Elon Musk Faces Lawsuit Related to Tesla Acquisition of SolarCity

In 2016, Tesla acquired SolarCity in a $2.2 billion deal that must have had some investors scratching their heads at the time. Why would a vehicle manufacturer want to go into the solar power business?

If one wanted to stretch a point, it might make sense to stave off criticism that electric vehicles run on electricity produced in coal-fired plants. Tesla has recently invested in some solar powered charging stations, often in partnership with companies like Fastned. Some Tesla and Elon Musk followers have speculated that it could use the solar power production capacity that used to belong to SolarCity to add solar roofs and solar panels to its charging stations.

“I’m pretty optimistic about how it’s going to turn out. … It’s been extremely well received at the consumer level,” Elon Musk told investors in a November 2016 investor call.

Since then, Tesla’s new solar power wing has faced challenges related to production and delivery of the solar roofs. Most recently, it dropped the ball by drastically jacking up pricing for customers that had already signed a contract for a solar roof at a lower price and offering no options other than paying the higher price or cancelling their reservation. The latest development in that saga had a Californian court considering combining the lawsuits coming out of the increased pricing into a class-action lawsuit.

Now shareholders have brought a lawsuit against Elon Musk over allegations that the acquisition of SolarCity amounted to a bailout of a company in which his cousins had a stake. Before the acquisition, SolarCity had never had a profitable quarter and hadn’t proven out its previous business model of effectively leasing solar panels to customers.

Board members, including Tesla chairman Robyn Denholm, have already settled for $60 million, admitting no fault. The lawsuit had also alleged that the board was lax in its corporate governance duties. Musk refuses to settle and is expected to appear in court on July 12. He could lose about $2 billion if he loses the case.

Although it’s rare for corporate executives like Musk to be held individually liable for wrongdoing, he has gotten himself in trouble with regulators over posts on his Twitter account, which Tesla regards as official company communications in lieu of an actual PR department. He was previously fined by the SEC and had to give up his position as chairman of the board for statements on Twitter that included his desire to take Tesla private. He has since admitted that taking Tesla private would be impossible, though he did tangle with the SEC again over comments he made in relation to Tesla’s production capacity.

(Tesla has set two quarterly delivery records in a row this year, though, including delivering over 200,000 vehicles in Q2 2021.)

Meanwhile, Tesla’s solar power side languished, likely because it wasn’t paying all that much attention to that part of its business beyond trimming costs until recently. Most of the costs were related to SolarCity’s practice of aggressive (and expensive) marketing.

“There were some of the sales channels that we thought were not consistent with the Tesla brand, such as door-to-door, sort of knocking on people’s doors, so we wanted to transition that to sales to the Tesla stores instead. It makes more sense, which I think we’ve mentioned as one of the rationales for the SolarCity acquisition,” Elon Musk said during deposition when the lawsuit was filed in 2019.

Analysts questioned whether the acquisition was a good move for Tesla, especially considering that it seemed to struggle with selling its products at first. It sold just $178 million worth of solar products in 2016.

“When Tesla bought them, supposedly they were going to recapitalize the business and revamp. Instead, it really declined significantly, I think because they weren’t paying that much attention to it and had other things going on,” says Joseph Osha, senior research analyst for Guggenheim Securities.

Those “other things” apparently included difficulties that Tesla was having with the Model 3 electric sedan at the time. It reassigned personnel away from the former SolarCity to work on the vehicle.

The most recent figures indicate that sales of solar products jumped to $1.99 billion of revenue in 2020, mostly driven by batteries like the Powerwall and Powerpack, which are designed to store solar power. Tesla has also mentioned that demand for its solar products is strong and growing this year. Earlier this year, Apple tapped Tesla to provide 85 Powerpacks for the solar farm being developed in California, for instance.

That may not be enough to convince the shareholders involved in this particular lawsuit against Tesla. Despite promises that Tesla can ramp up production of its solar power products at facilities like a large-scale solar panel factory in Buffalo, New York, other companies that specialize in solar power have far more traction in this space.

“The SolarCity acquisition was a deal to forget for Tesla investors as it’s a crowded space with minimal traction since the acquisition,” says Wedbush analyst Dan Ives.