## Facts

- Tesla pursued a strategy to become an integrated clean-energy company and considered acquiring a solar business starting in 2015.
- SolarCity, a leading residential solar company founded by Elon Musk’s cousins, experienced severe liquidity stress by 2015–2016, including rapidly increased debt and covenant/default risks.
- Elon Musk was Tesla’s CEO and Chair and also Chair and a large stockholder of SolarCity; he held about 22% of Tesla and about 21–22% of SolarCity, and his SolarCity stake would convert into over $500 million in Tesla stock in the merger.
- In February 2016, Musk proposed combining Tesla and SolarCity; Tesla initially declined and retained independent financial advisors to evaluate options.
- In June 2016, Tesla authorized a non-binding proposal to acquire SolarCity, subject to due diligence and approval by a majority of disinterested Tesla stockholders; no special committee was formed, but Musk was recused from formal board votes.
- After due diligence revealed deeper SolarCity distress, Tesla’s board (without Musk) reduced the offer; the merger agreement signed July 31, 2016 valued SolarCity at about $2.1 billion in equity value and was supported by a fairness opinion.
- In November 2016, about 85% of voting Tesla stockholders approved the deal.
- Stockholder plaintiffs alleged Musk was a de facto Tesla controller despite his minority stake and used influence over directors and management to cause Tesla to overpay to rescue SolarCity.
- At the pleading stage, the Court of Chancery held plaintiffs adequately alleged “actual control” by Musk and allowed controller-based claims to proceed; after trial, the court assumed controller status and nonetheless found the transaction entirely fair, entering judgment for Musk.

## Issues

1. Whether the Court of Chancery correctly applied the entire fairness standard (fair dealing and fair price) to Tesla’s acquisition of SolarCity.
2. Whether the Court of Chancery improperly weighted market-based evidence and the disinterested stockholder vote in concluding the transaction was entirely fair.

## Decision

- The Delaware Supreme Court unanimously affirmed the judgment for Musk.
- Because the Court of Chancery assumed Musk was a controlling stockholder and applied entire fairness, the Supreme Court did not need to decide controller status.
- The Supreme Court held the Court of Chancery committed no reversible legal error in applying entire fairness and that the fairness finding was supported by the record.
- The Supreme Court agreed that robust market evidence and a fully informed, uncoerced 85% disinterested stockholder vote could be weighed in the fair price analysis even though the vote did not change the standard of review.
- Although the Supreme Court identified an analytical concern with comparing merger consideration to SolarCity’s announcement-day trading price without fully accounting for liquidity and credit concerns, it found the point non-outcome-determinative given other valuation evidence.

## Legal Principles

- Entire fairness is Delaware’s most demanding standard of review and requires an examination of both fair dealing (process) and fair price (substance).
- A stockholder with less than majority voting power may be treated as a controller if plaintiffs plead and prove “actual control” over corporate decision-making.
- When a court assumes controller status and applies entire fairness, appellate review may focus on whether the test was correctly applied rather than on whether controller status was definitively established.
- Entire fairness does not require equal weighting of fair dealing and fair price in every case; the strength of the evidence may differ by prong.
- Under entire fairness, contemporaneous market indicators (e.g., trading prices, analyst coverage, market reaction) and a fully informed, uncoerced disinterested stockholder vote may be considered probative of fair price, even if not cleansing the transaction to business-judgment review.

## Conclusion

The Delaware Supreme Court affirmed a post-trial judgment that Tesla’s acquisition of SolarCity satisfied entire fairness, holding that the Court of Chancery permissibly weighed market-based valuation evidence and an informed, uncoerced disinterested stockholder vote, and that any identified methodological flaw was not material to the outcome.


In re Tesla Motors, Inc. S’holder Litig., No. 181, 2022 (Del. June 6, 2023)