Tesla says lawsuits may delay SolarCity deal

September 19, 2016 9:16 AM EDT

FILE PHOTO -- Elon Musk, Chairman of SolarCity and CEO of Tesla Motors, speaks at SolarCity?s Inside Energy Summit in Manhattan, New York October 2, 2015. REUTERS/Rashid Umar Abbasi/File Photo


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By Liana B. Baker and Rachit Vats

(Reuters) - Tesla Motors Inc (NASDAQ: TSLA) said on Monday its proposed acquisition of SolarCity Corp (NASDAQ: SCTY) could be delayed because of shareholder lawsuits alleging board members breached their fiduciary duty, the latest hurdle to a $2.6 billion deal.

The four lawsuits were filed by two individuals, a police pension fund, and a group of retirement funds, according to a regulatory filing by Tesla on Monday.

If a judge grants any of the plaintiffs an injunction, the closing of the deal could be delayed beyond the end of the year when it had been expected, Tesla said. A hearing is scheduled on Oct. 18 in Delaware.(http://bit.ly/2cMzghr)

Tesla said in the filing that the actions are without merit and the shareholders were unlikely to prevail in delaying the transaction. SolarCity declined to comment.

"Simply because someone uses litigation to try to delay an acquisition does not mean it will be successful. At this point, it is not yet known if anyone will even end up pursuing such a request. If anyone does, Tesla will oppose it," a Tesla representative said in a statement.

FAMILY TIES

Family and ownership connections between the two companies have raised concerns about Tesla's motivations in buying SolarCity, which has been burning through its cash pile to finance its growth.

Since Tesla Chief Executive Officer Elon Musk is the biggest shareholder in both Tesla and SolarCity, both companies have acknowledged the conflict of interests inherent in the merger and have taken steps to avoid them.

SolarCity, in considering Tesla's offer for the company, formed a special committee to review Tesla's offer independent of the influence of Musk and other executives close to him including his cousins, SolarCity co-founder and Chief Executive Officer Lyndon Rive and co-founder and Chief Technology Officer Peter Rive.

If the deal is approved by minority shareholders, his stake in Tesla could increase to 23.4 percent from about 21 percent, including the conversion of his current stake in SolarCity.

Arkansas Teacher Retirement system and Boston Retirement System said in their lawsuit that Tesla's board did not form a special committee to evaluate the acquisition. While Musk and Antonio Gracias, a board member at both companies, recused themselves from voting on the deal, the shareholders called this move "superficial."

Injunctions sought by shareholders are rare but can be granted. In 2013, the Delaware Chancery court blocked Activision Blizzard Inc (NASDAQ: ATVI) $8.2 billion buyout of its shares from Vivendi SA, after a shareholder filed a lawsuit. A higher court lifted the injunction less than a month later.

Lawrence Hamermesh, a professor of corporate law at Delaware Law School, said while the shareholders will have to convince a judge that Tesla's board was not disinterested, the case could go forward.

"It's not impossible. Most M&A litigation is kind of a weak argument about getting the right price, but in this case, you have conflicts of interest and familial relationship you don't see in other public deals," Hamermesh said.

SolarCity shares have been trading at a 31 percent discount to Tesla's stock swap offer, which valued SolarCity shares at $25.37 on Aug 1.

Tesla's shares have fallen nearly 11 percent amid skepticism that the deal will happen. Tesla is facing its own cash crunch and has said it plans to raise additional money this year. Some of the funds being raised could also support the SolarCity acquisition if the deal goes through, Tesla said.

Tesla shares were about up 0.9 percent at $206.34 on Monday on the Nasdaq. SolarCity shares were down 1.5 percent at $17.23.

(Reporting by Liana Baker in San Francisco and Rachit Vats in Bengaluru; additional reporting by Joe White in Detroit and Tom Hals in Wilmington, Delaware; Editing by Carmel Crimmins and Cynthia Osterman)



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