On June 6, 2023, in an opinion authored by Justice Karen L. Valihura, the Supreme Court of Delaware sitting en banc
unanimously affirmed judgment in favor of defendant, the CEO/Founder and then-Chairman (the “Chairman”) of Tesla Motors, Inc. (the “Company”), on derivative claims for breach of fiduciary duty asserted by stockholders in connection with the Company’s acquisition of SolarCity Corporation (the “Target”). In re Tesla Motors, Inc. Stockholder Litig.
, No. 181, 2022 (Del. June 6, 2023). Plaintiffs alleged that the Chairman was the Company’s controlling stockholder and that he was conflicted because he also was the chairman of the board and largest stockholder of the Target. As discussed in our prior post
, following a trial, the Delaware Court of Chancery found that the transaction was “entirely fair” and rejected plaintiffs’ claims. In re Tesla Motors, Inc. Stockholder Litig
., C.A. No. 12711-VCS (Del. Ch. Apr. 27, 2022). On appeal, the Delaware Supreme Court held that the record supported the trial court’s determinations that “despite certain process flaws, the [a]cquisition was the product of fair dealing” and “the price paid was a fair one.”
As described by the Court, the Company is a corporation that “designs, develops, manufactures, and sells electric vehicles … and energy storage products,” and “bills itself as ‘the world’s only vertically integrated energy company.’” The case arose out of its 2016 stock-for-stock acquisition of the Target, which developed and produced solar panels. Approximately 85% of votes cast by all stockholders of the Company were in favor of the deal.
Plaintiffs alleged that the Target was insolvent at the time of the acquisition and the Chairman caused the Company to overpay through his alleged “domination and control” of the Company’s board. Appealing the trial court’s determination that the deal was entirely fair, plaintiffs “primarily” challenged the “degree of importance the trial court placed on market evidence” in determining whether the price paid was fair. In particular, plaintiffs contended that the trial court improperly relied on the fact that the acquisition was ultimately consummated at a small discount compared to the Target’s unaffected, pre-announcement stock price.
The Delaware Supreme Court explained that “[e]ntire fairness is a unitary test, and both fair dealing and fair price must be scrutinized by the Court of Chancery.” The Court highlighted that “[b]oth aspects of the entire fairness test—fair dealing and fair price—must be satisfied.” However, the Court noted that “sometimes, a fair price is the most important showing.” The Court added that, where entire fairness review applies, defendant bears the burden of proof.
As to fair dealing, the Court explained that the trial court “did not ignore the process flaws,” but rather “considered them in [the] overall assessment of the process.” It found that the trial court’s determination that the Chairman “did not exploit any inherent coercion was adequately supported by numerous factual findings,” including that there were “several instances where the [Company’s board] simply refused to follow [his] wishes.” Moreover, a credible and “indisputably independent director” led the negotiations, and the board was advised by independent legal and financial advisors. The Court also noted that the process resulted in a final deal at a price lower than the initial offer and explained that negotiations that are “vigorous and spirited are an indicium of fair dealing.” The Company’s inclusion of a majority-of-the-minority voting requirement as part of the transaction was also a “strong indicator of fair dealing.”
Regarding the Company’s decision not to form a special committee, the Court “recognize[d] that there may be reasons why a board decides not to employ such devices, including transaction execution risk.” The Court added that a board may also “wish to maintain some flexibility in the process, as [the Company’s board] did here, by having the ability to access the technical expertise and strategic vision and perspectives of the controller.” The Court clarified that it “continue[s] to encourage the use of special negotiation committees as a ‘best practice,’” but “nothing in Delaware law requires
a board to form a special committee in a conflicted transaction.”
As to fair price, the Court acknowledged that “there was an error in the trial court’s fair price analysis.” The Court explained that it has previously “cautioned against reliance on a stock price that did not account for material, nonpublic information,” and there was evidence that non-public information uncovered during diligence regarding the Target’s liquidity and debt covenants was not reflected in its pre-announcement stock price. Nevertheless, the Court concluded that “other bases for the court’s fair price determination are sufficient to support the opinion.” In particular, the Court found that the board’s financial advisor was “diligent” and “credibly demonstrated … that the price paid was fair.” This conclusion was also supported by expert testimony at trial. Further, the Court concluded that the record supported the trial court’s finding that the Target was solvent, as shown by a contemporaneous analysis by an accounting firm, and “brought substantial value” to the Company, notwithstanding its liabilities. The Court also emphasized that “synergistic values are a relevant input for a court to consider in assessing the entire fairness of an acquisition” because potential synergies are “often a prime motivator for an acquiring company,” as “was the case here.”
The Court highlighted that the process does not have to be “pitch perfect.” Instead, “the question is whether the [a]cquisition was entirely fair” and the record supported the conclusion that it was.