Elon Musk is in the midst of numerous legal battles charging that he’s watching out more for his own interests than those of Tesla’s shareholders.
Tesla shareholders have brought the lawsuits against Musk, the company and the rest of its board. One is challenging the terms of a compensation package that could end up paying him stock worth more than $50 billion over ten years. That could catapult him to becoming the world’s richest man. The other claims that he engineered Tesla’s 2016 purchase of SolarCity — another company in which he was the largest shareholder — primarily as a bailout of the troubled solar panel company.
Tesla like all other automakers is the defendant in countless other lawsuits. And shareholder suits are not unusual for all major companies. But these are giving new attention to questions about the interlocking nature of Musk’s many varied interests, which also includes space exploration company SpaceX. Despite the efforts of Musk’s lawyers, neither suit has been dismissed by the courts. That could be bad news for Musk and Tesla, potentially disrupting the ambitious goals he has set for his various companies.
“They are distractions at a time they don’t need distractions,” said tech analyst Gene Munster, managing partner at Loup Ventures.
Tesla spokespeople and attorneys say the suits are without merit and Tesla will vigorously contest them and expects the cases.
The first suit questions the company’s purchase of SolarCity, the solar panel and battery company that Tesla bought for $2.1 billion. Musk was chairman and the largest shareholder of SolarCity, a company that was run by his cousins at the time of the purchase.
In a filing that was unsealed on Monday, plaintiffs claimed that at the time the deal closed, Ernst & Young, SolarCity’s auditor, doubted SolarCity could stay in business as a “going concern” if it remained a standalone company.
According to the filing, investors in SpaceX pushed for SolarCity to repay money that SpaceX had loaned it, creating a cash-crunch at SolarCity. The suit charges that cash crunch made Tesla’s acquisition more of a “bailout” of one of Musk’s companies than a strategic merger that would benefit Tesla, as Musk argued.
“As a standalone entity [SolarCity] will not have sufficient cash to meet its obligations as they come due,” the filing quotes analysis of SolarCity prepared by Ernst & Young.
But in response to CNN’s request for comment, Tesla said Ernst & Young’s concerns quoted in the shareholders’ suit were from an early draft, not the firm’s final analysis.
“These allegations are based on the claims of plaintiff’s lawyers looking for a payday, and are not representative of our shareholders who support our mission and ultimately voted in favor of the acquisition,” said a statement from Tesla (TSLA). “The accusations made in the plaintiff’s brief are false and misleading.”
Munster said it’s not unusual for companies, particularly tech companies, to be facing a cash crunch at the time they are purchased by a more successful, deeper pocketed buyer. It doesn’t make those purchases improper, he said. But the fact that Musk was the primary shareholder raises questions that Tesla doesn’t need to be dealing with right now, Munster said.
“Make the acquisition in solar, I think it makes sense,” said Munster. “But find someone else to buy, not someone he wasn’t invested in.”
The other shareholder suit challenges Musk’s pay package. If Tesla reaches certain performance thresholds, particularly an increased market value, Musk will get additional shares of Tesla worth billions. He is currently paid nothing.
The lawsuit challenges a compensation package that Musk was granted last year by Tesla’s board. The package was valued at $2.6 billion over the course of 10 years, using accounting methods for estimating the cash value of stock options. But if Tesla’s market value balloons just as the payment plan hopes, those stock awards could be worth more than $50 billion. Shareholders approved the compensation package in March 2018.
Telsa, which has yet to post an annual profit, did not meet any of the performance milestones last year, so Musk received no compensation. Musk tweeted in May that after paying for Tesla expenses, he was actually at “net negative” compensation.
Typically suits challenging compensation packages are dismissed by the courts, especially if there is a shareholder vote.
But the judge in the case said the arguments against the pay package were sufficient to be “very outer margins of adequacy.” He ruled that “it is reasonably conceivable the award is unfair.” So the suit is still alive.
Tesla has said that if Musk gets a huge payday from the compensation package, it will be because the value of the company has increased significantly, benefiting shareholders. It said that’s why shareholders overwhelmingly approved the deal. In defense of the pay package, a Tesla spokesperson pointed to the tenuous nature of the judge’s ruling.
Tesla is subject of numerous other lawsuits as well, as are virtually all automakers. But these shareholder suits are getting particular attention because they are questioning the motives of the company’s superstar CEO.
In addition to the shareholder suits against Tesla, Musk is also dealing with a federal defamation lawsuit from Vernon Unsworth, a rescue worker who helped save a Thai youth soccer team from a flooded cave in 2018.
While the young soccer players were still trapped in the flooded cave, gaining worldwide attention, Musk suggested that the best way to save them would be a ‘kid-size” submarine that engineers on his staff created. Unsworth claimed the submarine, which was not used in the rescue, had no chance of working. Unsworth dismissed Musk’s sub a “PR stunt.”
So Musk made an unsubstantiated tweet, which he since deleted, in which he called Unsworth a “pedo” guy, suggesting Unsworth was a pedophile. Musk did eventually delete the tweet and issued an apology. But Unsworth filed suit against Musk last September.
Musk’s lawyers filed a motion in the case last week, arguing the suit should be dismissed even if the Unsworth is not a pedophile. They argued that “pedo guy” is commonly used in Musk’s home country of South Africa to mean “creepy old man.”
“He intended his statements about Mr. Unsworth to be schoolyard taunts and not representations of fact,” his attorney said in their motion.
Unsworth’s attorneys have until next month to respond to Musk’s argument. The case is scheduled for a December trial.
– CNN Business’ Jackie Wattles and Shannon Liao contributed to this report