A Delaware judge has ruled that a lawsuit by Tesla Inc. (NASDAQ: TSLA) investors challenging the acquisition of SolarCity Corp. may proceed. Delaware Chancery Court Judge Joseph Slights concluded Musk being Tesla’s founder, CEO and board chairman, along with his ties to other directors, allowed him to influence the SolarCity shareholder vote enough to raise questions about its propriety.
The judge’s ruling effectively allows the class-action suit to move forward. Tesla had sought to have the lawsuit dismissed. The case is In Re Tesla Motors Inc. Stockholders Litigation, No. 12711, Delaware Chancery Court (Wilmington).
The investors claim that billionaire founder Elon Musk fooled them into backing his $2.6 billion all-stock buyout of the solar-energy firm, which was founded by his cousins, in 2016. They are accusing Musk and the board of failing to act in their best interest. If the allegations are true, it would be a violation of U.S. laws prohibiting publicly traded companies from engaging in actions that do not serve the shareholders’ best interests.
Critics opposing the deal claim Musk used his outsized influence at Tesla to manipulate the shareholder vote over the buyout. Musk owns a 22 percent stake in Tesla. Shareholders in the class-action suit also claim Musk and a handful of Tesla board members improperly benefited from the acquisition. The complaint also claims the merger amounted to “a bailout” of SolarCity, which was deeply in debt at the time of the acquisition.
The judge ruled Tesla shareholders produced enough evidence indicating the deal may have been flawed by conflicts among Musk and other company directors. The judge also said the investors showed that conflicts “diminished the board’s resistance to Musk’s influence.” Over 85 percent of the company’s stockholders voted in favor of the acquisition.
Tesla said it didn’t agree with the judge’s decision and insists the allegations in the complaint are false. The company’s lawyers argued Musk didn’t coerce or trick investors into backing the SolarCity acquisition. The company will be taking appropriate next steps, according to a Tesla spokesperson.