When Tesla announced it had agreed, in principle, to purchase SolarCity, many analysts were shocked. Not only does the deal represent a merger of two innovative companies, neither of which is currently turning a profit, but many analysts also believe the deal represents a massive conflict of interest.
Elon Musk founded Tesla in 2003 and remains Tesla’s CEO. Musk also founded SolarCity, which is the United States largest solar power provider. Musk is currently SolarCity’s Chairman. Musk is also the largest shareholder in both Tesla and SolarCity, holding over twenty percent of each company. As if Musk were not entangled enough, the current CEO of SolarCity is Lyndon Rive, and the company’s CTO is Peter Rive. Lyndon and Peter Rive are Musk’s cousins.
As a result of Musk’s many connections to both SolarCity and Tesla, many corporate governance experts have said the deal suffers from a blatant conflict of interest on the part of Musk.
However, Tesla and SolarCity have taken several steps to ensure the propriety of the deal. First, in order to allay any concerns about a conflict of interest, independent board members were brought on to review, and ultimately approve, the acquisition. The next step required in finalizing the deal is to gain shareholder approval by a majority vote of each company’s respective shareholders. At first glance, this step seems to actually exacerbate the conflict of interest because Musk owns twenty percent of the outstanding shares of both companies. However, as part of the conditions of the deal, Musk and his affiliates have recused themselves from voting on the deal. Musk’s absence from the vote allows shareholders to make a meaningful decision instead of Musk’s interests tipping the scales dramatically in favor of approval. Furthermore, SolarCity CEO Lyndon Rive will also recuse himself, as will Antonio Gracias, who serves on the boards of both companies.
As a result of Musk’s recusal, institutional investors may become decisive in deciding whether or not the deal is approved. The leading institutional shareholder for both companies is Fidelity Management & Research Co. Fidelity owns 11.2% of Telsa shares, and 14.8% of SolarCity shares. Fidelity has praised Musk and his vision repeatedly, but has not definitively revealed its voting position on the potential deal.
What is so interesting about Tesla’s potential acquisition of SolarCity is that while many experts worry about Musk’s conflict of interest, experts vehemently disagree who is getting the worse end of the deal. Some analysts worry that Tesla is overpaying in order to save SolarCity’s sinking ship. SolarCity’s shares are down over 50% from the start of the year, and Tesla has offered to purchase SolarCity’s shares at $25.83 per share, which is a 45.1% premium over SolarCity’s closing price as of September 12. However, in spite of SolarCity’s recent struggles, many believe Tesla is in fact getting a steal of a deal. SolarCity remains the largest U.S. solar provider and less than six months ago the company was valued at over $57 per share, more than double Tesla’s potential purchase price.
Even if shareholders approve the deal, the deal is far from guaranteed. At the end of the day regulators must also approve the merger, and with the high level of concern and controversy regarding the deal, regulators are sure to take a long look at Elon Musk and his new master plan.