also SolarCity directors or executive officers). The merger closed a few days later. Asserting direct and derivative claims for breach of fiduciary duty, plaintiffs alleged that Musk “orchestrate[d]” the acquisition to effect a “bail-out” of SolarCity, which was before the merger “severely distressed” and on the brink of bankruptcy.
Denying the motion to dismiss, the Court found that the complaint pleaded facts sufficient to support a reasonable inference that Musk was a controlling stockholder, at least with respect to the SolarCity transaction. The Court highlighted Musk’s alleged “domination of the [b]oard during the process leading up to the [a]cquisition,” as well as the company’s and Musk’s own “acknowledgements of his outsized influence.” The Court also explained that a majority of the board was allegedly interested in the transaction or not independent of Musk. Notably, the Court distinguished its decision from Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd, 177 A.3d 1 (Del. 2017), where an influential founder and CEO was determined not to be a controlling stockholder, emphasizing that unlike Dell, here “there were practically no steps taken to separate Musk from the [b]oard’s consideration of the [a]cquisition.”