Tesla founder Elon Musk will attend a Delaware court this month as he is the sole remaining defendant in an approximately $2.2 billion lawsuit filed by his company’s shareholders. If Musk is ruled liable, the judgement would be among the largest ever cast on an individual corporate executive in history.
The suit alleges that Tesla’s purchase of major solar installer SolarCity was an attempt to bailout Musk’s cousin’s struggling company, of which Musk was the largest investor and chairman. The shareholders’ suit also accuses Tesla’s board of having a lax approach to corporate governance.
In response, Tesla stated, in its 2020 annual report: “We believe that claims challenging the SolarCity acquisition are without merit and intend to defend against them vigorously. We are unable to estimate the possible loss or range of loss, if any, associated with these claims.”
Debts
Much of this lawsuit revolves around why SolarCity was purchased to begin with. Peter and Lyndon Rive founded SolarCity in 2006 with encouragement from their cousin, Musk. By the time Tesla purchased the company, Musk owned 22.2% and was chairman of the board. Though it had grown to be the largest U.S. installer in 2016, earning record revenues of $730 million, losses were mounting, with $820 million in net losses that year. The company had accumulated more than $1.5 billion in debt by the year of the purchase of the company by Tesla.
SolarCity’s business model relied on marketing, and it spent heavily on advertising and door-to-door sales while offering low-priced, no-upfront-cost, long-term leases. Post-purchase of the company by Tesla, the strategy changed, as the new owner began to slash marketing costs, moving sales direct-from-online and in-store. Musk noted, in a 2019 deposition on the shareholder lawsuit, that the door-to-door and other sales channel strategies did not match Tesla’s brand.
Musk also said in the deposition, that problems with the Tesla Model 3 electric vehicle caused the company to reassign much of its SolarCity workforce to bolster its vehicle production operations. He could not confirm exactly what portion of the workforce was reassigned.
Tesla’s power division is now mostly focused on home energy storage system the PowerWall. That product accounted for the largest portion of the power division’s $1.99 billion in revenue last year. Meanwhile, solar installations have fallen behind, with 205 MW installed in 2020, much less than the 803 MW SolarCity deployed in 2016.
Direct sales
The development of Tesla’s solar roof program has taken things in a different direction from SolarCity’s model. SolarCity installed panels and equipment from top manufacturers and focused on getting customers signed to long-term leases. Tesla’s solar program now focuses on direct sales and uses proprietary solar tiles in its “solar roof” installations.
Also included in the purchase of SolarCity was a Buffalo, NY panel manufacturing plant. Tesla aimed for 1 GW-per-year of solar production but its partner, Panasonic, has since walked away from the project. It is now unclear what volume of panels or roof tiles Tesla currently produces at the facility.
While no investor can argue against the fact Tesla has shown dramatic share value growth, the SolarCity deal has not panned out the way some, including Musk, had predicted. In 2016, Musk called the purchase “pretty transformational,” but now he faces significant potential damages in the July hearing.
