Tesla Inc. (NASDAQ:TSLA) CEO Elon Musk is being accused of misleading shareholders in 2016 regarding the acquisition of SolarCity for 2.6 billion. Unsealed court documents indicate that Musk knew the company was going bankrupt but still urged investors to acquire it.
Elon Musk mislead Shareholders to SolarCity deal
Weeks after the company closed the deal, Ernst & Young confirmed that the company was insolvent and could not meet its obligations as an independent company. Tesla faces a lawsuit from shareholders who indicate that the CEO and the Board breached their duties by approving the acquisition.
It alleges that the CEO, who was also the chairman of SolarCity, ignored his conflict of interest. They didn’t disclose important information about the troubles the company was facing. SolarCity did not disclose information regarding two payments to lenders that could have been vital in determining its financial position.
The petitioner, in its motion, is seeking a summary judgment from the Delaware Chancery Court. Defendants requested the court to dismiss the suit before it gets to trial next year. Usually, shareholder cases that survive a motion to dismiss settle before getting to trial, which in this case could include payment by Musk to shareholders.
Tesla dismisses allegations
On Monday evening, Tesla indicated that the allegations are not representative of its shareholders. Tesla claims that lawyers of the plaintiff are after a payday, and their shareholders voted and approved the acquisition. The statement states that allegations made in the petitioner’s brief are false and misleading because Tesla and SolarCity made all information public.
Unsealed court documents on Monday indicated that the company was insolvent before the merger. Musk knew about it because he was the chairman of SolarCity, a company founded by his cousin. Also, Musk’s other company, SpaceX, had loaned the company money to help the company’s cash position from dropping below $169 million. This could have prompted a bond default which could potentially lead to bankruptcy. The filing reveals that the company sought financing from several private equity investors and investment banks that said no.