By:  Devan A. McCarrie, DJCL staff member at Widener University Delaware Law School.

Elon Musk (“Musk”) is no stranger to making top headlines in the news cycle with his radical and seemingly impossible ideas. He began acquiring his massive amount of wealth with his successful startup, an online financial services and payment company, which was bought for $1.5 billion and transformed into PayPal.[1] Most famously, Musk is known for his roles at SpaceX and Tesla, Inc., a company dedicated to producing affordable, mass-market electric cars.[2] Currently, Tesla, Inc. is involved in ongoing shareholder litigation over its 2016 acquisition of SolarCity.[3] The issue sparking legal action involves Musk’s role as the largest shareholder and board member of both Tesla, Inc. and SolarCity at the time of the acquisition.[4] Musk owned approximately 22.1% of Tesla’s common stock and had multiple positions in the company, including the roles of CEO, Chief Product Architect, and Chairman of the Tesla Board.[5] Similarly, he owned 21.9% of SolarCity stock and also served as the Chairman of the SolarCity Board since its formation in 2006.[6] Additionally, SolarCity is co-founded by Musk’s two cousins.[7] On multiple occasions, Musk presented a plan to acquire SolarCity and stated the purpose of the proposed transaction was “to complement the Company’s Energy business, grow the Sales operations of the Company and to create other product, service and operational synergies through the combination of the companies.”[8]

The Tesla Board takes issue with the fact that Musk only proposed SolarCity and failed to discuss the possibility of other corporations within the same field.[9] The Tesla Board also claims they felt forced to vote affirmatively due to Musk’s coercive behavior.[10] The initial lawsuit determined that Musk was a controlling shareholder at the time of the acquisition.[11] This prompted Tesla’s stockholders to file several derivative and putative class action lawsuits alleging that the Tesla board of directors and Musk, as a conflicted controller, breached their fiduciary duties by approving the acquisition for the benefit of SolarCity stakeholders and to the detriment of Tesla stockholders.[12] The Delaware Supreme Court considers a stockholder to be controlling when they “(1) own more than 50% of the voting power of a corporation or (2) own less than 50% of the voting power of the corporation but exercise control over the business affairs of the corporation.”[13] Following the Delaware Supreme Court’s precedent involving controlling stockholders, the Court of Chancery concluded that it is reasonably inferable that Musk exercised his influence as a controlling stockholder with respect to the acquisition and the case should move forward to discovery.[14] This distinction is crucial because it will determine the proper standard of review, whether it will receive the lower standard set forth in Corwin[15] or an entire fairness standard of review.[16] The opinion in Corwin allows the Court of Chancery to use the business judgment rule as the appropriate standard of review for a post-closing damages action when a merger that is not subject to the entire fairness standard of review has been approved by a fully informed, uncoerced majority of the disinterested stockholders.[17] An entire fairness review arises from the fiduciary duty of loyalty and will determine if there was inherent coercion with regard to the SolarCity acquisition.[18] Musk will have to explain why the transaction’s process and price were fair.[19]

Now, the Tesla shareholders argue that Musk was aware of the financial difficulties that SolarCity was experiencing during the time of the acquisition.[20] Even though the company was purchased based on the fair Evercore estimate,[21] the shareholders contend that they were coerced because of Musk’s position at the company, and they felt like they had no other option.[22] In the initial suit, the plaintiffs provided evidence that “SolarCity was at serious risk of breaching the liquidity covenants in its revolver in 2016; SolarCity had limited options for outside financing; and SolarCity’s advisors questioned whether the company had ‘sufficient cash to meet its obligations as they come due.’”[23] There are emails between Musk and SolarCity CFO clearly showing that Musk was aware of the liquidity crisis.[24] Vice Chancellor Slights determined on February 4, 2020, that even if the information is outdated, as the defendant claims, it provides a basis for genuine disputes of material facts that need to be further explored.[25] The week before this decision was released, the five members of the board of directors of Tesla, not including Musk, decided to settle the shareholder litigation with a $60 million settlement.[26] Musk now faces an approaching 10-day trial that is scheduled to begin on March 16, 2020.[27] The trial will focus on Elon Musk’s fiduciary duties and whether he did not fully disclose the depth of SolarCity’s problems.[28]

Devon A. McCarrie

About the Author: Devan is a second-year Regular Division student expected to graduate in May 2021. Devan participated in a study abroad program through Temple University Beasley School of Law in Rome, Italy, during the summer of 2019. She took classes in European Union Law and International Civil Litigation. Devan is an active staff member of the Delaware Journal of Corporate Law, the Transactional Law Honor Society, Phi Alpha Delta, and the Brehon Irish Law Society.


[1] Caleb Melby, How Elon Musk Became A Billionaire Twice Over, Forbes, Mar. 12, 2012, (last visited Feb. 21, 2020).

[2] Id.  

[3] In re Tesla Motors, Inc. Stockholder Litig., No. 12711-VCS, 2020 WL 553902, at *1 (Del. Ch. Feb. 4, 2020).

[4] Tom Hals, Tesla Directors Settle, Isolating Musk as SolarCity Trial Looms, Reuters, Jan. 30, 2020, (last visited Feb. 21, 2020).

[5] In re Tesla Motors, Inc. Stockholder Litig., No. 12711-VCS, 2018 WL 1560293, at *2 (Del. Ch. Mar. 28, 2018).

[6] Id.  

[7] Jef Feeley & Dana Hull, All Tesla Directors But Musk Settle Investors’ SolarCity Suits, Bloomberg, Jan. 29, 2020, (last visited Feb. 21, 2020).

[8] In re Tesla, 2018 WL 1560293, at *6.

[9] Id.

[10] Alison Frankel, Elon Musk’s Liability For Tesla’s SolarCity Deal Could Come Down To A Question Of His Control, Reuters, Feb. 5, 2020, (last visited Feb. 21, 2020).

[11] In re Tesla, 2018 WL 1560293, at *1 (Del. Ch. Mar. 28, 2018).

[12] Id.

[13] Id. at *19 (citingKahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1113-14 (Del. 1994)).

[14] Id.

[15] Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304, 305-06 (Del. 2015).

[16] Id.

[17] Id.

[18] In re Tesla, 2018 WL 1560293, at *12.

[19] Id.

[20] Id.

[21] Reuters, Tesla’s Musk Pushed For Solarcity Deal Despite Major Cash Crunch, Bus. Insider, Sept. 23, 2019,  (last visited Feb. 21, 2020).

[22] In re Tesla, 2018 WL 1560293, at *12.

[23] In re Tesla, 2020 WL 553902, at *21.

[24] Linette Lopez, The Future Of Elon Musk’s Empire Was In Peril In 2016, And New Documents Reveal More About The Desperate Plan To Save It, Bus. Insider, Oct. 30, 2019, (last visited Feb. 21, 2020).

[25] Id.

[26] Hals, supra note 4.

[27] Id. This post was written before the trial was set to begin and before the COVID-19 pandemic. Due to unforeseen circumstances relating to the pandemic, the matter has been postponed until further notice.

[28] Id.