In re Tesla Motors, Inc. Stockholder Litigation

• Court: Court of Chancery of Delaware
• Decided: April 27, 2022
• Docket: C.A. No. 12711-VCS
• Status: Published

Opinion

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

IN RE TESLA MOTORS, INC. ) CONSOLIDATED STOCKHOLDER LITIGATION ) C.A. No. 12711-VCS

MEMORANDUM OPINION

Date Submitted: January 18, 2022 Date Decided: April 27, 2022

Jay W. Eisenhofer, Esquire, Christine M. Mackintosh, Esquire, Kelly L. Tucker, Esquire and Vivek Upadhya, Esquire of Grant & Eisenhofer P.A., Wilmington, Delaware; Michael Hanrahan, Esquire, Kevin H. Davenport, Esquire and Samuel L. Closic, Esquire of Prickett, Jones & Elliott, P.A., Wilmington, Delaware; Daniel L. Berger, Esquire of Grant & Eisenhofer P.A., New York, New York; Lee D. Rudy, Esquire, Eric L. Zagar, Esquire, Justin O. Reliford, Esquire, Matthew Benedict, Esquire of Kessler Topaz Meltzer & Check, LLP, Radnor, Pennsylvania; Randall J. Baron, Esquire and David T. Wissbroecker, Esquire of Robbins Geller Rudman & Dowd LLP, San Diego, California, Attorneys for Plaintiffs.

David E. Ross, Esquire, Garrett B. Moritz, Esquire and Benjamin Z. Grossberg, Esquire of Ross Aronstam & Moritz LLP, Wilmington, Delaware and Evan R. Chesler, Esquire, Daniel Slifkin, Esquire, Vanessa A. Lavely, Esquire and Helam Gebremariam, Esquire of Cravath, Swaine & Moore LLP, New York, New York, Attorneys for Defendant Elon Musk.

Kevin R. Shannon, Esquire, Berton W. Ashman, Jr., Esquire, Jaclyn C. Levy, Esquire and Nicholas D. Mozal, Esquire of Potter Anderson & Corroon LLP, Wilmington, Delaware, Attorneys for Nominal Defendant Tesla, Inc.

SLIGHTS, Vice Chancellor In 2006, Elon Musk, co-founder, CEO and Chairman of Tesla Motors, Inc.,

publicly declared in a so-called “Tesla Motors Master Plan” (the “Master Plan”) that

“Tesla’s mission is to accelerate the world’s transition to sustainable energy” and,

more specifically, “to help expedite the move from a mine-and-burn hydrocarbon

economy towards a solar electric economy . . . .”1 Ten years later, Tesla purported

to execute the Master Plan when it announced on June 21, 2016, that it would acquire

a solar energy company, SolarCity Corporation, in a stock-for-stock merger

(the “Acquisition”) valued at the time at approximately $2.6 billion. Several Tesla

stockholders have alleged the Acquisition, as consummated, was the product of

breaches of fiduciary duty and other wrongdoing. They have sued members of the

Tesla board of directors (the “Tesla Board”) and, separately, Elon as Tesla’s

controlling stockholder seeking damages and equitable remedies. After denying

defense motions to dismiss and cross-motions for summary judgment, the Court

convened an eleven-day trial.2 This is the Court’s post-trial verdict.

1 Plaintiffs named both Elon Musk and his brother, Kimbal Musk, as defendants. To avoid confusion, I will refer to the brothers Musk by their first names. I intend no familiarity or disrespect. 2 All named defendants, except Elon, settled with the plaintiffs in advance of trial, leaving Elon as the sole remaining defendant.

1 As will be described in detail below, Elon owned approximately 22% of

Tesla’s common stock at the time of the Acquisition. In addition to his leadership

roles at Tesla, Elon was Chairman of the SolarCity board of directors (the “SolarCity

Board”) and the largest stockholder of that company. He was also the catalyst and

a vocal proponent of the Acquisition. Despite conflicts among its members,

the Tesla Board elected not to form a special committee of independent directors to

negotiate the Acquisition. It did, however, condition the Acquisition on the

affirmative vote of a majority of the minority of Tesla’s disinterested stockholders,

even though that vote was not required by Delaware law. While Elon was recused

from certain Tesla Board discussions regarding the Acquisition, he actively

participated in others. And he had several private discussions directly with the target

(SolarCity) and with Tesla’s financial advisor for the deal without the knowledge of

the Tesla Board.

According to the plaintiffs, as Tesla’s controlling stockholder, Elon caused

Tesla’s servile Board to approve the Acquisition of an insolvent SolarCity at a

patently unfair price, following a highly flawed process, in order to bail out his

(and other family members’) foundering investment in SolarCity. This, say the

plaintiffs, was a clear breach of Elon’s fiduciary duty of loyalty. Given Elon’s status

as a conflicted controlling stockholder, the plaintiffs maintain that the Court must

2 review their claims under the entire fairness standard, which requires Elon to prove

the Acquisition was the product of a fair process that yielded a fair price.

Elon counters that the plaintiffs failed to prove he was Tesla’s controlling

stockholder, failed to prove the Tesla Board was conflicted, and failed to prove the

Tesla stockholder vote approving the Acquisition was uninformed or coerced. Given

these failures of proof, Elon maintains that he is entitled to deference under

Delaware’s venerable business judgment rule. Should the Court disagree, Elon

argues the trial evidence reveals the Acquisition was entirely fair, regardless of

which party bore the burden of proof.

Against this factual backdrop, the plaintiffs’ claims against Elon, and Elon’s

defenses, call out like a carnival barker, beckoning the Court to explore a wide range

of interesting and arguably unsettled legal issues, including, among others, the

contours and nuances of Delaware’s controlling stockholder law, the extent to which

personal and business relationships among fiduciaries will result in disabling

conflicts of interest, the appropriate means by which a corporation’s board of

directors can disable fiduciary conflicts, the applicability and effect of an eleventh-

hour “fraud on the board” theory of fiduciary liability, the applicability and effect of

stockholder ratification of fiduciary conduct as a defense to various breach of

fiduciary duty claims, the triggers and effects of shifting burdens of proof when

litigating claims of fiduciary misconduct under the entire fairness standard of review,

3 and the interaction between fair process and fair price when reviewing a transaction

for entire fairness. To be sure, in answer to the barker’s call, it is tempting to venture

into each tent and confront the legal enigmas that await there. Given the clarity

provided by compelling trial evidence, however, there is no need to take on the

challenge of discerning the appropriate standard of review by which to decide the

plaintiffs’ claims. Even assuming (without deciding) that Elon was Tesla’s

controlling stockholder, the Tesla Board was conflicted, and the vote of the majority

Tesla’s minority stockholders approving the Acquisition did not trigger business

judgment review, such that entire fairness is the standard of review, the persuasive

evidence reveals that the Acquisition was entirely fair.

The process employed by the Tesla Board to negotiate and ultimately

recommend the Acquisition was far from perfect. Elon was more involved in the

process than a conflicted fiduciary should be. And conflicts among other Tesla

Board members were not completely neutralized. With that said, the Tesla Board

meaningfully vetted the Acquisition, and Elon did not stand in its way. Equally if

not more important, the preponderance of the evidence reveals that Tesla paid a fair

price—SolarCity was, at a minimum, worth what Tesla paid for it, and the

Acquisition otherwise was highly beneficial to Tesla. Indeed, the Acquisition

marked a vital step forward for a company that had for years made clear to the market

4 and its stockholders that it intended to expand from an electric car manufacturer to

an alternative energy company. The Court’s verdict, therefore, is for the defense.

I. BACKGROUND

The following facts were either stipulated to by the parties or proven by a

preponderance of the credible, competent evidence presented during trial.3

A. The Parties and Relevant Non-Parties

Co-lead plaintiffs, Arkansas Teachers Retirement System, Roofers Local 149

Pension Fund, Oklahoma Firefighters Pension and Retirement System, KBC Asset

Management NV, Erste Asset Management GmbH, and Stitching Blue Sky Active

Large Cap Equity Fund USA (collectively, “Plaintiffs”), were Tesla stockholders at

all relevant times.4 They, along with their counsel, were selected by the Court to

prosecute these claims following a vigorous leadership contest.5

Nominal defendant, Tesla, is a publicly traded Delaware corporation that

designs, develops, manufactures and sells electric vehicles (“EVs”) and energy

3 I cite to the joint trial exhibits as “JX __”; the docket items as “D.I. __”; the trial transcript as “Tr. __ (witness name)”; the Amended Stipulated Joint Pre-Trial Order (D.I. 454) as “PTO [paragraph number]”; and depositions lodged as evidence as “(Name) Dep. __.” 4 PTO ¶¶ 27–32. 5 D.I. 86, 92–93.

5 storage products.6 At the time of the Acquisition, its stock traded at

$185.02 per share.7 As of this writing, the stock trades at about $900.00 per share.8

Defendant, Elon Musk, is Tesla’s co-founder and largest stockholder.9 At the

time of the Acquisition, he owned approximately 22% of Tesla’s common stock.10

He also served as the chairman of the Tesla Board from April 2004 to November

2018,11 and has continuously served as Tesla’s CEO since October 2008.12 Elon

directs Tesla’s operational and strategic decisions.13 Tesla is “highly dependent on

[his] services,” and his departure from the company would likely “disrupt [its]

operations, delay the development and introduction of [its] vehicles and services,

and negatively impact [its] business, prospects and operating results.”14 According

6 PTO ¶¶ 120–21. 7 PTO ¶ 180. 8 See Tesla, Inc. (TSLA), Yahoo! Finance (last accessed Apr. 27, 2022), https://finance.yahoo.com/quote/TSLA/. 9 PTO ¶ 125; Tr. 81:24–82:1 (Elon) (describing himself as “co-founder” of Tesla). 10 PTO ¶ 41. 11 PTO ¶ 33. 12 PTO ¶ 34. 13 See, e.g., Tr. 2222:6–8 (Jurvetson) (describing Elon as Tesla’s “chief product architect and visionary” and “[a]n incredible leader and motivator of people”); JX 3109 (Elon tweets: “Working on Top Secret Tesla Masterplan, Part 2”); Tr. 78:24–79:19 (Elon) (testifying he wrote the Master Plan himself). 14 JX 824 at 21.

6 to Musk, he tried “very hard not to be the CEO of Tesla,” “[but], unfortunately, [he]

had to or the company was going to die.”15

Non-party, SolarCity, was a publicly traded Delaware corporation founded in

2006 by Elon’s cousins, Peter Rive and Lyndon Rive.16 It installed and financed

solar photovoltaic (“PV”) systems.17 Elon served as the Chairman of the SolarCity

Board from the company’s formation in 2006 until the Acquisition closed.18 He was

also SolarCity’s largest stockholder, holding approximately 21.9% of its common

stock.19

Non-party, Space Exploration Technologies Corporation (“SpaceX”), is a

private aerospace manufacturer and space transport services company founded by

15 Tr. 72:12–14 (Elon). As of March 15, 2021, Elon can add the title “Technoking of Tesla” to his resume. See Tesla, Inc., Current Report (Form 8-K) (Mar. 15, 2021); Tr. 89:14–24 (Elon) (“Q. You crowned yourself ‘Technoking’ in 2021. Right? A. Well, I, you know, do have a sense of humor. I think—I think I’m funny. Q. But it’s not just a joke, Mr. Musk. You actually officially changed your title to Technoking. Correct? A. Well, and also the CFO was added ‘Master of Coin.’ Q. Yes. A. Let’s not forget that.”). 16 PTO ¶¶ 45, 131. Just as I address Elon and Kimbal by their first names, I refer to Peter Rive and Lyndon Rive by their first names for clarity. Again, no disrespect or familiarity is intended. 17 PTO ¶ 133. 18 PTO ¶¶ 36, 131. 19 PTO ¶ 42; JX 2121 at 184.

7 Elon in 2002.20 Between March 2015 and March 2016, SpaceX purchased

$255 million in SolarCity corporate bonds called “Solar Bonds.”21

At the time of the Acquisition, Tesla’s sitting directors were Elon, Kimbal,

Brad Buss, Robyn Denholm, Ira Ehrenpreis, Antonio Gracias, and Stephen

Jurvetson.22 According to Plaintiffs, except for Denholm, each Tesla director was

conflicted (in varying degrees) with respect to the Acquisition.

Buss served on the Tesla Board from November 2009 until June 2019.23

At Elon’s request, Buss became SolarCity’s CFO in 2014 and remained in this

position until February 2016.24 After stepping down as CFO, Buss worked as a

20 Elon has served as the Chief Executive Officer and Chief Technology Officer of SpaceX since 2002. PTO ¶ 35. 21 PTO ¶¶ 104–06. 22 See PTO ¶¶ 50, 57, 66, 73, 89, 94. 23 PTO ¶ 94. 24 Tr. 2383:8–23, 2396:3–2397:14 (Buss); PTO ¶ 95. Plaintiffs allege that Buss earned more than $30 million in compensation while serving as SolarCity’s CFO. See Second Am. Verified Class Action and Deriv. Compl. (“Compl.”) (D.I. 102) ¶ 29; JX 995 at 44 (SolarCity’s April 2016 proxy statement). At trial, however, Buss credibly testified that his compensation “was nowhere near that [amount]. It was a fraction.” Tr. 2386:2–6 (Buss). Although SolarCity’s April 2016 proxy statement reported that Buss’s total compensation for 2015 was approximately $31 million, this amount included unvested equity awards. Tr. 2386:24–2387:7 (Buss). The overwhelming majority of these equity awards, consisting of restricted stock awards and option awards, never vested. Tr. 2387:3– 2389:21 (Buss). The amount of compensation Buss actually earned, as he credibly testified, was less than 10% of the amount proffered by Plaintiffs and, according to Buss, was “actually below market.” Id.

8 consultant for SolarCity until March 2016.25 When the Tesla Board was considering

the Acquisition, approximately 45% of Buss’s wealth was attributable to his

relationship with Elon and Elon’s companies.26 At the time the Acquisition closed,

Buss beneficially owned 111,241 shares of Tesla common stock27 and 37,277 shares

of SolarCity common stock,28 meaning his investment in Tesla was worth

significantly more to him than his investment in SolarCity.29 According to Tesla’s

public disclosures, Buss did not qualify as an independent director under the

NASDAQ Listing Rules.30

Ehrenpreis is co-founder and co-managing partner of DBL Equity Fund-

BAEF II, L.P. (“DBL”), a venture capital fund he started with Nancy Pfund to pursue

“impact investing.”31 Pfund served on SolarCity’s Board and its special committee

25 Tr. 2397:15–2298:22 (Buss); PTO ¶¶ 95–96. 26 JX 3215 at 4 (Buss’s declaration stating that as of September 23, 2016, he owned Tesla shares valued at $23.1 million, SolarCity shares valued at $720,000, and more than $30 million in net assets exclusive of his Tesla and SolarCity holdings); Tr. 2442:6–2443:2 (Buss) (same). 27 PTO ¶ 98. 28 PTO ¶ 97. 29 JX 2862 at ¶¶ 27–30. 30 In re Tesla Motors, Inc. S’holder Litig., 2018 WL 1560293, at *3 (Del. Ch. Feb. 4, 2020) (denying defendants’ motion to dismiss) (the “MTD Opinion”) (citing JX 345 at 24). The MTD Opinion is filed as D.I. 128. 31 Tr. 2257:8–21 (Ehrenpreis); see also Ehrenpreis Dep. 13:6–14.

9 for the Acquisition.32 DBL held 928,977 shares of SolarCity common stock at the

time of the Acquisition, making it one of SolarCity’s largest investors.33 DBL also

invested several million dollars in SpaceX.34 Ehrenpreis personally held

254,713 shares of SpaceX stock at the time of the Acquisition.35 SpaceX, in turn,

held millions of dollars of SolarCity bonds at the time of the Acquisition and would

have been adversely affected had SolarCity failed.36 DBL’s promotional materials

identify Tesla, SolarCity and SpaceX as DBL portfolio companies, and identify Elon

and Lyndon as “Advisors” to DBL.37 While he denies a “personal friendship,”38

Ehrenpreis acknowledges that Elon has had a “significant influence on [his]

32 PTO ¶¶ 107–08. 33 JX 2121 at 185. 34 Tr. 2329:8–2330:17 (Ehrenpreis); JX 2741 at 9. 35 JX 2741 at 9; Tr. 2329:8–2330:6 (Ehrenpreis). 36 See Tr. 170:18–21 (Elon) (“Q. But to be clear, SpaceX was the primary purchaser of bonds from SolarCity; correct? A. I think the single biggest, but there were many others.”); JX 2121 at 121 (describing the ownership of Solar Bonds, including the amounts purchased by SpaceX, Elon and other parties). 37 JX 577 at 4 (“Over the last eleven years, the success of our portfolio companies and double bottom line assistance to our management teams has helped to put impact investing on the map.”). 38 Tr. 2279:12–15 (Ehrenpreis).

10 professional career” and that his continued status as a Tesla director has been “a real

benefit in fund-raising.”39

Gracias, like Elon, was a director of both Tesla (since May 2007) 40 and

SolarCity (from February 2012 until the Acquisition closed).41 Gracias was recused

from certain discussions regarding, and from voting on, the Acquisition.42

Jurvetson served on Tesla’s Board from June 2009 to July 2020. 43 He was a

managing director of a venture capital firm, Draper Fisher Jurvetson (“DFJ”),

SolarCity’s third-largest institutional stockholder, which held 4,827,000 shares as of

the Acquisition.44 Jurvetson personally owned 417,000 shares of SolarCity common

stock,45 but he testified that his personal holdings in SolarCity were equivalent to

routine single-day swings of his net worth.46 At the time of the Acquisition,

Jurvetson also personally held 50,000-plus shares of Tesla stock,47 and beneficially

39 Ehrenpreis Dep. 10:10–13, 62:20–63:6. 40 PTO ¶ 57. 41 PTO ¶ 60. 42 JX 2121 at 68. 43 PTO ¶ 73. 44 JX 1234 at 16; JX 2121 at 115. 45 Tr. 2229:10–24 (Jurvetson). 46 Tr. 2231:20–2232:21 (Jurvetson). 47 Tr. 2235:3–24 (Jurvetson).

11 owned 7,008,576 shares of SpaceX.48 Additionally, Jurvetson’s partner at DFJ,

John Fisher, was on the SolarCity Board.49 Jurvetson was also serving as a SpaceX

director at the time of the Acquisition.50

Kimbal is Elon’s brother.51 As such, he “did not qualify as independent under

the NASDAQ rules, which have a bottom line standard that a director is not

independent if [he] has ‘a relationship which, in the opinion of the Company’s board

of directors, would interfere with the exercise of independent judgment.’”52 He was

also a SolarCity stockholder and had significant margin loans on his SolarCity shares

at the time of the Acquisition.53 Kimbal was not recused from discussions regarding,

or the Tesla Board vote on, the Acquisition.54

48 PTO ¶ 81. 49 Tr. 2242:19–23 (Jurvetson); PTO ¶ 79. 50 JX 2744 at 8–10; PTO ¶ 79. 51 Tr. 99:21–24 (Elon); PTO ¶ 44. 52 Sandys v. Pincus, 152 A.3d 124, 126 (Del. 2016) (quoting NASDAQ Marketplace Rule 5605(a)(2)); see id. at 131 (“[T]he Delaware independence standard is context specific and does not perfectly marry with the standards of the stock exchange in all cases, but the criteria NASDAQ has articulated as bearing on independence are relevant under Delaware law and likely influenced by our law.”). 53 JX 2742 at 8–9, 17–18; JX 519. 54 PTO ¶ 56.

12 Denholm has continuously served on Tesla’s Board since August 201455 and

has served as the Tesla Board chair since November 2018.56 She has never held any

financial interest in SolarCity.57 Her disinterest in the Acquisition and her

independence were not seriously questioned at trial.58

Several other non-party fact witnesses testified at trial or via deposition:

(1) George Bilicic, the 30(b)(6) representative from Lazard Ltd., which served as

SolarCity’s financial advisor for the Acquisition;59 (2) Courtney McBean,

the 30(b)(6) representative from Evercore Partners, which served as Tesla’s

financial advisor for the Acquisition;60 (3) Tanguy Serra, the President and CFO of

SolarCity from early 2016 until just before the Acquisition closed;61 (4) Jeffrey

Straubel, a co-founder of Tesla, who was a member of the SolarCity Board and

55 PTO ¶ 66. 56 PTO ¶ 67. 57 PTO ¶ 69. 58 As this Court observed previously in this litigation, Denholm was not a dual fiduciary, and she had no financial interest in SolarCity. In re Tesla Motors, Inc. S’holder Litig., 2020 WL 553902, at *12 (Del. Ch. Feb. 4, 2020) (denying defendants’ motion for summary judgment) (the “SJ Opinion”); see also PTO ¶¶ 69–72. The SJ Opinion is filed as D.I. 385. 59 PTO ¶ 187. 60 PTO ¶ 188. 61 Tr. 893:5–8 (Serra); Serra Dep. 22:14–24:15.

13 Tesla’s CTO at the time of the Acquisition;62 (5) Jason Wheeler, Tesla’s CFO from

November 2015 to April 2017;63 (6) Toby Corey, SolarCity’s former chief revenue

officer;64 (7) Hayden Barnard, SolarCity’s chief revenue officer at the time of the

Acquisition;65 (8) Donald Kendall, a SolarCity director and member of its special

committee;66 and (9) Radford Small, a capital markets executive at SolarCity who

became its CFO just before the Acquisition.67

The parties also presented several expert witnesses. Plaintiffs offered the

expert opinions of Ronald Quintero, Murray Beach and Juergen Moessner. Quintero

testified that, in his opinion, SolarCity was “insolvent” and “would have been unable

to satisfy its financial obligations . . . as a standalone entity, absent the merger.”68

Beach testified that SolarCity could not have executed a seasoned equity offering as

of a specific date, suggesting that SolarCity’s ability to finance itself was

62 PTO ¶¶ 114–15. 63 PTO ¶ 116. 64 Corey Dep. 16:4–7, 19:15–20:23. 65 Barnard Dep. 34:18–22. 66 See PTO ¶ 161. 67 Small Dep. 14:18–16:23. 68 JX 2840 at 4.

14 dangerously limited prior to the Acquisition.69 Moessner testified that the financial

projections used by SolarCity and Tesla (and their financial advisors) to value

SolarCity were overly optimistic.70

For his part, Elon offered the expert testimony of Dan Reicher,

Jonathan Foster, Frederick Van Zijl and Daniel Fischel. Reicher testified that the

combination of an EV company and a solar company could achieve several strategic

synergies, and the Acquisition provided those benefits to Tesla.71 Foster testified

that the Tesla Board’s process was consistent with custom and practice.72 Van Zijl

offered rebuttal testimony and, in particular, countered the position that SolarCity

was insolvent.73 And Fischel testified that Tesla did not overpay for SolarCity.74

B. The Tesla Motors Master Plan

In 2006, Elon authored and released the Master Plan.75 There, he declared

that Tesla would “accelerate the world’s transition to sustainable energy” by

69 JX 2834 at 1, 30, 33. 70 JX 2833 at 4–5. 71 JX 2841 at 4–5. 72 JX 2842 at 7–8. 73 JX 2853 at 3–6. 74 JX 2839 at 7. 75 JX 12; Tr. 21:3–17 (Elon).

15 “help[ing] to expedite the move from a mine-and-burn hydrocarbon economy

towards a solar electric economy.”76 As the Master Plan explained, EVs, by

themselves, are not a complete solution to reducing carbon emissions because the

traditional source of electricity used to power EVs is, itself, derived from fossil

fuels.77 With this in mind, the Master Plan was built upon “three fundamental

pillars”: (1) sustainable energy generation from clean sources, such as solar power;

(2) energy storage in batteries; and (3) energy consumption through EVs.78 Tesla’s

directors uniformly testified that they understood from the outset that Tesla’s long-

term goal was to “accelerate the world’s transformation to an alternative energy

future.”79

76 JX 12 at 1; Tr. 86:18–20 (Elon). 77 JX 12 at 2; Tr. 25:10–26:16 (Elon). 78 Tr. 21:13–24:8, 409:7–410:19 (Elon); JX 12 at 2. 79 Tr. 445:24–446:16 (Kimbal); Tr. 1953:15–17 (Denholm) (“The entire mission of the company was to accelerate the world’s transition to sustainable energy.”); Tr. 2215:22– 2216:9 (Jurvetson) (“[W]hen we first invested in Tesla, we were aware of the master plan. . . . And if I look out 50 years, it seems inevitable that we will have a future that is all electric vehicles with storage and renewable sources of electricity to feed them. You couldn’t . . . make an electric [vehicle] without also dealing with the electricity supply problem.”); Tr. 2261:22–2262:8 (Ehrenpreis) (“A. Tesla had published what was known as the master plan, which laid out the long-term strategy. Q. And what did you understand that long-term strategy to be? A. The strategy was a design to essentially shift from a fossil-fuel-reliant economy to a more sustainable economy and do so through a set of stages that started with the production of a vehicle, and then ultimately added a storage component to that, and then ultimately a renewable generation component.”); Tr. 2371:22–2373:21 (Buss) (testifying that he was “super passionate” about “the master plan concept” to

16 SolarCity was part of this vision.80 It is specifically mentioned in the

Master Plan, where Tesla announced it would be co-marketing “modestly sized and

priced” solar panels from SolarCity along with Tesla’s sports car.81

C. Tesla Before the Acquisition

As the industry leader for both EVs and battery technology, 82 Tesla was

uniquely positioned vertically to integrate EVs, solar energy, and stationary battery

storage.83 Tesla’s leadership understood that energy generated from the sun can

produce “ridiculous amounts of power” using little space; it is also more affordable

and scalable than other clean energy alternatives.84 On the other hand, they also

understood that consumers historically viewed solar energy as unreliable because,

when the sun is not shining, traditional solar power systems do not generate or

become “the leader and model for sustainable energy” and that solar was “definitely a big part” of Tesla’s future plans). 80 Indeed, Elon explained that it was “largely an accident of history” that SolarCity was formed separately from Tesla. JX 1618 at 2; see Tr. 447:12–448:17 (Kimbal) (explaining that it was always understood SolarCity would and should be part of Tesla). 81 JX 12 at 3; Tr. 23:13–24:8 (Elon). 82 Tr. 27:7–9 (Elon). 83 Tr. 1911:13–1912:6 (Reicher). 84 JX 2992; see also Tr. 898:14–24 (Serra); Tr. 485:3–24 (Kimbal).

17 deliver energy.85 Another piece was “needed to [facilitate] a proper transition to the

sustainable energy world”—high capacity stationary battery storage.86

Well before the Acquisition, Tesla invested heavily in batteries for its EVs

and energy storage products. In February 2014, Tesla announced the construction

of its “Gigafactory,” a massive lithium-ion battery manufacturing factory.87

The Gigafactory “was intended to produce more [lithium-ion] batteries . . . than the

entire manufacturing battery production of every other manufacturing facility on the

planet earth combined.”88 To achieve economies of scale, the Gigafactory would

have to be fully utilized.89 Tesla anticipated that the Gigafactory would easily meet

its need for batteries to power Tesla EVs,90 but the excess manufacturing capacity

85 Tr. 26:17–27:6, 407:3–409:1 (Elon); JX 2992; Tr. 1840:2–17 (Peter); Tr. 1910:1–16 (Reicher). 86 JX 2992; see also Tr. 2834:10–17 (Gracias); Tr. 2266:6–2267:3 (Ehrenpreis). 87 JX 169 at 8. 88 Tr. 2265:12–2266:5 (Ehrenpreis); see also JX 2382 at 1 (“Already, the current structure has a footprint of 1.9 million square feet, which houses 4.9 million square feet of operational space across several floors. And we are still less than 30% done. Once complete, we expect the Gigafactory to be the biggest building in the world.”). 89 See Tr. 2216:10–19 (Jurvetson) (“We were going to start producing batteries at a scale that was unprecedented at the time. And whenever you build a new factory with an enormous capacity for a new product like batteries . . . you want to fully utilize that factory from day one. You want to be at 100 percent capacity utilization to make the business make business sense.”); JX 2382 at 1–2. 90 Tr. 2425:21–2426:14 (Buss); Tr. 2832:5–2833:2 (Gracias); Tr. 1954:3–15 (Denholm); Tr. 2215:19–2217:15 (Jurvetson).

18 presented opportunities to advance the goals stated in the Master Plan with the

design and production of solar energy storage products, including “Powerwalls,”

designed to store solar energy for home use, and “Powerpacks,” designed to store

solar energy for commercial use.91

The Tesla Board toured the Gigafactory while it was under construction on

March 3, 2015.92 At the conclusion of the tour, having witnessed firsthand the

massive scale and capacity of the facility, the Tesla Board discussed Tesla’s long-

stated goal of acquiring a solar company.93 A little over a month later, Tesla publicly

launched Tesla Energy and debuted its Powerwall and Powerpack products.94 At the

launch, Elon explained the company’s vision: “[T]he path that I’ve talked about, the

91 Tr. 451:9–452:12 (Kimbal); Tr. 2215:14–2217:15 (Jurvetson) (“Where would those batteries go? Products like Powerwall, right, stationary storage . . . .”); JX 824 at 10 (Tesla Form 10-K describing production at the Gigafactory); see also Tr. 38:4–16 (Elon) (describing Powerwalls). 92 JX 306 at 1 (Tesla Board minutes); Tr. 2217:16–2218:21 (Jurvetson); Tr. 453:7–455:11 (Kimbal). 93 JX 849 at 1 (recognizing that the Tesla Board had “a number of previous discussions” about “a potential acquisition of SolarCity,” including “at the regular meeting of the Board on March 3, 2015”); Tr. 2833:3–9 (Gracias); Tr. 454:5–18 (Kimbal); Tr. 1954:3–15 (Denholm). As Plaintiffs point out, the discussion regarding a solar company acquisition was not documented in board minutes. But each member of the Tesla Board testified consistently and credibly that the discussion occurred. Perhaps the reason there are no minutes is that the conversation occurred while the Tesla directors were touring the roof of the Gigafactory. Tr. 2832:5–2833:9 (Gracias). 94 JX 2992; Tr. 2267:13–2268:4 (Ehrenpreis).

19 solar panels and the batteries, it’s the only path that I know that can do this. And I

think it’s something that we must do and we can do and that we will do.”95

Having now built the Gigafactory and reiterated the goals of the Master Plan,

Tesla set the stage for a combination of its battery storage capabilities with solar

energy. Prior to the Acquisition, Tesla had explored partnering with SolarCity at

arm’s length. Specifically, the two companies formed a joint venture to convert the

power supply on an island in American Samoa from diesel generators to solar

power.96 But the related-party nature of the companies’ dealings made cooperation

between engineers “very difficult” and ultimately caused the project to fail.97

If Tesla was to collaborate with SolarCity effectively, the two companies would

need to combine.98

D. SolarCity Before the Acquisition

As explained below, SolarCity had an innovative and aggressive business

model that prioritized growth and relied on external financing to fund that growth.

95 JX 2992. 96 JX 2331; Tr. 1844:14–1846:2 (Peter). 97 Tr. 1846:3–20, 1852:14–1854:16 (Peter); Tr. 448:18–450:1 (Kimbal) (describing the related-party nature of the companies’ relationship as “very difficult and frustrating” and “an enormous headache for [Tesla] that would reach the board level”). 98 See, e.g., JX 1618 (“We can’t [integrate energy generation and storage] well if Tesla and SolarCity are different companies, which is why we need to combine and break down the barriers inherent to being separate companies.”).

20 This model, combined with macroeconomic headwinds, resulted in liquidity

problems for SolarCity in late 2015 into 2016.

1. The SolarCity Business Model

At bottom, SolarCity designed, sold, installed and financed solar PV systems

for residential and commercial customers.99 SolarCity sold these systems through

various means, including internal call centers, door-to-door sales, in-store sales at

Home Depot, a channel partner network, and a customer referral program.100

Because most consumers cannot afford to purchase expensive solar panels outright,

SolarCity offered financing options.101 If a customer chose to finance the solar

system, SolarCity would pay the cost of installing and activating the solar panels in

exchange for the customer’s commitment to repay SolarCity incrementally, with

interest, over a period of 20–30 years.102 The vast majority of SolarCity’s customers

chose to finance their systems,103 and the delinquency rate was less than 1%.104

99 PTO ¶ 133. 100 PTO ¶ 135. 101 Tr. 1638:3–1639:7 (Lyndon); Tr. 898:6–13 (Serra); see PTO ¶¶ 136–42. 102 Tr. 1209:1–13 (Van Zijl); JX 199 at 21; Tr. 900:3–12 (Serra). 103 Tr. 900:3–12 (Serra); Tr. 1650:4–10 (Lyndon). 104 Tr. 936:15–938:17 (Serra); JX 772 at 8 (“Delinquencies of 180+ days remain comfortably below 1%.”); JX 700 at 27 (showing delinquency rates consistently below 1%).

21 To facilitate this business model, SolarCity organized itself into two

segments: DevCo and PowerCo. “DevCo represent[ed] growth and investment”—

booking new customers and installing new systems; PowerCo “represent[ed] the

long-term return on” SolarCity’s investment in the form of a “steady stream of

energy, revenue and cash flow over the estimated 30-year” life of SolarCity’s

contracted solar installations.105 Within the organization, SolarCity referred to

DevCo as the “Goose That Lays Golden Eggs” and PowerCo as the basket

containing those eggs.106

This financing model (and SolarCity’s prodigious growth) required SolarCity

to raise capital to bridge the gap between its short-term costs and long-term cash

flows.107 SolarCity historically monetized a portion of its long-term recurring cash

flows through variable interest entities (with third-party investors) and financing

structures (primarily tax equity funds and asset-backed notes).108 SolarCity also sold

105 JX 530 at 6; Tr. 1436:5–17 (McBean); Tr. 1984:7–1985:8 (Denholm). 106 JX 718 at 7–8, 18; Tr. 966:11–968:18, 970:3–972:1 (Serra). 107 See JX 700 at 58 (observing “M[egawatts (“MW”)] Have Grown 80% Per Year Since 2013”); JX 2853 at 11 (observing that between 2012 and 2015 SolarCity’s revenues had a compound annual growth rate of 47% and its customer compound annual growth rate was 90%); Tr. 161:19–162:5 (Elon); Tr. 901:15–20 (Serra); Tr. 1641:23–1642:24 (Lyndon); Tr. 684:14–18 (Moessner); JX 2853 at 16; Tr. 1209:1–13 (Van Zijl); Tr. 1144:14–18 (Beach). 108 JX 2853 at 7, 18; Tr. 1209:22–1210:6 (Van Zijl).

22 Solar Bonds, principally to Elon and SpaceX.109 When Evercore diligenced

SolarCity in connection with the Acquisition, it was struck by the success of the

SolarCity financing model and the sophistication of its capital markets team.110

At the end of 2016, SolarCity sponsored over 54 financing funds with 22 investors111

and carried substantial debt.112

In 2014, Elon asked Buss, who had considerable solar and public company

CFO experience, to join SolarCity as CFO to “clean up” SolarCity’s financial

accounting.113 Following Buss’s arrival, SolarCity attempted to integrate vertically

by acquiring solar-cell manufacturer Silevo LLC in September 2014.114 But Silevo

was a startup and had no experience with high-volume manufacturing.115

109 See Tr. 170:18–21 (Elon) (“Q. But to be clear, SpaceX was the primary purchaser of bonds from SolarCity; correct? A. I think the single biggest, but there were many others.”); JX 2121 at 121 (describing the distribution of Solar Bonds, including the amounts purchased by SpaceX, Elon and other parties). 110 Tr. 1409:1–11 (McBean). 111 PTO ¶ 144. 112 JX 1231 at 18 (SolarCity—Summary Debt Overview). 113 Tr. 2384:11–2385:10 (Buss). 114 PTO ¶ 134; JX 241 at 2. 115 Straubel Dep. 112:13–24; see also JX 1917 (email from Straubel stating that “Silevo is certainly not ready [to produce the solar roof] at any kind of volume”); JX 1708 (email from Chang stating that Silevo was expected to supply “a fraction of [SolarCity’s] overall module consumption” and observing a “[l]ack of maturity in Silevo manufacturing; still very much in R&D stage”); Tr. 2304:5–11 (Ehrenpreis) (“Q. Was SolarCity in the

23 Consequently, by 2015, SolarCity was incurring substantial costs building-out

Silevo’s factories.116

2. SolarCity’s Liquidity Problems

By the fall of 2015, the culmination of massive capital outlays for Silevo, debt

maturities coming due, and lower-than-expected installations caused SolarCity’s

management to believe that a “major liquidity crisis” was on the horizon.117

On September 29, 2015, a SolarCity executive reminded his superiors that SolarCity

needed to maintain an average monthly cash balance of approximately $116 million

to remain compliant with its revolving debt facility’s “Liquidity Covenant.”118

A breach would trigger a default on SolarCity’s revolver and cross-defaults on other

debts.119 At the same time, management projected that cash could drop to

manufacturing business at all at the time of the acquisition? A. Just some. They had a small part of the business known as Silevo, producing some panels.”); Tr. 1650:23– 1651:14 (Lyndon) (testifying that Silevo manufacturing was a “[v]ery small part of [SolarCity’s] business” at the beginning of 2016 because they “were still ramping up manufacturing” and “[t]he technology was a new technology”); JX 1096 (email from Straubel expressing concerns about manufacturing). 116 JX 1587 at 54, 277 (Tesla Board presentation explaining that “SolarCity’s manufacturing operations, Silevo, require significant expenditures” and detailing those expenditures); JX 780 at 68–69, 146. 117 JX 491 at 1; see also Tr. 2408:14–20 (Buss) (describing looming liquidity crisis). 118 JX 486 at 2–3. 119 JX 2002 at 3; see Serra Dep. 83:13–84:16.

24 $35 million by the week of November 20, 2015.120 The next day, SolarCity’s new

CFO, Serra, informed management that SolarCity’s “total war chest” of available

cash, which had filled to $1.1 billion in January 2015, would be drawn down to only

$200 million by year-end.121 To manage the company’s cash position, Lyndon

immediately instituted “weekly cash meeting[s].”122

On October 15, 2015, Buss and Lyndon told the SolarCity Board, including

Elon and Gracias, that SolarCity needed $180 million to $300 million in additional

cash to meet its various obligations.123 SolarCity management also reported that

2015 installations were expected to be “920MW versus budget of 1.05GW

[gigawatts],” thereby “reduc[ing] cash inflow.”124 On October 21, 2015, following

a weekly cash meeting, SolarCity management confirmed that “updated forecast[s]

project[] our December monthly average balance at ~$91 million, which is $24

million below our revolver covenant threshold.”125 At the next SolarCity Board

meeting, management informed SolarCity’s directors that management had spoken

120 JX 486 at 2–3. 121 JX 491 at 1. 122 JX 503 at 1; JX 505; Lyndon Dep. 38:15–39:7. 123 JX 506 at 4. 124 Id. at 3. 125 JX 522 at 1.

25 with two investment banks the company had been working with about a potential

equity raise, but “both banks d[id] not recommend an equity raise” at the time

because market volatility would likely result in “a meaningful discount.”126

In late 2015, macroeconomic headwinds exacerbated SolarCity’s liquidity

problems. One of SolarCity’s competitors, SunEdison, Inc., filed for bankruptcy.127

This increased market scrutiny of solar companies, which, in turn, increased the time

needed to close asset-backed refinancing deals.128 Changes in net metering laws also

had a profound—and highly publicized—effect on SolarCity.129 In addition, certain

federal tax credits available to solar customers were set to expire, and although

Congress had historically extended the tax credits, it had yet to do so.130

126 JX 527 at 8; see also JX 514 at 5; Buss Dep. 172:23–173:3. The presentation suggested other options, stating “[a]n At The Market [ATM] program is an option as well as a traditional marketed deal or bank bought deal.” JX 527 at 8. 127 JX 3180. 128 Tr. 2697:12–2698:24 (Moessner). 129 Net metering allows solar customers to sell excess solar energy back to the power grid, reducing their electricity bills. Tr. 1645:10–1646:8 (Lyndon); see also Tr. 1839:13–20 (Peter) (“Q. What is net metering? Could you remind us what net metering is? A. Sure. . . . The customer essentially gets full retail credit for their excess solar production during the day that they can count against their nighttime usage when the sun isn’t shining.”); Tr. 1661:19–1665:5 (Lyndon) (explaining effects of changes in net metering laws on SolarCity). 130 See, e.g., JX 2841 at 12 (“While the credit was initially set to expire at the end of 2007, Congress voted to extend the credit on three separate occasions—in 2006, 2008 and again in 2015.”); JX 596 (letter and emails discussing the tax credits).

26 To combat its liquidity issues, SolarCity increased monetization. Serra

developed a four-year plan to solve the cash crisis, which he presented to SolarCity

executives in December 2015.131 Among other components, Serra introduced the

idea of “cash equity” transactions—selling a portion of the future cash flows from

recurring customer payments to a third-party investor in exchange for an upfront

payment.132 SolarCity was quick to implement the plan; it completed the industry’s

first cash equity transaction with John Hancock Financial in May 2016.133 Two

similar transactions followed in 2016,134 and by Q1 2016, SolarCity’s DevCo was

cash-flow positive.135 SolarCity retained the rest of its future cash flows, which it

estimated to be worth billions of dollars.136

131 Tr. 956:5–18, 957:17–20, 961:12–964:7 (Serra); JX 604 at 1. 132 Tr. 1210:7–17 (Van Zijl); JX 2853 at 7, 18–19; JX 1855 at 10; Tr. 981:20–982:7 (Serra). These cash equity transactions have now become standard in the solar power industry. Tr. 981:20–984:19 (Serra); JX 1008 at 12; JX 2853 at 19. 133 Tr. 982:1–3 (Serra); JX 2853 at 19; Tr. 1243:17–23 (Van Zijl). 134 Tr. 2690:6–2692:15 (Moessner); Tr. 2720:14–2722:15 (Beach). 135 Tr. 984:20–985:3, 1022:18–1023:10 (Serra). As Plaintiffs point out, SolarCity was not “generating [positive] cash flows [solely] from operations,” as the SEC noted. JX 1185 at 8; see also JX 1849 (“[W]e cannot use the words ‘cash flow positive’ [in our Q2 shareholder letter and slide deck]. The SEC sent us a letter saying we should not use those words. The reason for being cash flow positive is the financing of the assets.”). 136 JX 1855 at 9; Tr. 1215:22–1217:1 (Van Zijl); Tr. 923:20–932:11 (Serra). Using a “retained value” methodology (calculating the net present value (“NPV”) after accounting for the repayment of associated debt), SolarCity valued its future cash flows as of Q2 2016

27 Despite achieving success with its creative financing strategies, SolarCity still

did not have the cash it needed “to sustain the growth and produce new volume in

line with [its four-year] plan.”137 By Q1 2016, the SolarCity Board decided to shift

focus to cash sales and began reducing costs.138 These steps reduced “deployments”

and that, in turn, caused SolarCity to fall short of Serra’s bullish four-year plan.139

Yet SolarCity management felt the company was “in a very good position” at the

beginning of 2016, given that it “had cash [on hand] of about $360 million.”140

Meanwhile, SolarCity’s lenders were concerned about its declining

creditworthiness.141 In early 2016, the Office of the Comptroller of Currency—one

at $2.2 billion (NPV) in retained value. This amount was available for monetization at the time of the Acquisition. Tr. 1215:11–1217:1, 1226:24–1227:21 (VanZijl); Tr. 923:20– 932:11, 964:4–16, 1013:1–14, 1070:18–1071:21 (Serra); Tr. 873:9–13 (Quintero); Tr. 684:8–13 (Moessner); JX 1855 at 9. 137 Tr. 2686:6–17 (Moessner). 138 Tr. 1681:17–1682:11 (Lyndon) (testifying that SolarCity determined it could “reduce capital expenditures,” “reduce headcount” and work with vendors to “push out payables”); Tr. 1682:15–18 (Lyndon) (“The—the right-sizing the company, we definitely wanted to do. The slowing down manufacturing and deploying that and slowing down that capital, we—we didn’t necessarily want to do that.”). 139 See Tr. 640:2–14 (Moessner) (“[I]f you lack the capability to underwrite because you’re liquidity-constrained, then that slows your machinery, slows your operation, and your growth is significantly hampered. You simply can’t process the volume anymore.”). 140 Tr. 1680:21–24 (Lyndon). 141 Tr. 645:11–646:20 (Moessner); Tr. 1309:10–1310:5 (Van Zijl); Tr. 1687:3–1688:1 (Lyndon).

28 of the primary regulators of SolarCity’s banks—downgraded SolarCity’s credit

rating.142 Even so, in the first quarter of 2016, SolarCity was able to secure

$305 million in tax equity financing, although that amount fell well short of the

$940 million originally projected.143

Despite its cash problems, the evidence leaves little doubt that SolarCity was

still a valuable company in 2016.144 It was the undisputed market share and cost

leader in the solar energy sector, with over 30% market share for U.S. residential

solar, 22% market share for U.S. commercial solar, and 15% of total U.S. solar.145

142 Tr. 994:11–13 (Serra). 143 Tr. 1304:1–1306:1 (Van Zijl); compare JX 669 at 3, with JX 951 at 2. 144 Plaintiffs argue that SolarCity was becoming increasingly less valuable with every customer transaction because “SolarCity historically spent more than $2.00 in operating and equipment costs to generate $1.00 in revenue. By 2015, SolarCity spent more than $1.00 in sales and marketing costs alone to produce $1.00 in revenue.” Pls.’ Post-Trial Br. (“POB”) (D.I. 476) at 63. This is misleading. As Elon correctly observed, “Plaintiffs focus only on costs and revenue within a single accounting recognition period, ignoring that SolarCity’s entire business model was creating long-term assets that would generate recurring revenue for 20–30 year periods.” Def.’s Answering Post-Trial Br. (“DAB”) (D.I. 481) at 21–22; see also Tr. 1211:5–1212:21 (Van Zijl) (testifying that the present value per watt installed and activated was over 50 cents higher than the cost); Tr. 1665:16– 1666:21 (Lyndon) (explaining the SolarCity business model “is to raise capital and deploy it into solar assets that produce long-term recurring revenue streams”); Tr. 2846:14–2849:7 (Gracias). As Serra testified, SolarCity was the residential solar industry’s cost leader and its installation costs per watt were “dramatically cheaper than anyone else.” Tr. 907:18– 909:22, 950:5–951:9 (Serra); see also JX 2853 at 16 (“SolarCity also had the lowest all-in unit costs in the industry in the year leading up to the Initial Tesla Proposal. . . . In exchange for incurring [] upfront costs, SolarCity received long-term cash flows . . . .”). 145 JX 700 at 13; Tr. 903:22–905:16 (Serra); Tr. 1643:1–10 (Lyndon).

29 With respect to residential solar installations and revenues, SolarCity exceeded its

two closest competitors (Vivint and Sunrun) combined.146 And with respect to costs,

SolarCity’s were 30% lower than its competitors.147 As noted, as of Q2 2016,

SolarCity had accumulated what it estimated to be $2.2 billion (NPV) in retained

value,148 using a 6% discount rate and assuming 100% contract renewals.149 And it

continued to raise billions of dollars from sophisticated financial institutions that had

deep access to SolarCity’s financials.150 SolarCity’s cash challenges were

ramifications of rapid growth, not market disinterest in its product or poor business

execution.151

146 Tr. 873:14–24 (Quintero). 147 Tr. 1653:19–1654:19 (Lyndon). 148 Tr. 1215:22–1216:6 (Van Zijl); Tr. 923:20–932:11 (Serra); JX 1855 at 9. 149 Tr. 2687:9–15 (Moessner). 150 JX 2853 at 21, 62 (illustrating that SolarCity raised $2.7 billion from 2015 to the first half of 2016); Tr. 981:5–19 (Serra). 151 See Tr. 1219:17–24 (Van Zijl) (“[T]he management had a number of things that were their prerogative, one of which was to simply slow down their growth. If they had stopped their growth, the company would have become very cash positive. That would have been bad for their equity, it wasn’t advisable to do that, but they could have slowed down their growth rate. Growing over 45 percent on a sustained basis is a very, very rapid rate of growth.”).

30 E. The Tesla Board Rebuffs Elon’s Initial Acquisition Overtures

In February 2016, Lyndon convened an emergency “cash planning” meeting

with Elon and SolarCity management to discuss “how we are going to manage our

cash needs.”152 Among other things, SolarCity management discussed measures to

conserve cash,153 including ranking accounts payable to modulate costs.154

Management also developed “finance postpone guidelines” to suspend certain

installations based on their cash impact.155 Immediately following this February

2016 meeting, Elon and Lyndon discussed Tesla potentially acquiring SolarCity.156

152 Tr. 1755:11–16 (Lyndon); see also JX 777; Tr. 162:23–163:12 (Elon). 153 Tr. 1755:7–10 (Lyndon); Lyndon Dep. 71:14–21; JX 812; JX 794; JX 1110 at 1–2. 154 JX 882 (SolarCity cash forecast). 155 JX 891 at 4. 156 Tr. 1755:21–24 (Lyndon). Plaintiffs argue that the Tesla stockholder vote on the Acquisition was not informed because the Joint Proxy Statement/Prospectus (“Proxy”) did not disclose Lyndon and Elon’s preliminary discussions about the Acquisition. See JX 2121; POB at 54–55. But the Proxy did disclose that Elon and Lyndon “have at various points . . . discussed . . . the possibility of Tesla acquiring SolarCity,” including that “[i]n February 2016, Mr. Elon Musk suggested to Mr. Lyndon Rive that he believed more serious consideration of a potential combination between Tesla and SolarCity was in order.” JX 2121 at 66–67. Any discussions that occurred later happened outside of the merger negotiations context. See Tr. 1703:13–23 (Lyndon) (“Q. Yeah. Okay. So after the public offer was made, did you continue to discuss the parameters of the transaction, the merger, with your cousin Elon Musk? A. No. At that point, we established a special committee, and I was removed for the most part of the process. Q. Did you have any conversations with Elon Musk? A. Yes, I still had plenty of conversations relating to the operations of SolarCity.”); JX 1278 at 1 (discussing the “economic value creation of [the] transaction”); JX 1340 at 1 (discussing the impact of SolarCity’s debt on Tesla’s balance sheet); JX 1455 at 1 (discussing SolarCity’s cash balances).

31 On February 27, 2016, Elon called Tesla’s CFO, Jason Wheeler, and asked

him to prepare a financial analysis of a Tesla/SolarCity merger for presentation at a

special Tesla Board meeting two days later.157 Before the meeting, Lyndon and Elon

arranged for the law firm Wilson Sonsini Goodrich & Rosati—which had

historically represented both companies—to waive conflicts and attend Tesla’s

Board meeting.158

At this special meeting of the Tesla Board, Tesla’s directors considered a

potential acquisition of SolarCity to “complement the Company’s Tesla Energy

business . . . and to create other product, service and operational synergies.”159

Wheeler presented preliminary financial information, including information

highlighting SolarCity’s historically low stock price.160 While the Tesla Board

recognized the significant potential product synergies,161 it ultimately declined to

proceed with an acquisition, notwithstanding Elon’s strong endorsement, so that

157 Wheeler Dep. 30:8–31:7. 158 JX 833. Plaintiffs emphasize that the conflict waiver was not disclosed to Tesla stockholders. POB at 54. While that is true, it is difficult to see how the disclosure would have been material. After the February 2016 Tesla Board meeting attended by Wilson Sonsini, during which the Board decided not to proceed with the Acquisition, the firm had nothing more to do with the Acquisition. See JX 849; Tr. 393:6–15 (Elon). 159 JX 849 at 1. 160 Id.; JX 855 at 5 (comparing current stock price to 52-week high and low). 161 JX 849 at 1; Tr. 1958:10–1959:6 (Denholm); Tr. 395:5–23 (Elon); Tr. 457:18–458:15 (Kimbal).

32 Tesla management could focus on resolving Tesla Model X production and delivery

challenges.162 The Tesla Board did, however, “authorize management to gather

additional details and to further explore and analyze a potential transaction with

SolarCity or other related businesses.”163

Beginning around March 2, 2016, investment websites and newspapers

reported that Elon might take SolarCity private, following which SolarCity’s stock

price rose from $18.01 on March 1 to $22.49 on March 3.164 The Tesla Board,

however, was not yet ready to move forward.

At a March 2016 board meeting, Tesla’s Board once again discussed the

possibility of acquiring SolarCity.165 And, just as before, it “determined not to

162 JX 849 at 2 (noting “the potential impact [of an acquisition] on the management team’s time and resources in the near term”); Tr. 1959:7–1960:13 (Denholm); Tr. 457:4–17 (Kimbal); Tr. 2837:23–2838:12 (Gracias); JX 950 at 4; JX 1049 at 6. According to Elon, the Model X production was behind schedule to such a degree that he was “sleeping in the factory for Model X production in order to make the production system work.” Tr. 130:18– 21 (Elon). 163 JX 849 at 2; see also Tr. 1700:7–1701:2 (Lyndon) (expressing disappointment that the Tesla Board did not authorize moving forward with the SolarCity acquisition); Tr. 1959:7– 1960:13 (Denholm); Tr. 457:4–17 (Kimbal); JX 950 at 4; JX 1049 at 6; Tr. 2837:23– 2838:12 (Gracias). 164 PTO Ex. C; JX 870; JX 3106; JX 3107; JX 3108; JX 868. 165 JX 902.

33 proceed” with an acquisition,166 reiterating that “this is something that we should

postpone to a later date.”167 Even so, Tesla’s Board discussed with management

preparatory steps that should be taken “in the event that [a solar] acquisition were to

be considered in the future.”168 These steps included engaging the law firm

Wachtell, Lipton, Rosen & Katz to advise the Tesla Board regarding the potential

transaction. This marked the first time that Tesla had engaged Wachtell.169 As Tesla

and the Tesla Board focused on other challenges, Elon asked Lyndon to manage

166 JX 902 (“[T]he Board determined not to proceed with evaluating a potential acquisition of SolarCity or other similar businesses at this time, and directed management to instead focus its efforts on the execution of current business matters[.]”). 167 Tr. 261:22–263:3 (Elon). Plaintiffs point out that the Proxy did not disclose this meeting. See POB 19; JX 2121 at 67. This omission is not material given that it was a repeat of what had occurred at the February meeting (which was disclosed in the Proxy)— Elon proposed moving forward with the Acquisition and the Tesla Board said, in essence, “not now.” Id. 168 JX 902 at 2. 169 Tr. 1964:11–13 (Denholm); Tr. 2840:8–12 (Gracias). Plaintiffs make much ado about how Elon, Gracias and Maron (Tesla’s general counsel) engaged Wachtell to be deal counsel for Tesla before the Tesla Board had decided it wanted to pursue a transaction, and then the Tesla Board failed to disclose that fact in the Proxy. POB at 19, 23, 54; Plaintiffs’ Post-Trial Answering Br. (“PAB”) (D.I. 481) at 21, 24, 34; Tr. 263:23–265:12 (Elon); JX 922; JX 3226 at 8. What Plaintiffs have failed to do, however, is to explain persuasively how this timing presents a reason to question Wachtell’s independence or how the non- disclosure was material. Plaintiffs did not demonstrate a longstanding relationship or conflict between Elon or Tesla and Wachtell. To the contrary, based on the evidence, I am satisfied that Wachtell was an independent and effective advisor to the Tesla Board. For this reason, the failure to disclose the circumstances or timing of Wachtell’s engagement in the Proxy was immaterial. See JX 2121 at 67.

34 SolarCity’s financial position until May 2016, when he would ask the Tesla Board

to revisit a potential acquisition.170

F. SolarCity’s Outlook Worsens

With $32 million in net negative cash flow in the first quarter of 2016,

SolarCity projected over $139 million in additional negative cash flow for the second

quarter before achieving positive cash flow in the third and fourth quarters.171

By April 2016, SolarCity management acknowledged that, in the short term, the

company had “no room for error.”172

At a SolarCity Board meeting on April 26, 2016, Lyndon addressed

“important/disturbing” issues.173 SolarCity expected installations of only 900MW

for 2016, 28% fewer than the 1,250MW guidance provided just two months

earlier.174 Importantly, Lyndon also warned that “May–August are at risk of tripping

170 Tr. 1684:14–1685:9, 1700:7–1701:2 (Lyndon). 171 JX 1008 at 16; Tr. 1016:11–24 (Serra). A Q2 report observed that “Cash Consumption of ~$216 million in Q2 2016 was mainly because of: Project financing delays of ~30 days due to the proposed Tesla acquisition” and “Investment in module manufacturing operations and R&D.” JX 1855 at 11. 172 JX 982 at 1; Tr. 1041:19–1042:1 (Serra); see also JX 1855 at 11 (reporting cash crunch but noting “[c]ash balance expected to increase by the end of Q3 2016 . . . and to further increase by the end of Q4 2016”). 173 JX 1007; see also JX 1010 (email containing SolarCity Board Q2 2016 meeting materials). 174 JX 1010 at 23.

35 [the revolver] covenant,” and presented an “Updated 2016 Liquidity by Month”

report that showed intra-month cash balances dropping to $73 million and remaining

below the Liquidity Covenant through October 2016 before increasing at the end of

the year.175

After SolarCity announced disappointing first quarter results, its stock price

dropped, with an excess negative return of 17.4% relative to its peers. 176 Internal

bookings reports were “drenched in a sea [of] red.”177 The company was fighting

175 Id. at 18. Notably, despite the chart showing that the revolver covenant could be breached in February, the “covenant was not tripped.” Id. Plaintiffs seize on the fact that SolarCity’s Form 10-Q for the first quarter of 2016 failed to disclose these issues and reported instead that SolarCity would have sufficient cash to “meet cash requirements for the next 12 months.” JX 1072 at 41. And management only lowered guidance to 1,000– 1,100MW rather than the 900–1,000MW range in management’s 2016 Reforecast. See JX 1066 at 9. But, as Plaintiffs admit, SolarCity did in fact have sufficient cash to meet its requirements and never breached its Liquidity Covenant. See POB at 65 (“Plaintiffs proved that SolarCity was . . . likely to breach its Liquidity Covenant . . . .”) (emphasis added); Pls.’ Post-Trial Reply Br. (D.I. 484) at 18 (mentioning “SolarCity’s many near- breaches of its Liquidity Covenant”) (emphasis added); Tr. 1196:2–4 (Beach); Tr. 380:2– 4 (Elon); Tr. 991:21–24 (Serra); Tr. 2705:7–10 (Moessner). And although Lyndon recommended to the SolarCity Board that the company conservatively reduce 2016 guidance to 900MW on April 26, 2016, SolarCity ultimately forecasted additional international MW because of “a strong pipeline in Mexico” that was “just getting started” and ultimately generated the installation of a “large system of over 30 megawatts,” bringing guidance above 1,000MW. Tr. 1694:22–1696:20 (Lyndon); JX 1010 at 29. 176 Tr. 2721:4–8 (Beach). 177 JX 1387 at 2.

36 “turnover” and “morale” problems among its sales staff and was “exposed and

vulnerable” to losing its top sales talent.178

Meanwhile, SolarCity continued to raise cash, but in lower amounts than

originally projected.179 It was able to close two tax equity transactions during

Q2 2016, including a reduced $80 million commitment by Bank of America, one of

SolarCity’s largest tax equity lenders.180 SolarCity reported $145.7 million in cash

and cash equivalents as of June 30, 2016—less than $30 million above the Liquidity

Covenant.181 To save cash, SolarCity worked with vendors on accounts payable and

slowed the Silevo deployment.182

Elon and Lyndon again spoke privately about the Acquisition in May 2016.183

Lyndon wanted to proceed with the Acquisition immediately, but Elon told him

Tesla would have to “push[] it out to June.”184 In a later call between the two,

Lyndon emphasized that he “need[ed] to know that [SolarCity would] get a bridge

178 Corey Dep. 37:2–38:10, 42:18–43:21; Barnard Dep. 65:3–7; JX 1000. 179 JX 951; JX 1230; Tr. 1308:8–20 (Van Zijl) (acknowledging that in Q2 2016, “SolarCity brought in substantially less” than forecasted). 180 Tr. 1308:4–7 (Van Zijl); JX 951 at 3 (Cast3 Fund). 181 JX 1854 at 4, 50. 182 Tr. 1791:1–1792:10 (Lyndon). 183 Tr. 1778:4–13 (Lyndon); JX 1451. 184 Tr. 1700:20–1701:12, 1785:7–1786:5 (Lyndon).

37 loan when the offer” arrived, or else he would need to “put the deal off so we can go

raise equity.”185 Elon told Lyndon that Tesla would provide a bridge loan to

SolarCity along with its acquisition proposal.186

G. Acquisition Talks Heat Up

On May 31, 2016, Elon again brought the idea of acquiring SolarCity to the

Tesla Board.187 This time, the Board thought the timing was right for an acquisition.

Tesla had stabilized Model X production and was poised to commence Model 3

production, which it expected to be difficult but manageable in light of the Model X

experience.188

1. The Initial Advice from Independent Advisors

The Tesla Board authorized management to: (1) engage an independent

financial advisor; (2) assess a potential solar acquisition; and (3) instruct Tesla’s deal

counsel, Wachtell, to undertake a legal review.189 The Tesla Board later selected

Evercore as the financial advisor for the potential merger.190 Elon and Gracias were

185 Tr. 1701:3–12 (Lyndon). 186 Tr. 1776:9–15 (Lyndon); Elon Dep. 275:7–13; JX 1451. 187 JX 1131. 188 Tr. 1962:18–1963:3 (Denholm); Tr. 405:22–406:17 (Elon); Tr. 462:23–463:6 (Kimbal); Tr. 2872:14–22 (Gracias). 189 JX 1131 at 1–2. 190 JX 2121 at 67; Tr. 2355:1–5 (Foster); JX 2842 at 19–20.

38 not involved in Evercore’s selection and, like Wachtell, Evercore had not previously

worked for Tesla or SolarCity.191

On June 20, 2016, Elon called another special meeting of the Tesla Board.192

Prior to the meeting, he reviewed a draft offer letter and blog post announcing the

offer,193 as well as a draft presentation from Evercore.194

Once the Tesla Board decided it would pursue an acquisition of SolarCity,

following discussions with counsel,195 it was determined that Elon and Gracias

should be recused from any vote relating to the transaction given, among other

conflicts, their roles on the SolarCity Board.196 But the Tesla Board believed that

Elon and Gracias’ perspectives regarding the solar industry and SolarCity,

191 Tr. 2840:13–18 (Gracias); Tr. 465:15–17 (Kimbal); Tr. 1368:8–15 (McBean); Tr. 1964:11–1965:14 (Denholm). 192 JX 1228. 193 JX 1231 at 114–22; JX 1224; Tr. 279:23–280:6 (Elon). 194 JX 1227. 195 JX 1228 at 4–5; JX 2121 at 68. 196 JX 1233 at 5; JX 2121 at 68; Tr. 1969:19–1970:17 (Denholm). For reasons unclear, the Tesla Board “didn’t discuss whether [Kimbal] should be recused along with [Elon].” Tr. 525:24–526:2 (Kimbal).

39 in particular, would be helpful, so it was agreed that the two could participate in

certain high-level strategic discussions regarding the Acquisition.197

At the June meeting, Evercore presented an overview of potential solar

acquisition targets.198 Based on Evercore’s analysis, SolarCity was the “clear market

leader” and “the most attractive asset in the solar market.”199 The Tesla Board

197 JX 2121 at 68; Tr. 30:15–22 (Elon); Tr. 2842:3–8 (Gracias). Plaintiffs argue that the extent of Elon’s recusal was overstated in the Proxy. But as Elon points out, the Proxy disclosed that Elon was recused from any vote relating to the Acquisition, which he was. See Tr. 1377:21–1378:14 (McBean) (testifying that the Proxy description was “consistent with what actually happened” and that Elon did not “vote on any matters relating to the SolarCity acquisition”). The Proxy disclosed that Elon’s “strategic vision, expertise and perspectives . . . would continue to be helpful to the Tesla Board’s evaluation of a potential acquisition,” and so he was not fully recused. JX 2121 at 68. Additionally, the Proxy disclosed the Tesla Board meetings Elon attended. Id. at 73, 75–76. With that said, as discussed below, the recusal protocol was not precise, and the fluidity of its enforcement revealed a flaw in the deal process. 198 JX 1228 at 3; JX 1231 at 33–40; Tr. 1379:21–1380:12 (McBean); Tr. 1966:12–17 (Denholm). 199 JX 1231 at 9; Tr. 1378:15–1382:12 (McBean); JX 1228 at 3. In this regard, I am satisfied that Evercore performed a more than adequate survey of solar targets before recommending Elon’s preferred target. Evercore, and the Tesla Board, believed SolarCity was the obvious choice and for good reason. E.g., Tr. 2399:15–2401:1 (Buss) (“Q. Did you personally have a view on which target Tesla should pursue? A. Yes. It was very obvious to me. Q. And what was that view? A. Really was SolarCity. . . . I think with the vision and scale of where Tesla was and where we expected it to go, not doing a market leader really wouldn’t have made sense. . . . And then the other big factor in the solar space is really cost. You need to be a low-cost provider. And they were the lowest-cost provider out there. . . . And obviously, my prior company, SunPower, was on the list. Right? I think they were number four. And I wouldn’t have supported that either.”); Tr. 1382:1–12 (McBean) (“So you say ‘Clear Market Leader’ here. Was it a close call, in Evercore’s view, as to which company was the best target? A. No, not at all. Q. Can you explain that? A. Because of their position in the market, it was just—and the vertical integration, it was a very obvious choice. As I said, they had, you know, a much higher market share

40 discussed SolarCity’s financial condition and “ability to meet its current and future

debt obligations and financing needs.”200 Evercore presented its preliminary

valuation and its recommendation that market conditions favored a stock-for-stock

deal.201 With Evercore’s guidance, the Tesla Board was focused on the strategic

rationale for the transaction and recognized the “significant synergies” a solar

acquisition would bring to the table.202 It discussed how it would structure an

acquisition, including the need to pay a premium over SolarCity’s closing stock

price.203 According to notes from an Evercore team member, Elon, in attendance,

noted that the price had to be “publicly defensible,” meaning “in the middle . . . of

precedent premia paid.”204

The Tesla Board expressed that it was not willing to do the deal unless it made

sense financially for Tesla and discussed “a walkaway price.”205 Evercore

than the other participants. And it just wasn’t—it was kind of a no brainer. It’s not usually that obvious; it was in this situation.”). 200 JX 1228 at 3; Tr. 1982:12–1983:9 (Denholm). 201 JX 1228 at 3; JX 1231 at 11. 202 JX 1238 at 1; see also Tr. 1389:20–1390:6 (McBean) (testifying that the Tesla Board did not approve the deal “to bail out SolarCity” but was “really focused on the strategic rationale and the combination of solar and storage”). 203 JX 1228 at 2–3; Tr. 1987:2–24 (Denholm). 204 JX 1238 at 2. 205 Tr. 1389:13–19 (McBean).

41 recommended a stock exchange ratio equating to a $25–$27 per share offer.206

For his part, Elon observed that, given SolarCity’s much higher “historical trading

performance,” “[p]remia to current prices don’t mean that much” or “might come in

a bit low.”207 While not entirely clear in the evidence, Elon appears to have proposed

a 30% premium over SolarCity stock’s 4-week trailing price, which amounted to

$28.50 per share.208 The Tesla Board discussed the specific exchange ratio of

“0.122x to 0.131x” (equating to $26.50–$28.50 per SolarCity share).209 Elon was

“not a fan of using ranges,” but Denholm insisted that “giving a range [] provides

flexibility” in due diligence.210 Elon and Gracias then left the meeting, and the

remaining directors continued to discuss the potential acquisition.211

206 JX 1239 at 5 (notes from second Evercore deal team member: “Our thoughts–risk vs return: if our offer is 25–27, upside is relatively limited.”); JX 1238 at 2 (notes from Evercore deal team member: “What range are we actually suggesting? $25–27 under EVR’s suggested exchange ratio.”). 207 JX 1238 at 2. 208 See id. (“Robyn–what’s the best way to arrive at specific prices? Stu–FF indicates mid- to-high 20s, 30-day premium . . . Elon–30% over 4-week trailing (~$28.50).”). 209 Compare JX 1228 at 3 and JX 1238 at 2, with JX 2121 at 68. 210 JX 1238 at 2. 211 JX 1228 at 4–5.

42 2. The Initial Offer

With Elon and Gracias recused, the Tesla Board approved a preliminary, non-

binding proposal to acquire SolarCity, subject to due diligence, using an exchange

ratio range of 0.122–0.131 shares of Tesla common stock per share of SolarCity

common stock.212 The exchange ratio represented a premium of approximately 21%

to 30% over SolarCity’s trading price at the time.213 Even though not required under

Delaware law, the Tesla Board also determined that any acquisition proposal would

be conditioned “on the approval of a majority of disinterested SolarCity stockholders

and Tesla stockholders voting on the transaction.”214 Notably, despite Elon’s

request, the Tesla Board did not include a bridge loan in the preliminary proposal,215

as Evercore and the Tesla Board “didn’t think it was in Tesla’s best interest.”216

212 JX 1228 at 5; JX 1233 at 2; Tr. 1993:17–1994:21 (Denholm). 213 JX 1275 at 2; JX 1233. 214 JX 1233 at 2 (meeting minutes) (emphasis added); see JX 2121 at 68 (description of required votes in the Proxy); Tr. 1973:22–1974:13 (Denholm). 215 JX 1233; Tr. 1701:20–23 (Lyndon). 216 Tr. 1517:13–16 (McBean); see also Tr. 2186:4–18 (Denholm) (testifying that she “was not in favor of doing a bridge loan at all, that we would discuss it at the board, but, for me, it didn’t sound like a good idea”); Tr. 2187:10–21 (Denholm) (“Q. Was it, in fact, the case that Tesla did not want to do a bridge loan? A. Yes. I mean, I didn’t want to do a bridge loan. And in the subsequent discussions with the rest of the board, the board agreed with me that we did not want to do a bridge loan. Q. And, again, what was Mr. Musk’s position, as far as you understood at the time, on whether Tesla should do a bridge loan to SolarCity? A. Again, my understanding was he wanted to do a bridge loan and thought it would be best if that bridge loan came from Tesla.”).

43 On June 20, 2016, Tesla made an offer to acquire SolarCity at an exchange

ratio of 0.122 to 0.131 Tesla common shares for each SolarCity common share.217

Tesla announced its preliminary proposal after market close on June 21, 2016.218

In response to the initial offer, the SolarCity Board formed a special committee

consisting of directors Nancy Pfund and Don Kendall.219

Following the announcement, Tesla’s stock price dropped by more than 10%,

or $3.07 billion—an amount greater than SolarCity’s entire market capitalization.220

Evercore’s McBean, who spoke with market commentators, explained that

“it became very clear that they did not understand” the strategic logic of the

combination because “the media and the public thought of Tesla as a car

company.”221 Tesla’s stock price quickly rebounded and ultimately rose above the

unaffected price by mid-July.222

217 PTO ¶ 159. 218 Id. 219 PTO ¶ 161. 220 JX 1590 at 254; JX 2834 (Beach Expert Report) ¶¶ 33–34. 221 Tr. 1394:15–1396:21 (McBean); see also JX 1590 at 254 (concluding the stock fell “mainly due to investors lack of understanding regarding the timing of the announcement and the strategic rationale”). 222 See PTO Ex. A. 10–11.

44 After the initial offer, Bank of America further downgraded SolarCity’s risk

rating.223 One week later, SolarCity ended the second quarter with ⁓$216 million in

negative cash flow.224 According to SolarCity, Tesla’s initial offer created financial

strain for SolarCity.225 In this regard, whether Tesla’s offer made it more difficult

for SolarCity to finance itself was the subject of much debate at trial, and there is

evidence to support both sides.226 Ultimately, the preponderance of the evidence

suggests that Tesla’s offer caused delays in SolarCity’s financing efforts, which

ultimately exacerbated SolarCity’s liquidity problem.227 Despite these problems,

223 JX 1355; Tr. 1792:15–1793:15 (Lyndon). 224 Tr. 1031:8–1032:4 (Serra); JX 1858 at 12. 225 Tr. 1701:20–1702:1 (Lyndon). 226 See, e.g., Tr. 1510:16–21 (McBean) (“Q. SolarCity had liquidity concerns before Tesla made its public offer. Right? A. Yes.”); JX 1406 (email from Evercore’s Roger Altman: “Mark me down as a skeptic on the argument that this proposed merger makes it harder for them to finance themselves.”); Tr. 1510:22–1512:24 (McBean) (discussing Altman’s email); Tr. 422:14–423:10 (Bilicic) (“I think the company had a liquidity problem that had almost nothing to do with the presence of the Tesla proposal.”). 227 See, e.g., Tr. 477:19–24 (Kimbal) (“I’ve been through this a few times with companies I’ve been part of. If you create a public offer, you freeze the options of your acquisition target, You force any lender or equity provider to come to you and you can, hence, control their options.”); Tr. 1703:24–1704:18 (Lyndon) (explaining how “the financial institutions had to now go back to their credit committees and get approval for continuing to invest in SolarCity” and how that caused a delay of “two or three weeks” which “put[] a lot of stress” on the company’s cash situation); JX 1360 (email from J.P. Morgan stating that because of the Tesla offer, additional approvals will be needed and “we do not expect to be able to complete the additional approvals in time to make the requested [] closing date”); JX 1858 at 2 (“Because of the Tesla Motors acquisition proposal, we experienced greater than usual delays closing new project financing commitments.”).

45 Bank of America continued to lend and sought to deepen its ties to SolarCity.228

In fact, when all was said and done, SolarCity’s financing counterparties participated

in financing transactions with SolarCity worth more than $3 billion from Q4 2015

through Q4 2016, including times when Plaintiffs claim SolarCity was insolvent.229

On June 25, 2016, SolarCity’s special committee retained Lazard as a

financial advisor.230 Lazard confirmed that SolarCity “was close to breaching a

liquidity covenant under the Company’s revolving credit facility” and “would be

operating with little margin for error until October 2016.”231 One of the Lazard

bankers advising SolarCity was worried about the damage a liquidity event could

cause the company and was “concerned” that such an event would threaten “the

company on a stand-alone basis going forward.”232

228 Tr. 1235:1–1238:8, 1347:24–1348:24 (Van Zijl); Tr. 998:1–9 (Serra) (“Q. In 2016, did Bank of America ever conclude that SolarCity was not viable as a going concern? A. Quite the opposite. I mean, the investment bank of Bank of America was trying to do more business with us.”); JX 1430 at 27. 229 JX 2384; JX 2028; JX 2853 Ex. 8. 230 JX 1347 at 2; JX 1350. 231 JX 1453 at 1; see also JX 1721 at 2 (stating that SolarCity was “on the brink of a liquidity event”). 232 Tr. 429:15–430:1 (Bilicic) (“So the company had a liquidity problem based on our analysis, which had a risk of producing a covenant problem but, more generally, had the risk of damaging the overall business. And the other concern we had here was . . . we were concerned about the company on a stand-alone basis going forward.”).

46 3. Negotiations Begin

Denholm led due diligence and negotiations with SolarCity,233 spending

nearly six weeks and hundreds of hours on the Acquisition.234 She met with the

chairman of SolarCity’s special committee,235 managed the due diligence team,236

reported to the Tesla Board and led the exchange of offers and counteroffers.237

In aid of Denholm’s efforts, Evercore performed extensive diligence. McBean

credibly testified that Evercore’s 10-member team spent thousands of hours

reviewing SolarCity’s financial condition, conducting valuation analyses and

negotiating with Lazard.238

233 Tr. 2001:14–23 (Denholm); Tr. 30:23–31:14, 279:2–280:9 (Elon); Tr. 1376:3–7 (McBean); Tr. 466:18–467:8 (Kimbal). Plaintiffs dispute this fact because, they say, there are no Tesla Board minutes or resolutions that state the Tesla Board put Denholm in charge of the negotiations. See PAB at 23–26. This argument fails. All director testimony is consistent that Denholm was in charge. And there are special meeting minutes that imply the same. See JX 1673 at 2–3 (noting that Denholm “updated the other members of the Board with respect to her discussion the prior day with Mr. Donald R. Kendall [regarding SolarCity’s counteroffer]”). More importantly, I found Denholm to be an extraordinarily credible witness. If she says she was in charge, then she was in charge. 234 Tr. 2001:24–2002:8 (Denholm). 235 Tr. 2024:2–15 (Denholm); JX 2121 at 69. 236 Tr. 1966:18–1967:24, 2001:14–23 (Denholm). 237 Tr. 30:23–31:14 (Elon); Tr. 2027:1–19 (Denholm). 238 Tr. 1466:12–15 (McBean).

47 Outside the Tesla Board process, Lyndon provided Elon with updates on

SolarCity’s cash position and need for bridge financing.239 On July 9, 2016, Lyndon

and Elon discussed SolarCity’s liquidity needs and the Acquisition.240 Lyndon

reminded Elon that SolarCity was “running crazy close” to its Liquidity Covenant,

and he acknowledged he was “really afraid of the domino effect” that would result

if SolarCity did not get cash soon.241 The next day, Lyndon emailed Elon the “cash

forecast [he] gave the [SolarCity Board] in April,” again warned of the “domino

effect” that SolarCity faced due to “delay[s] [in] funding,” and asked Elon to speak

over the phone about SolarCity’s $200 million bridge loan request.242 In response,

Elon informed Lyndon that, contrary to Elon’s wishes, Tesla’s Board would not

authorize a bridge loan.243

239 Elon Dep. 272:21–23; Lyndon Dep. 106:6–107:42. 240 Tr. 1794:2–10 (Lyndon). 241 JX 1451; Lyndon Dep. 107:5–11; see also Elon Dep. 272:10–273:12 (recounting the conversation with Lyndon). 242 JX 1455; Tr. 1796:10–16 (Lyndon). Plaintiffs point out that this communication was not disclosed in the Proxy. See JX 2121 at 71–72. Here again, the missing disclosure was not material as the bridge loan was never approved. 243 Tr. 1702:24–1703:6, 1798:3–1799:12 (Lyndon).

48 4. The Tesla Board Becomes Aware of SolarCity’s Cash Issues

Through due diligence, Evercore discovered SolarCity’s significant liquidity

concerns.244 On July 15, 2016, Evercore had a “very concerning” call with Lazard,

during which Lazard claimed it was unaware that SolarCity was at risk of tripping

its Liquidity Covenant.245 McBean immediately telephoned Elon.246 Elon “was

surprised . . . that [Lazard] didn’t know that [SolarCity] could potentially default on

its revolver.”247 But Elon did not appear surprised by the liquidity problems;248

instead, changing the subject, he advised McBean that he was “very concerned about

the pace of diligence.”249

Within an hour of that call, Elon arranged daily meetings with the Evercore

team to push along the pace of due diligence.250 It is not clear from the record if

244 JX 1471; Tr. 1513:18–1515:24 (McBean). Plaintiffs correctly observe that Elon did not disclose these issues to his fellow Tesla Board members, likely because he was wearing his SolarCity Board hat when he received the information. 245 JX 1512; Tr. 1518:12–1519:2 (McBean). 246 JX 1528; Tr. 1520:18–1521:1 (McBean). 247 McBean Dep. 163:20–164:8, 238:3–12; see also Tr. 1521:2–5 (McBean). 248 McBean Dep. 164:9–12, 238:14–17. 249 Tr. 1521:6–23 (McBean). 250 Tr. 1521:2–1522: 21 (McBean). Plaintiffs argue that Elon’s daily calls with Tesla’s advisors and management were not disclosed to stockholders. See POB at 30. That is true, and the omission may well have been material given Elon’s conflicts.

49 Elon’s meetings with Evercore came at the suggestion of the Tesla Board. McBean

testified that she thought the idea originated at the board level.251 Denholm knew

about “a daily call with Evercore and the due diligence team, many of which [she]

sat in on, and Elon was on some of those,” but testified she did not know that Elon

“was having [] private conversations with Evercore.”252 Regardless, the evidence

suggests that the purpose of any calls with Evercore likely was for the bankers to

update Elon on the progress and speed of the deal so Elon could prod SolarCity to

respond to outstanding diligence requests.253

The first “daily call” took place the following morning, on July 16, 2016,254

and addressed “the status of all the work streams.”255 Less than 30 minutes after the

start of the call, McBean emailed her team: “We are running out of time. Plan is to

sign this week and fairness is on Monday,” which was in two days.256

Over the next 48 hours, Evercore created its own “downside” case projections.

On July 18, 2016, these projections were presented to Evercore’s Fairness

251 Tr. 1402:18–1403:18, 1526:5–1527:19 (McBean). 252 Tr. 2144:17–2145:1, 2152:22–2154:3 (Denholm). 253 Tr. 1403:3–6 (McBean); see also JX 1526 at 2 (“[W]e’re going to have a daily check- in call with Elon to discuss gating items and progress.”). 254 JX 1526; Tr. 1523:2–7 (McBean). 255 Tr. 1527:24–1528:24 (McBean). 256 JX 1527 at 2; Tr. 1534:12–1535:18 (McBean).

50 Committee, which proposed some changes.257 Later that day, Evercore sent Wheeler

the same downside case it shared with its Fairness Committee and McBean called

Elon.258

At the next Tesla Board meeting on July 19, Evercore presented on

SolarCity’s dire liquidity situation. Evercore explained that SolarCity could trip its

Liquidity Covenant by July 30, 2016,259 and warned that disclosure of an event of

default “could lead to potential cross defaults” and “impair SolarCity’s ability to

monetize future assets.”260 Evercore further detailed SolarCity’s significant

257 Tr. 1561:4–16 (McBean); JX 1575 (“We just finished a call with our opinion committee and they would like us to make a number of changes to the analysis . . . SolarCity just sent us some data that we needed to complete our analysis this morning . . . .”). 258 JX 1553; Tr. 1561:19–1563:12 (McBean). Plaintiffs argue that “[a]fter talking with Musk, Evercore’s projections doubled overnight,” implying that Evercore changed its projections at Elon’s request. POB at 32. That implication is not supported by the credible evidence. McBean was asked if Elon “ever ask[ed] Evercore to change one of its presentation or advice that it was providing to the Tesla board” or if “Evercore [was] seeking approval from Elon Musk on valuation,” in response to which she credibly testified, “No. Never.” Tr. 1628:1–8 (McBean). To the contrary, McBean testified that “around the same time we were working with Tesla to finalize the sensitivity case,” Tesla was continuing to give Evercore adjustments, and Evercore “would have received signoff from Jason [Wheeler]” for additional changes. Tr. 1565:20–1569:24 (McBean). SolarCity was also supplying relevant information at the last minute. See JX 1575. In any event, the final deal price implicated the middle of the lowest sensitivity case before any adjustments were made. See POB at 32 (showing a DCF range of $15–$25); Tr. 1572:3–1573:1 (McBean). 259 JX 1588 at 28, 30; Tr. 1573:6–1575:6 (McBean). 260 JX 1588 at 28, 30; see also Tr. 1573:6–1575:6 (McBean) (describing Evercore’s advice regarding the SolarCity Liquidity Covenant). Plaintiffs argue the fact that Evercore advised the Tesla Board that breaching the Liquidity Covenant would threaten SolarCity’s

51 upcoming expenses in connection with Silevo.261 From McBean’s perspective, the

Tesla Board fully understood and was “particularly concerned” about SolarCity’s

financial challenges.262

The day after his fellow directors learned the extent of SolarCity’s liquidity

crisis, Elon self-published the so-called “Master Plan Part Deux.”263 In addition to

promising that Tesla’s EVs would feature self-driving capabilities and touting the

prospect of heavy-duty EV trucks and urban transport, Elon explained that “the time

has come” for Tesla to acquire SolarCity and “sell integrated solar and energy

storage systems.”264 With this declaration, Elon went directly to Tesla’s

stockholders to explain that Tesla’s vision for the future could not be achieved

without a solar company.265

solvency was not disclosed to stockholders. While true, the fact remains that SolarCity never breached the Liquidity Covenant. 261 JX 1588 at 28; Tr. 1579:19–1580:8 (McBean). 262 Tr. 1576:13–1577:4 (McBean). 263 JX 1618. 264 Id. 265 Tr. 574:8–22, 576:9–19 (Kimbal). I note that Oppenheimer stated that the Master Plan Part Deux did not come as a shock to the market. See JX 1617 at 1. (“That TSLA plans to move into higher powered vehicles like semi and pick-up trucks, introduce/coordinate a fleet of autonomous driving vehicles, and sell integrated solar and energy storage systems will not surprise many investors.”) (emphasis added). 52 Given the information discovered in diligence, Evercore decided to

recommend that Tesla lower its offer.266 The recommendation was communicated

to Elon during a call on July 21 and to the Tesla Board the following day.267

On July 24, the Tesla Board met to discuss the merger and whether to revise

the offer.268 Elon agreed that SolarCity’s liquidity issues should lower the deal value

but reiterated his belief that the “strategic rationale was still intact.”269 After Elon,

Gracias and Straubel left the meeting, Evercore “provided an update of [its]

valuation analysis.”270 Among other things, the Tesla Board discussed whether to

make a revised offer before the release of SolarCity’s Q2 2016 results and reduced

installation guidance, which they anticipated would lower SolarCity’s stock price.271

After discussion, the Tesla Board “determined to make a revised proposal to acquire

SolarCity at a lower price that reflected [Tesla’s] due diligence findings, prior to

266 JX 1619; Tr. 1592:20–24 (McBean). 267 JX 1619; JX 1655 at 2–3. Plaintiffs point out that Evercore’s call with Elon was not disclosed to the stockholders or the Tesla Board. See POB at 34. The fact that Evercore told management that they were planning on making a formal recommendation to the Tesla Board is not material evidence of a conflict. There is no evidence Elon resisted or pushed back on the idea; indeed, he agreed that SolarCity’s liquidity issues should affect the price Tesla was willing to pay. See Tr. 1603:20–1605:5 (McBean). 268 JX 1673. 269 Tr. 1603:20–1605:5 (McBean). 270 JX 1673. 271 Tr. 1598:5–1599:23 (McBean).

53 SolarCity’s announcement of its second quarter results.”272 The Tesla Board

lowered the offer to an exchange ratio of 0.105 shares of Tesla stock per SolarCity

share, and negotiations continued.273

H. The Final Terms of the Acquisition

On July 30, 2016, the Tesla Board offered to pay 0.110 shares of Tesla stock

for each share of SolarCity stock274—well below the initial offer range of 0.122–

0.131. As detailed below, Evercore provided a fairness opinion to the Tesla

272 JX 1673. I note that Tesla protected itself from a SolarCity liquidity event by requiring as a condition of the Acquisition that SolarCity remain in compliance with its debt covenants. JX 2121 at 249–50 (§ 7.02(e)); Tr. 1407:2–23 (McBean). And, of course, SolarCity’s second quarter and third quarter results were a matter of public knowledge by the time the Tesla stockholders voted on the Acquisition. Tr. 2029:19–2030:1 (Denholm). 273 Tr. 2160:9–2161:1 (Denholm). Plaintiffs argue that before this lowered offer, the Tesla Board called Elon to ask whether Tesla could acquire the Silevo assets instead of SolarCity in total, to which “[Elon] said no.” POB at 35. This is not a fair characterization of the exchange. Denholm testified that, in discussing price (with Elon and Gracias recused), the Tesla Board “wanted to understand if there was an alternative strategy around acquiring a certain set of technologies of SolarCity rather than the entirety of the company.” Tr. 2032:16–2033:5 (Denholm). The Tesla Board was exploring alternatives in case the revised offer they contemplated of 0.105 was rejected outright, given that SolarCity had counteroffered with a price above the range Tesla initially proposed, and Tesla had planned to counter with a proposal even lower than the initial range. Id. In other words, this alternative was being considered “if we couldn’t get to a negotiated outcome.” Tr. 2033:6– 12 (Denholm). Without discussing price, the Tesla Board called Elon to discuss “the technology assets themselves,” and ultimately decided not to make a separate offer for just Silevo because “it would not allow [Tesla] to do the integrated product that was key to the strategy.” Tr. 2033:13–2034:1 (Denholm). 274 JX 1736 at 2–3.

54 Board,275 which concluded that the Acquisition consideration was fair to Tesla.276

In fact, the Acquisition price fell within or below each of the seven stock price ranges

Evercore presented to the Tesla Board (plus two illustrative reference ranges).277

I. The Merger Agreement Is Executed and the Acquisition Is Announced

Tesla and SolarCity executed the Agreement and Plan of Merger (the “Merger

Agreement”) on July 31, 2016, and announced the Acquisition the following day.278

The Merger Agreement limited SolarCity’s ability to issue equity or take on

275 JX 2121 at 83. 276 Id. Plaintiffs argue that “Evercore’s fairness opinion was unreliable.” POB at 60 (citing Gerber v. Enter. Prods. Hldgs., LLC, 67 A.3d 400, 420–21 (Del. 2013) (affirming trial court’s finding that a financial advisor had “compromise[d] its professional valuation standards to achieve the controller’s unfair objective”), overruled on other grounds by Winshall v. Viacom Int’l, Inc., 76 A.3d 808 (Del. 2013)). I disagree. The preponderance of the evidence reveals this opinion was reliable, honest and independently given. Evercore was a diligent advisor with no previous ties to Tesla, and McBean credibly explained and defended its work and advice. Tr. 1401:4–12, 1414:6–18, 1421:15–1428:13, 1448:4–1458:1 (McBean); see also Tr. 1467:20–1468:6 (McBean) (“Q. One final question. Sitting here today, do you stand by Evercore’s work and the fairness opinion that was issued for this deal? A. Absolutely. Tesla paid a great price for a very valuable company. As I said many times, the strategic rationale is sound and it just becomes clearer every day. The combination of solar and storage is incredibly compelling, and they were able to get this company at a very good price. So absolutely.”). As explained below, however, Evercore’s fairness opinion is just one of many pieces of evidence that justify the price paid in the Acquisition. 277 JX 1735 at 23. 278 PTO ¶¶ 1, 173–74; JX 2121 at 79.

55 additional debt without Tesla’s consent.279 Importantly, it also required SolarCity to

remain in compliance with its debt covenants pending closing.280

In the Form 8-K Tesla filed to disclose the Merger Agreement, Tesla informed

its stockholders that the Acquisition exchange ratio represented an equity value for

SolarCity of approximately $2.6 billion, or $25.37 per share, based on the 5-day

volume-weighted average price of Tesla stock as of July 29, 2016.281 At the time

the Acquisition closed, however, the agreed upon exchange ratio resulted in Tesla

paying a good bit less––an equity value of $20.35 per share of SolarCity common

stock (or approximately $2.1 billion).282

With the executed Merger Agreement in hand, SolarCity still faced short-term

liquidity tightness that it needed to address into August 2016 to avoid tripping its

Liquidity Covenant prior to closing.283 Lyndon recognized that, given delays in

financing, SolarCity could not close on available debt fast enough and was “now at

the last resort stage.”284 Although SolarCity could have improved its liquidity

279 JX 2121 at 226–27 (§ 5.01(b)); Tr. 1716:21–1717:11 (Lyndon). 280 JX 2121 at 249–50 (§ 7.02(e)). 281 JX 1762 at 163. 282 JX 2839 ¶ 12; JX 2443 at 76–77. 283 Tr. 1717:12–19, 1719:24–1720:7 (Lyndon). 284 JX 1850; see also JX 1869 (SolarCity cash meeting materials).

56 position through macro changes, such as scaling back installations, these changes

would not solve SolarCity’s short-term liquidity problem, nor would they comply

with the Merger Agreement’s ordinary course covenant.285 To make matters worse,

SolarCity could not access funds from its usual investors as a result of the pending

Acquisition, its recent failure to secure certain credit approvals, and the quick

turnaround required to satisfy SolarCity’s financing needs.286

With other sources more difficult to access, SolarCity turned to its existing

shelf registration for Solar Bonds to meet its need for cash.287 On August 23, Elon

Remainder of Page Intentionally Left Blank

285 Tr. 1717:12–1718:2 (Lyndon); JX 2121 at 226–27 (§ 5.01(b) (ordinary course covenant)). 286 Tr. 1718:12–1720:7 (Lyndon); JX 1885 at 3. 287 Tr. 1720:13–20 (Lyndon); Tr. 33:15–20 (Elon); JX 1907 at 2.

57 and his cousins purchased $100 million of 12-month 6.5% Solar Bonds,288 which

solved SolarCity’s short-term cash needs.289

J. The Tesla Stockholder Vote

On August 31, 2016, Tesla filed a preliminary proxy that included:

(1) an explanation of the Acquisition’s strategic rationale; (2) descriptions of the

deal process, including the scope of Elon’s and Gracias’ recusals; (3) estimated cost

synergies; (4) the financial advisors’ projections and sensitivity cases; (5) the

fairness opinions and valuation methods of Lazard and Evercore; (6) disclosures of

the Tesla directors’ holdings in related companies; and (7) a description of the risks

posed by SolarCity’s liquidity challenges.290

288 JX 1921 at 2. Plaintiffs argue that Elon and the Rive brothers’ purchase of Solar Bonds should have been disclosed to Tesla stockholders to underscore the lengths to which SolarCity was forced to go in order to raise cash. POB at 57. The argument mischaracterizes the record. While the parties may dispute the desirability of the rates imposed for the short-term bridge financing available to SolarCity in advance of closing, or the timing in which a financing deal could have been consummated, the preponderance of the evidence shows SolarCity was discussing bridge financing with various banks and other investors in advance of closing, and I am satisfied that these options presented viable (albeit less attractive) alternatives to the sale of Solar Bonds to insiders. See, e.g., JX 2853 at 34–37 (highlighting various financing options SolarCity was exploring). 289 Tr. 1723:24–1724:2 (Lyndon). 290 JX 1952 at 11, 65–123, 209–305. Plaintiffs maintain that “[Elon] did not disclose that SolarCity was insolvent; could not pay its bills or employees on time without breaching debt covenants; could not raise equity; and had no viable solution to a ‘liquidity crisis’ that began in 2015.” POB at 2. I address those contentions below.

58 The preliminary proxy also disclosed three sets of SolarCity financial

projections to the Tesla stockholders: (1) the SolarCity Base Case: the base case

reflecting the best view of SolarCity’s management on the company’s future as of

2016;291 (2) the Evercore Sensitivity Case: the sensitivity case prepared by Evercore

and Tesla by adjusting the SolarCity Base Case to “reduce[] SolarCity’s projected

capital needs;”292 and (3) the Lazard Sensitivity Case: the sensitivity case prepared

by Lazard and SolarCity that assumed SolarCity faced challenges accessing the

capital markets and with borrowing costs.293

Evercore’s initial fairness analyses were based on the SolarCity Base Case

and Evercore Sensitivity Case because the Lazard Sensitivity Case was not yet

provided to Tesla or Evercore.294 Upon learning that Lazard had developed a

downside case, Evercore immediately obtained a copy and re-ran its cash flow

analyses.295 Evercore determined that the Evercore Sensitivity Case was more

291 JX 2121 at 85. The SolarCity Base Case is referenced in the Proxy as the “Unrestricted Liquidity Case.” 292 Id. at 109. The Evercore Sensitivity Case is referenced in the Proxy as the “Revised Sensitivity Forecasts.” 293 Id. at 85; Tr. 2521:22–2522:16 (Fischel). The Lazard Sensitivity Case is referenced in the Proxy as the “Liquidity Management Case.” 294 Tr. 1245:16–22, 1437:3–6, 1458:5–1459:3 (McBean). 295 Tr. 1459:12–15, 1463:3–7 (McBean).

59 conservative than the Lazard Sensitivity Case, which generated uniformly higher

values for SolarCity.296 Evercore then presented this analysis to the Tesla Board.297

The market’s reaction to the Acquisition announcement was mixed, with

extensive commentary.298 After learning that some major Tesla stockholders had

concerns about the Acquisition, Elon told Buss that certain things “need to happen

to change investor sentiment,” including that SolarCity would need to “solv[e] its

liquidity crisis,” and Tesla stockholders would need a “joint product demo” of a

promising SolarCity product in development––the “Solar Roof.”299

296 JX 2922 at 4; Tr. 1461:16–1464:2 (McBean). 297 Tr. 1463:8–20 (McBean). 298 Tr. 2653:1–2655:7 (Fischel); Tr. 1998:11-18 (Denholm). Fischel’s Expert Report compiles some of the robust commentary surrounding the Acquisition. See JX 2839 at 162–65, 170–72. To highlight just a few, Cowen & Company said the offer was “well short of our $35 price target”; Guggenheim Securities stated, “[w]e think the offer for SCTY is low”; Credit Suisse stated that the price was “too low” and “could be a steal for TSLA shareholders”; Oppenheimer stated the offer range “represents a fair price”; JP Morgan stated that the offer is “slightly above our $25 price target” and expressed skepticism “that there are near-term customer, product or technology synergies”; Roth Capital stated that the Acquisition “would serve as yet another front or major challenge” for both companies; Raymond James thought SolarCity stockholders “are being shortchanged”; and Morningstar stated the proposal “is a great value for SolarCity shareholders.” Id. at 163–64, 168. 299 JX 2038 at 1. The Solar Roof integrated solar technology into roof tiles so the roof itself would generate electricity. See JX 2200 at 2; Tr. 1847:2–5 (Peter) (“[W]e realized that the only way to make solar power look really good is that it can’t be something that is on the roof; it needs to be the roof.”).

60 On October 12, 2016, Tesla and SolarCity filed the definitive Proxy

incorporating by reference their recent SEC filings.300 Proxy advisory firms ISS and

Glass Lewis both offered voting recommendations to stockholders. ISS

recommended the Acquisition, characterizing it as “a necessary step towards

TSLA’s goal of being an integrated sustainable energy company” for which Tesla

was paying “a low to no premium.”301 Glass Lewis recommended against the deal,

calling it a “thinly veiled bail-out plan” and “significantly value destructive” to Tesla

because “SolarCity’s principal stand-alone business, as it exists today, is

increasingly and materially incapable of supporting itself.”302

Given the mixed market reaction, Tesla took steps to persuade the market of

the deal rationale and the value proposition. Denholm led outreach to Tesla’s

institutional stockholders, ISS, and Glass Lewis.303 As the CEO of the proposed

combined company, Elon participated in some outreach as well to share his vision

for the combination.304 Specifically, Elon focused on selling the “integrated

300 JX 2121 at 191–92. 301 JX 2249 at 11, 15. 302 JX 2237 at 7–9. 303 Tr. 2050:3–17, 2058:24–2060:1 (Denholm); Tr. 2473:1–3 (Foster). 304 Tr. 31:23–32:9 (Elon).

61 product” solution to stockholders.305 On October 28, 2016, Tesla and SolarCity

jointly presented to the market a prototype of the Solar Roof product, showcasing a

future combination of the Solar Roof, solar storage through the Powerwall and Tesla

EVs powered by solar.306 SolarCity had no budget for this product, which was just

conceptual in nature and prototyped “for demonstration of the aesthetics.”307

Days after the product launch, Elon tweeted that “first solar roof deployments will

start next summer.”308 On cross examination, Elon admitted that, in 2016, Tesla did

not have a formalized plan to begin installing solar roofs in 2017, and that the time

from idea phase to volume deployment would likely take up to three years, but he

allowed that the roll out could “[p]ossibly” be done in the timeframe he touted to the

market.309

305 Tr. 343:2–9 (Elon). 306 JX 2199. 307 Tr. 343:19–344:8 (Elon) (explaining that the Solar Tiles were not operational at the time of the demonstration); see also JX 2304 at 1 (Tesla management commenting, “SCTY Finance has zero visibility on how much it is going to cost [to] make a solar roof, install it, R&D, where it will be manufactured . . . running blind here which may be a big risk?”). 308 JX 2241. Plaintiffs also point to Elon’s statement at an investor Q&A where he said “we expect to start doing the solar roofs in volume somewhere next year,” and argue this false representation shaped the Tesla stockholder vote. JX 2302 at 9; see POB at 38. But this comment was made after the Acquisition was approved by stockholders. See JX 2302 at 6. 309 Tr. 346:3–13 (Elon) (“Q. But this is more than optimistic. This is just plain out false. There is no way with an idea that is in existence at Q3 2016 that you would [] start doing solar roofs in volume by 2017; correct? A. Well, I think—it’s not out of the question,

62 During a special stockholder meeting held on November 17, 2016, Tesla’s

stockholders overwhelmingly voted to approve the Acquisition.310 Approximately

85% of votes cast by Tesla’s stockholders were voted in favor of the deal.311 Most

of those votes were cast by sophisticated institutional investors.312

18 months later, thereabouts, that we could start production of it, but not deployment. Q. And certainly not volume. A. I don’t know. Possibly. It’s not out of the question.”); Tr. 339:20–340:23 (Elon) (confirming that it would take three to four years to take a product idea like the Solar Roof from idea phase to volume production). 310 JX 2302 at 6; JX 2320 at 7. At the time of special meeting, Tesla had 1,792,626 total shares outstanding. The results of the vote were: 68,788,787 shares voted in favor of the Acquisition (excluding the Tesla shares owned, directly or indirectly, by SolarCity directors and named executive officers or their affiliates); 12,067,314 shares voted in opposition of the Acquisition; and the holders of 569,421 shares abstained from voting. PTO ¶ 179. 311 JX 2320 at 7. I note Plaintiffs have argued that votes cast by institutional investors who held stock in both Tesla and SolarCity cannot be counted as disinterested votes. MTD Opinion at *10 n.183 (discussing Plaintiffs’ argument that votes of stockholders who held shares in both Tesla and SolarCity should not be counted when addressing the defendants’ stockholder ratification defense). Because I have not considered the ratification defense in reaching my verdict, I need not address this interesting argument, and leave it to others to decide whether similar arguments are persuasive. Cf. Lockton v. Rogers, 2022 WL 604011 at *10 (Del. Ch. Mar. 1, 2022) (holding that Corwin cleansing will not be triggered by a stockholder vote where the majority of votes cast were not truly disinterested) (citing Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015)); In re CNX Gas Corp. S’holders Litig., 4 A.3d 397, 416 (Del. Ch. 2010) (observing that a stockholder with “roughly equivalent equity interests” in the seller and the acquirer has “materially different incentives” than a stockholder invested in only one company, “thereby calling into question the effectiveness of the majority-of-the-minority condition”). 312 JX 2237 at 2 (listing Tesla’s largest stockholders by percentage); Tr. 2529:9–2530:1 (Fischel) (“Q. Now, you note on this slide that almost 62 percent of Tesla’s stock was held by large, sophisticated institutional investors including some of the top-40 wealth management firms in the United States. Okay. So to you, what is the weight of those facts? A. I think just it adds credibility to the importance of the shareholder vote . . . .”);

63 K. Closing the Acquisition

The Acquisition closed on November 21, 2016.313 Despite its liquidity issues

in late 2015 and 2016, as of closing, SolarCity brought substantial value to Tesla.

It had 15,000 employees,314 $200 million a month in business,315 over $3 billion in

future cash flows,316 over 300,000 customers,317 and net assets in excess of its market

capitalization (as confirmed by KPMG), resulting in Tesla booking an $89 million

gain on the Acquisition.318 As noted, as of closing, SolarCity had accumulated and

continued to accumulate substantial net retained value. 319

Shortly after closing, in early 2017, Tesla faced its most difficult challenge to

date—launching the Model 3, the company’s first volume production EV.320

Tr. 860:3–861:13 (Quintero) (acknowledging the sophistication of certain wealth management firms that voted in favor of the Acquisition). 313 PTO ¶ 181. 314 Tr. 1733:11–17 (Lyndon). 315 Tr. 1648:10–1650:22 (Lyndon). 316 Tr. 1733:11–1734:12 (Lyndon); Tr. 349:4–350:23, 404:6–16 (Elon); Tr. 2309:24– 2310:4 (Ehrenpreis); JX 2971 at 40, 58; Tr. 2857:2–21 (Gracias). 317 Tr. 1647:22–1648:2 (Lyndon). 318 JX 2443 at 77. 319 Tr. 1215:22–1216:6 (Van Zijl); Tr. 923:20–932:11 (Serra); JX 1855 at 9; JX 2853 at 7, 19–20. 320 Tr. 36:11–37:1, 127:13–20 (Elon).

64 Notwithstanding its confidence that the experience bringing the Model X to market

would ease the strain of the Model 3 rollout, unexpected production delays and other

logistical knots surfaced post-Acquisition. Tesla leadership understood that if the

Model 3 issues were not solved and solved quickly, then Tesla would face

commercial disaster.321 Recognizing that “Tesla was in extremely dire straits and at

mortal risk,” Elon repurposed everyone in Tesla—from Tesla Energy

(former SolarCity) personnel to Tesla’s legal department—to work on the Model 3

launch.322

The Tesla Energy personnel helped Tesla survive, but their redeployment to

Model 3 substantially slowed the progress of the solar business.323 By the end of

2016, Tesla Energy had terminated 4,163 employees,324 including its solar

installation workforce.325 Tesla had also eliminated SolarCity’s main sales channels,

321 Tr. 34:8–36:10 (Elon) (testifying “we were headed for bankruptcy, frankly, at a very high speed”). 322 Tr. 35:21–37:1 (Elon). 323 Tr. 347:10–348:23 (Elon); JX 2863 at 8 (“So for about 1.5 years, we unfortunately stripped Tesla Energy of engineering and other resources and even took the cell production lines that were meant for Powerwall and Powerpack and directed them to the car because we didn’t have enough cells. Now that we feel that Model 3 production is in a good place and headed to a great place, we’ve restored resources to Tesla solar and storage. And that’s going to be, I think, the really crazy growth for as far [in the] future as I can imagine.”); Tr. 486:24–487:5 (Kimbal); Tr. 1747:11–1748:17 (Lyndon). 324 JX 2731 at 5. 325 Tr. 660:22–661:23 (Moessner).

65 including its “big box” retailer and door-to-door sales.326 As of trial, Tesla continued

to rely on other solar companies to manufacture, produce, install and sell parts of its

solar products.327 In other words, the synergistic integration that Tesla hoped for is

still a work in progress.

Despite these challenges, Tesla’s value has massively increased following the

Acquisition. The preponderance of the evidence suggests that the Acquisition was

and is synergistic. Tesla has realized approximately $1 billion in nominal cash flows

and expects, conservatively, to realize at least $2 billion more from the legacy

SolarCity systems.328 It has achieved cost synergies by eliminating high-cost,

traditional solar sales channels (door-to-door marketing and big box stores), using

Tesla’s high-traffic website and stores to sell solar products instead.329 And it has

achieved revenue synergies by cross-selling electric cars, battery storage, and solar

326 Elon Dep. 328:25–329:7. 327 For example, Tesla negotiated a joint venture with Panasonic so that Panasonic, not Silevo, would manufacture Tesla’s solar cells in Buffalo. Straubel Dep. 54:6–24; JX 2147. As of today, Tesla does not produce “critical components” of its solar PV system. Tr. 661:24–662:20 (Moessner). And customers can “still buy a Tesla Powerwall through one of SolarCity’s competitors.” Tr. 660:19–21 (Moessner). 328 Tr. 349:4–350:23, 404:6–16 (Elon); Tr. 2309:24–2310:4 (Ehrenpreis); JX 2971 at 40, 58; Tr. 2857:2–21 (Gracias). 329 Tr. 37:2–16 (Elon); JX 2679 at 3; Tr. 2866:5–12 (Gracias); JX 2763 at 2–3; Tr. 2301:19– 2302:21 (Ehrenpreis).

66 products to its customers.330 One of Elon’s expert witnesses, Fischel, provided

credible testimony regarding the causal connection between the Acquisition and

Tesla’s skyrocketing performance.331 As long-promised, following the Acquisition,

Tesla became “the world’s first vertically integrated sustainable energy company,

offering end-to-end clean energy products.”332

L. Procedural History

This litigation began when several stockholders filed separate actions bringing

claims against the entire Tesla Board in connection with the Acquisition. 333 The

Court consolidated the individual actions and appointed certain plaintiffs and

counsel to leadership positions.334 All defendants moved to dismiss, and after the

parties briefed and argued that motion, this Court issued a Memorandum Opinion

330 JX 2993; Tr. 2308:9–2309:5 (Ehrenpreis); Tr. 2870:3–23 (Gracias); JX 3182 at 13; see JX 2679 at 3 (“At the end of Q3, there were almost 450,000 Tesla vehicle owners around the world. Ultimately, we believe this group will become the largest demand generator for our residential solar and Powerwall business.”). 331 Tr. 2667:9–2670:4 (Fischel). Of course, the evidence does not allow a meaningful assessment of the extent to which the Acquisition has contributed to Tesla’s growth, much less a conclusion that the Acquisition helps to explain the Tesla zeitgeist. Accordingly, I have not based my verdict on any supposition in this regard. 332 JX 2908 at 4. 333 PTO ¶ 2. 334 PTO ¶ 4.

67 denying the motion (the “MTD Opinion”).335 Specifically, the Court held, in part,

that “the Complaint pleads sufficient facts to support a reasonable inference that

[Elon] exercised his influence as a controlling stockholder with respect to the

Acquisition.”336 The MTD Opinion also observed that, even though Plaintiffs

carried their burden of well-pleading that Elon’s status as Tesla’s controlling

stockholder was reasonably conceivable at the motion to dismiss stage, “[t]he facts

developed in discovery may well demonstrate otherwise.”337 Defendants filed an

application for certification of interlocutory appeal, which this Court (and later the

Supreme Court) denied.338

On April 18, 2021, the Court entered a Stipulated Order of Class Certification

with respect to certain of Plaintiffs’ claims.339 Plaintiffs and Defendants then filed

cross-motions for summary judgment and, after briefing and oral argument,340

335 PTO ¶ 7; MTD Opinion. 336 MTD Opinion at *19. 337 Id. (citing In re W. Nat’l Corp. S’holders Litig., 2000 WL 710192 (Del. Ch. May 22, 2000) (determining the controlling stockholder issue at summary judgment); In re Cysive, Inc. S’holders Litig., 836 A.2d 531, 552 (Del. 2003) (determining the controlling stockholder issue post-trial)). 338 PTO ¶ 8. 339 PTO ¶ 14; D.I. 234. At this stage of the litigation, Plaintiffs were pressing their direct class action claims based on Gentile v. Rossette, 906 A.2d 91 (Del. 2006) (recognizing the viability of certain direct claims based on allegations of dilution and overpayment). 340 PTO ¶ 15.

68 the Court issued a Memorandum Opinion (the “SJ Opinion”) denying the motions,

with limited exceptions not relevant here.341

Well before trial, Plaintiffs reached an agreement with all Tesla Board

members except for Elon—namely, Kimbal, Gracias, Jurvetson, Buss, Ehrenpreis

and Denholm—to settle all claims against them for $60 million, funded by

insurance.342 This partial settlement was approved by the Court on August 17,

2020.343

After several delays caused by the COVID-19 pandemic,344 the Court held a

ten-day, in-person trial from July 12–16 and July 19–23, with one additional remote

trial day on August 16, 2021.345 After receiving post-trial briefs,346 the Court heard

post-trial oral argument on January 18, 2022.347 The matter was deemed submitted

for decision on that date.

341 PTO ¶ 17; SJ Opinion at *2. 342 PTO ¶ 16. 343 PTO ¶ 23. 344 PTO ¶¶ 20–22, 24. 345 D.I. 459–63, 466–70, 475. 346 D.I. 476–77, 481–82, 484–85. 347 D.I. 491.

69 On September 20, 2021, the Supreme Court of Delaware issued its opinion in

Brookfield Asset Management, Inc. v. Rosson,348 expressly overruling Gentile v.

Rossette,349 and holding that “corporation overpayment/dilution Gentile claims,

like those present here, are exclusively derivative under Tooley.”350 Following this

development, the parties stipulated to decertify the class, dismiss the direct claims,

and submit only Plaintiffs’ derivative claims for decision.351 I address those claims

in turn below.

II. ANALYSIS

Four counts remain to be adjudicated after motion practice and settlement:

Counts I and II assert derivative breach of the duty of loyalty claims against Elon in

his capacities as Tesla’s controlling stockholder and as a member of the Tesla Board

by causing the company to acquire an insolvent SolarCity;352 Count III asserts a

348 261 A.3d 1251 (Del. 2021). 349 906 A.2d 91 (Del. 2006). 350 Brookfield Asset Mgmt., 261 A.3d at 1277. 351 D.I. 480. 352 Compl. ¶¶ 294–302. As discussed below, neither the Complaint nor the pretrial order assert claims against Elon in his capacity as Tesla’s CEO. This is significant since Tesla’s certificate of incorporation contains an exculpatory provision, as permitted by Section 102(b)(7) of the Delaware General Corporation Law, that, by its terms, and as a matter of law, exculpates Elon for any breaches of the duty of care as a Tesla director but does not exculpate him for breaches of the duty of care as Tesla’s CEO. See 8 Del. C. § 102(b)(7); JX 19 (attaching Tesla charter), § 8.1 (exculpatory provision).

70 claim of unjust enrichment against Elon in connection with the Tesla stock he

received in the Acquisition;353 and Count VI asserts that the Acquisition constituted

waste.354

The parties’ dispute begins, unsurprisingly, with the “gating question” of what

standard of review is implicated by Plaintiffs’ showcase claims of breach of

fiduciary duty.355 Again unsurprisingly, Plaintiffs argue the Court should review the

fiduciary duty claims under the entire fairness standard, and they proffer the means

by which entire fairness is triggered here—namely, that a majority of the Tesla

Board was conflicted with respect to the Acquisition and that Elon is a conflicted

controlling stockholder. Predictably, Elon counters that the business judgment rule

is the correct answer to the standard of review question because he is not a

controlling stockholder, a majority of the Tesla Board was not conflicted and, even

if it was, the fully informed, uncoerced vote of Tesla’s stockholders “cleansed” any

fiduciary duty breaches.

I have approached my deliberations in the following sequence. First, I recount

the parties’ contentions and identify the factual and legal support on both sides.

353 Compl. ¶¶ 303–07. 354 Compl. ¶¶ 320–25. 355 See Larkin v. Shah, 2016 WL 4485447, at *7 (Del. Ch. Aug. 25, 2016) (noting that standard of review is often the “gating question” that “largely dictates the end result” in breach of fiduciary duty cases).

71 In doing so, however, I remain focused on the point of post-trial deliberations––to

reach a verdict. With this focus in mind, after explaining the factual and legal bases

for doing so, I assume Plaintiffs’ best case on standard of review––that entire

fairness applies––and consider the trial evidence through that lens. After setting the

standard of review, I explain my finding that Elon has proven the Acquisition was

entirely fair and, therefore, he did not breach his fiduciary duties. The evidence

adduced at trial proved the Acquisition process, like most worldly things, had both

flaws and redeeming qualities. The linchpin of this case, though, is that Elon proved

that the price Tesla paid for SolarCity was fair—and a patently fair price ultimately

carries the day. That same finding puts the nail in Plaintiffs’ unjust enrichment and

waste claims. My reasoning follows.

A. The Breach of Fiduciary Duty Claims

The gravamen of Plaintiffs’ fiduciary duty claims is that Elon breached the

duty of loyalty both as a controlling stockholder and director of Tesla by

“orchestrat[ing] Board approval of the Acquisition, which unfairly provides

SolarCity’s stockholders . . . with excessive value.”356 Put simply, Plaintiffs seek to

prove that “[Elon] Musk harmed Tesla” by causing Tesla to bail out an insolvent

356 Compl. ¶ 296.

72 SolarCity.357 As noted, Plaintiffs do not allege that Elon breached the duty of care

as an officer of Tesla.358 Accordingly, I focus, as the parties do, on Elon’s conduct

as alleged controller and as a member (and Chair) of the Tesla Board to assess

whether he breached his fiduciary duty of loyalty.

1. The Standard of Review

“The starting point for analyzing a fiduciary breach is to determine the correct

standard of review.”359 “Delaware has three tiers of review for evaluating director

decision-making: the business judgment rule, enhanced scrutiny, and entire

fairness.”360 As noted, the battle line here is drawn between entire fairness

357 POB at 2. 358 See, e.g., Compl. ¶¶ 299–300 (“[E]ach of the Individual Defendants had a fiduciary duty to, among other things, act in furtherance of the best interests of the Company and its stockholders so as to benefit all stockholders equally and not in furtherance of their personal interests. Each of the Individual Defendants breached his or her fiduciary duty of loyalty by causing and/or allowing Tesla to enter into the self-dealing SolarCity Acquisition.”); POB at 3 (“Given Musk’s disloyalty, the Court has wide discretion to fashion an equitable remedy.”) (emphasis added); id. at 44 (citing duty of loyalty jurisprudence); id. at 78 (“Here, Musk’s disloyal conduct caused Tesla to pay excessive shares for an insolvent company.”) (emphasis added); see generally id. (failing to discuss the duty of care or Elon’s duties as CEO of Tesla). 359 In re Columbia Pipeline Gp., Inc. Merger Litig., 2021 WL 772562, at *30 (Del. Ch. Mar. 1, 2021). 360 Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 457 (Del. Ch. 2011).

73 (Plaintiffs’ proffered standard)361 and the deferential business judgment rule

(Elon’s proffered standard).362 Neither party has advocated for enhanced scrutiny.363

a. The Competing Standards of Review

To explain my decision to review for entire fairness, it is useful to identify the

catalysts for the parties’ competing legal arguments. To state it bluntly, the knock-

on effects of two decisions of our Supreme Court––Corwin and MFW––frame the

standard of review controversy here.364 These seminal decisions offer conflicted

fiduciaries two pathways to the coveted deference afforded by the business judgment

rule.365 Elon wants that deference; Plaintiffs want to deny him that deference.

361 POB at 44. 362 Def.’s Opening Post-Trial Br. (“DOB”) (D.I. 477) at 2, 83. 363 Plaintiffs have not asserted a Revlon claim presumably because, as stockholders of the buyer, they do not dwell in “Revlon Land.” See Revlon, Inc. v. MacAndrews & Forbes Hldgs., Inc., 506 A.2d 173 (Del. 1986); Mohsen Manesh, Defined by Dictum: The Geography of Revlon-Land in Cash and Mixed Consideration Transactions, 59 Vill. L. Rev. 1, 5, 18 (2014) (explaining that when a board decides the company it serves is for sale, and thereby “enters Revlon-land, as it is colloquially called, the board loses the presumption of the deferential business judgment rule and becomes subject to enhanced judicial scrutiny under an objective standard of reasonableness”) (emphasis in original) (internal citations omitted); see also Leo E. Strine, Jr., Categorical Confusion: Deal Protection Measures in Stock-for-Stock Merger Agreements, 56 Bus. Law. 919, 927 n.25 (2001) (stating that the “[t]he Revlon principle grows out of the traditional principle that fiduciaries must sell trust assets for their highest value”). 364 Corwin v. KKR Fin. Hldgs., 125 A.3d 304, 313–14 (Del. 2015); Kahn v. M & F Worldwide Corp., 88 A.3d 635, 644 (Del. 2014) (“MFW”). 365 See Corwin, 125 A.3d at 305–06 (affirming that “the business judgment rule is invoked as the appropriate standard of review for a post-closing damages action when a merger that

74 If Elon is deemed a controlling stockholder of Tesla, he cannot invoke Corwin

to achieve business judgment deference.366 Not surprisingly, then, Plaintiffs argue

that Elon is a controlling stockholder; Elon steadfastly maintains that he is not.367

In making their controlling stockholder argument, Plaintiffs, no doubt, are

comforted by the fact that Elon, as controller, cannot invoke MFW to achieve

business judgment review because the Tesla Board elected not to form an

independent special committee, a predicate to the operation of MFW’s ratchet from

entire fairness down to the business judgment rule.368 If Elon is deemed a controlling

stockholder of Tesla, therefore, his conduct will be subject to the “onerous” entire

is not subject to the entire fairness standard of review has been approved by a fully informed, uncoerced majority of the disinterested stockholders”); MFW, 88 A.3d at 644 (“We hold that business judgment is the standard of review that should govern mergers between a controlling stockholder and its corporate subsidiary, where the merger is conditioned ab initio upon both the approval of an independent, adequately-empowered Special Committee that fulfills its duty of care; and the uncoerced, informed vote of a majority of the minority stockholders.”) (emphasis added); Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) (explaining that the business judgment rule embodies a “presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company”), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000). 366 Larkin, 2016 WL 4485447, at *8 (holding the Corwin does not apply in cases involving conflicted controlling stockholders); In re Merge Healthcare, Inc. S’holders Litig., 2017 WL 395981, at *6 (Del. Ch. Jan. 30, 2017) (same). 367 See Gladriel Shobe & Jarrod Shobe, The Dual Class Spectrum, 39 Yale J. Reg. 101, 147 (forthcoming 2022) (“Shobe”) (observing that “questions of whether a shareholder has control can significantly change the standard of review, and therefore the outcome, of fiduciary duty cases”). 368 MFW, 88 A.3d at 644.

75 fairness review since there is no question he was conflicted with respect to the

Acquisition.369

If Elon clears the controlling stockholder hurdle, he still has to traverse the

treacherous terrain of board-level conflicts to reach business judgment arcadia.

When “properly reviewable facts reveal that the propriety of a board decision is in

doubt because the majority of the directors who approved it were grossly negligent,

acting in bad faith, or were tainted by conflicts of interest,” the court will review the

decision for entire fairness.370 On the other hand, if the Tesla Board was not

conflicted, and Elon was not a controlling stockholder, then the business judgment

rule is the standard of review.371 Thus, the parties understandably clash over the

extent to which a majority of the Tesla Board was conflicted with respect to the

Acquisition by way of self-interest or a lack of independence from those who were

self-interested.

369 In re Trados Inc. S’holder Litig., 73 A.3d 17, 44 (Del. Ch. 2013) (characterizing entire fairness review as “onerous”); see also Flannery v. Genomic Health, Inc., 2021 WL 3615540, at *11 (Del. Ch. Aug. 16, 2021) (holding “the presence of a controller will not per se trigger entire fairness review; this heightened standard is only appropriate when a controller ‘engage[s] in a conflicted transaction’”) (quoting In re Crimson Expl. Inc. S’holder Litig., 2014 WL 5449419, at *14 (Del. Ch. Oct. 24, 2014)). 370 In re Dollar Thrifty S’holder Litig., 14 A.3d 573, 598 (Del. Ch. 2010). 371 Id.

76 Here again, the spirit of Corwin looms large. Even if the Acquisition was

approved by a conflicted Tesla Board, assuming Elon is not a controlling

stockholder, the uncoerced, fully informed vote of a majority of Tesla’s disinterested

minority stockholders will “cleanse” any breach of fiduciary duty by triggering

business judgment deference.372 And so, the parties dispute whether Tesla’s

stockholders were given the full and accurate information they needed to cast an

informed vote in favor of the Acquisition.

b. The Court Will Skip to Entire Fairness

As the above discussion reveals, the parties have explored all of the recesses

of Delaware law regarding shifting standards of review, from controlling

stockholder liability to stockholder ratification and all of the nooks in between.373

372 In re Merge Healthcare, 2017 WL 395981, at *6 (holding “the only transactions that are subject to entire fairness that cannot be cleansed by proper stockholder approval are those involving a controlling stockholder”). 373 In a single sentence in their opening post-trial brief, Plaintiffs assert for the first time in this years-long litigation that Elon “withheld critical information from the Board and stockholders about his reasons for the Acquisition and SolarCity’s true financial condition” such that he committed “fraud on the board.” POB at 42. They cite Mills Acquisition Co. v. MacMillan, which held that a fiduciary’s silence in the boardroom “in the face of [a] rigorous affirmative duty of disclosure” amounts to a fraud perpetrated upon his fellow board members. Mills Acq. Co. v. MacMillan, Inc., 559 A.2d 1261, 1283 (Del. 1989). If Plaintiffs intended to assert and prove a “fraud upon the board” theory, they should have raised the issue well in advance of their post-trial briefs. See PharmAthene v. SIGA Techs., Inc., 2001 WL 6392906, at *2 (Del. Ch. Dec. 16, 2011) (“The general rule . . . that a party waives any argument it fails properly to raise shows deference to fundamental fairness and the common sense notion that, to defend a claim or oppose a defense, the adverse party deserves sufficient notice of the claim or defense in the first instance.”); ABC Woodlands

77 The parties’ claims and defenses present provocative questions that could be debated

at even the most fashionable corporate law conferences.374 Beyond satisfying idle

L.L.C. v. Schreppler, 2012 WL 3711085, at *3 (Del. Ch. Aug. 15, 2012) (“When an argument is first raised in a pretrial brief after the parties already have shaped their trial plans, it is simply too late and deemed waived.”). Even if not deemed untimely, the argument stands wholly undeveloped. Beyond the off-handed mention in their opening post-trial brief, Plaintiffs did not argue fraud on the board in any other submission to the Court before or after trial. Nor did they argue fraud on the board during post-trial oral argument. D.I. 491. Accordingly, I do not consider the argument here. See, e.g., Voigt v. Metcalf, 2020 WL 614999, at *8 (Del. Ch. Feb. 10, 2020) (observing that defendants “invested so little in those arguments that they can be regarded as waived”). Of course, in addressing the entire fairness of the Acquisition, I necessarily have considered the state of the Tesla Board’s knowledge at relevant times during the deal process, as discussed in detail below. 374 The controlling stockholder question is of particular interest. Elon owned less than 50% of Tesla’s voting stock. At the pleadings stage, and at summary judgment, I held there was a triable issue of fact regarding whether Elon “exercised actual domination and control over the directors” such that “independent directors could not freely exercise their judgment.” MTD Opinion at *12 (cleaned up); see also SJ Opinion at *7 (citing Williamson v. Cox Commc’ns, Inc., 2006 WL 1586375, at *6 (Del. Ch. June 5, 2006) (“The question whether a shareholder is a controlling one is highly contextualized and is difficult to resolve based solely on the complaint.”)). Our law regarding controlling stockholders is, and has been for some time, in flux. See, e.g., Ann M. Lipton, After Corwin: Down the Controlling Shareholder Rabbit Hole, 72 Vanderbilt L. Rev. 1977, 2011 (2019) (“Delaware’s difficulties in dealing with controlling shareholders are not new; inconsistencies and ambiguities go back decades.”); id. (“[T]he combination of Corwin, C & J Energy, and MFW have spotlighted those doctrinal fissures by requiring courts to draw artificially sharp distinctions between control and noncontrol transactions when in fact control exists on an increasingly nuanced spectrum.”); Shobe, at 147–48 (discussing entire fairness review in the evolving context of control exercised via dual-class stock); compare In re Pattern Energy Gp. Inc. S’holders Litig., 2021 WL 1812674, at *38 (Del. Ch. May 6, 2021) (“It is an open question under Delaware law whether the Entity Defendants’ soft power alone, anchored in historical and commercial ties and the contractual Consent Right, can support including the Entity Defendants [non-stockholders] in a control group and imposing fiduciary duties.”); id. at *39 (discussing cases where the court “looked beyond the bounds of stock ownership to other sources of soft power”);

78 curiosity, however, there is no point to be served by pondering these questions

further here. And there is certainly no reason to answer them.375

Blue v. Fireman, 2022 WL 593899, at *16 (Del. Ch. Feb. 28, 2022) (observing that even though “stock ownership is the traditional vehicle through which outsiders gain voting power, [] holding stock is not a prerequisite to exercising voting control that carries the weight of fiduciary duties”); SJ Opinion at *5–6 (discussing the “inherent coercion” doctrine in the context of minority blockholders acting as controlling stockholders); with Lawrence Hamermesh et al., Optimizing the World’s Leading Corporate Law: A 20-Year Retrospective and Look Ahead 6 (Harv. L. Sch. Program on Corp. Governance, Discussion Paper No. 2021-12, 2021), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=3954998 (“[W]e propose limiting the concept of ‘controlling stockholder’ to the situation where a stockholder’s voting power gives it at least negative power over the company’s future, in the sense of acting as a practical impediment to any change of control.”) (“Hamermesh”); Corwin, 125 A.3d at 307 (“In addressing whether KKR was a controlling stockholder, the Chancellor was focused on the reality that in cases where a party that did not have majority control of the entity’s voting stock was found to be a controlling stockholder, the Court of Chancery, consistent with the instructions of this Court, looked for a combination of potent voting power and management control such that the stockholder could be deemed to have effective control of the board without actually owning a majority of stock.”). 375 In justifying his decision to assume certain points and skip over others when deciding a motion to dismiss, Chancellor Chandler explained, “[i]t has been said that ‘[t]he art of life is the art of avoiding pain; and he is the best pilot, who steers clearest of the rocks and shoals with which it is beset.’ Accordingly, I steer a course that will be more comfortable for all involved.” MCG Cap. Corp. v. Maginn, 2010 WL 1782271, at *13 (Del. Ch. May 5, 2010) (quoting Thomas Jefferson, The Jeffersonian Cyclopedia: A Comprehensive Collection of the Views of Thomas Jefferson 503 (John P. Foley ed., Funk & Wagnalls Co. 1900)). While the controlling stockholder issue, in particular, calls out for guidance from this court and ultimately our Supreme Court, I “steer a course” that avoids the “rocks and shoals” of unsettled questions ever mindful that, unlike my judicial colleagues, I soon will inhabit a place where I am not burdened with the effects of my answers on future cases. See, e.g., State ex rel. Smith v. Carey, 112 A.2d 26, 28 (Del. 1955) (“[T]he expression of dictum is ordinarily to be avoided.”); Gatz Props., LLC v. Auriga Cap. Corp., 59 A.3d 1206, 1220 (Del. 2012) (“To the extent Delaware judges wish to stray beyond those issues and, without making any definitive pronouncements, ruminate on what the proper direction of Delaware law should be, there are appropriate platforms, such as law review articles, the classroom, continuing legal education presentations, and keynote speeches.”); United

79 The parties have proffered evidence on both sides of the controlling

stockholder issue, the board-level conflicts issues, and the “Corwin cleansing” issue

(particularly regarding the quality of the disclosures made to Tesla stockholders).376

This is not a case where business judgment deference is obviously justified from

undisputed or clearly proven facts. Whether by virtue of Elon’s control,377 or by

States v. Leon, 468 U.S. 897, 963 (1984) (Stevens, J., concurring in part) (“[W]hen the Court goes beyond what is necessary to decide the case before it, it can only encourage the perception that it is pursuing its own notions of wise social policy, rather than adhering to its judicial role.”). 376 With regard to board-level conflicts, I acknowledge Plaintiffs’ arguments that each member of the Tesla Board, save Denholm, was either interested or lacked independence with respect to the Acquisition. I have already reviewed the relevant evidence in that regard as I introduced each Tesla Board member in the Background section of this opinion. Suffice it to say, there is a bona fide dispute regarding whether a majority of the Tesla Board was conflicted as it considered, negotiated and ultimately approved the Acquisition. There is, therefore, a factual basis to justify an assumption that entire fairness is the standard of review on this basis alone. 377 I pause here to emphasize that the source of Elon’s control was hotly disputed. Plaintiffs focused at trial on Elon’s “managerial supremacy,” not his stock ownership or the voting power flowing from his stock. POB at 51 (quoting Cysive, 836 A.2d at 553). Of course, that argument brings the controlling stockholder debate in clear focus. See Hamermesh, at 36 (“Being valuable to the company does not make an executive a controlling stockholder, nor does it implicate the concerns underlying Lynch—namely, the potential to use affirmative voting power to unseat directors and implement transactions that the minority stockholders do not like, and use blocking voting power to impede other transactions.”); Matt Levine, Elon Musk Never Wanted to be CEO, Money Stuff, Bloomberg Law (July 13, 2021), https://news.bloomberglaw.com/banking-law/matt- levines-money-stuff-elon-musk-never-wanted-to-be-ceo (“[T]his is a matter of being a charismatic founder-CEO, not a controlling shareholder. The fact that [Elon] owns 18% or 22% of Tesla’s stock is not what gives him power over Tesla; what gives him power over Tesla is that he is the CEO and product architect and visionary and social media manager, and it would die without him, or so he and the board and let’s face it the shareholders think. This has nothing to do with his shareholder voting power or his ability

80 virtue of irreconcilable board-level conflicts,378 there is a basis for assuming that

entire fairness is the governing standard of review. Accordingly, I will give no

deference to Elon (or his fellow Tesla Board members) and will review Plaintiffs’

breach of fiduciary claim with the highest degree of scrutiny recognized in our law.

or inability, as a matter of technical corporate governance, to remove directors who disagree with him. It has to do with his personality, and his job as CEO, and the love that retail shareholders have for him, and the general backdrop that boards of directors of public tech companies tend to be very deferential to charismatic founder-CEOs regardless of how many shares they own.”). Again, I have chosen not to enter into the fray of this debate, as the outcome does not depend on whether Elon is or is not a controller (or a controlling stockholder, if that is different). In avoiding the question, I take some comfort in the observation of a noted scholar that “some ex ante doubt about controller status” may better incentivize boards to “be strict about cleansing mechanisms.” Ann Lipton, Will He or Won’t He?, Law Professor Blogs Network (July 17, 2021), https:// lawprofessors.typepad.com/business_law/2021/07/will-he-or-wont-he.html (observing that the Court could reach its verdict in this case without deciding the controlling stockholder issue). 378 In this regard, this case presents yet another question not yet answered in Delaware, at least not directly. Each of the allegedly conflicted directors was asked directly, under oath, whether he made his decision regarding the Acquisition based on conflicted motivations or whether he considered only the best interests of Tesla and its stockholders. Each arguably conflicted director credibly testified (and, in detail, explained how) he made his decision consistent with his duty of loyalty. Yet the facts implicating the potential for self-interest or lack of independence, all similar to scenarios where Delaware courts have found a reasonably conceivable disabling conflict on pled facts, were proven at trial (e.g., familial ties, personal friendships, “thick” business relationships, cross-investments, etc.). This raises the question whether credible (and convincing) testimony revealing loyal decision making can overcome proven facts revealing recognized scenarios where the potential for conflict exists. Here again, I raise but do not answer the question.

81 2. The Acquisition Was Entirely Fair

“The concept of fairness has two basic aspects: fair dealing and fair

price.”379 Fair dealing (or fair process) “embraces questions of when the transaction

was timed, how it was initiated, structured, negotiated, disclosed to the directors, and

how the approvals of the directors and the stockholders were obtained.”380 Fair price

“relates to the economic and financial considerations of the proposed merger,

including all relevant factors: assets, market value, earnings, future prospects, and

any other elements that affect the intrinsic or inherent value of a company’s

stock.”381

Entire fairness is a composite. “Although the two aspects may be examined

separately, ‘the test for fairness is not a bifurcated one as between fair dealing and

price. All aspects of the issue must be examined as a whole since the question is one

of entire fairness.’”382 And while it is generally understood that “perfection is not

379 Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del. 1983); see also Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1163 (Del. 1995) (“Technicolor II”) (explaining that under entire fairness review, the defendant (absent a burden-shifting) must prove “to the court’s satisfaction that the transaction was the product of both fair dealing and fair price”) (internal quotation marks omitted). 380 Weinberger, 457 A.2d at 711. 381 Id. 382 Trados, 73 A.3d at 56 (citing Weinberger, 457 A.2d at 711); see also Owen v. Cannon, 2015 WL 3819204, at *32 (Del. Ch. June 17, 2015) (“Under the entire fairness standard, I must make a unitary conclusion as to whether the Merger was entirely fair.”).

82 possible, or expected” when designing and executing a deal process,383 “[e]vidence

of fair dealing [or not] has significant probative value to demonstrate the fairness of

the price obtained.”384 As our Supreme Court has explained, though, “[t]he

paramount consideration [] is whether the price was a fair one.”385 Much like the

idiom “all roads lead to Rome,” in our law, while there are necessary stops along the

way, all roads in the realm of entire fairness ultimately lead to fair price.386

383 Weinberger, 457 A.2d at 709 n.11; Technicolor II, 663 A.2d at 1179 (“Thus, ‘perfection is not possible, or expected’ as a condition precedent to a judicial determination of entire fairness.”) (citation omitted); see also Brinckerhoff v. Texas E. Prod. Pipeline Co., LLC, 986 A.2d 370, 395 (Del. Ch. 2010) (“Perfection is an unattainable standard that Delaware law does not require, even in a transaction with a controller.”). 384 Ams. Mining Corp. v. Theriault, 51 A.3d 1213, 1244 (Del. 2012); see also Reis, 28 A.3d at 467 (“A strong record of fair dealing can influence the fair price inquiry, reinforcing the unitary nature of the entire fairness test. The converse is equally true: process can infect price.”); Trados, 73 A.3d at 78 (“As the Delaware Supreme Court has recognized, an unfair process can infect the price, result in a finding of breach, and warrant a potential remedy.”); Kahn v. Tremont Corp., 694 A.2d 422, 432 (Del. 1997) (“[H]ere, the process is so intertwined with price that under Weinberger’s unitary standard a finding that the price negotiated by the Special Committee might have been fair does not save the result.”). 385 Ams. Mining Corp., 51 A.3d at 1244. 386 See, e.g., eBay Domestic Hldgs., Inc. v. Newmark, 16 A.3d 1, 42 (Del. Ch. 2010) (“Price, however, is the paramount consideration because procedural aspects of the deal are circumstantial evidence of whether the price is fair.”); Weinberger, 457 A.2d at 711 (“[I]n a non-fraudulent transaction we recognize that price may be the preponderant consideration outweighing other features of the merger.”); 2 Donald J. Wolfe & Michael A. Pittenger, Corporate and Commercial Practice in the Delaware Court of Chancery, § 16.09[c], 16-126 (2d ed. 2020) (“[T]he Court of Chancery has been reluctant to exercise its discretion in favor of awarding monetary damages when plaintiffs receive a fair price in a transaction that does not comport with entire fairness solely because of an unfair process.”); Oliver v. Boston Univ., 2006 WL 1064169, at *25 n.239 (Del. Ch. Apr. 14, 2006) (finding of fair price precluded damages (except nominal damages) even when there was “no process to protect the interests of the minority shareholders”) (emphasis added).

83 That fair price is the preponderant consideration in entire fairness review

makes perfect sense. Just as “[a] strong record of fair dealing can influence the fair

price inquiry,”387 a demonstrably fair price is inconsistent with the notion that a

fiduciary disloyally attempted to channel value to himself or third parties at the

expense of the beneficiaries of his duties.388 That being said, this court has held that

a fair price “does not ameliorate a process that was beyond unfair.”389 “Factors such

as coercion, the misuse of confidential information, secret conflicts, or fraud could

387 Reis, 28 A.3d at 467. 388 See, e.g., Ams. Mining Corp., 51 A.3d at 1253 (finding that “defendants breached their duty of loyalty” by channeling value away from stockholders through the exchange of “over $3 billion worth of actual cash value for something that was worth much less”); In re Orchard Enters., Inc. S’holder Litig., 88 A.3d 1, 36 (Del. Ch. 2014) (“[T]he members of the Board . . . owed a duty of loyalty to the stockholders to seek the alternative that maximized the value of their residual claims without regard to the particular interests of the controller.”); Macrophage Therapeutics, Inc. v. Goldberg, 2021 WL 2582967, at *17 (Del. Ch. June 23, 2021) (finding evidence that a conflicted fiduciary channeled consideration away from stockholders to himself supported the archetypical case of breach of the duty of loyalty). 389 In re Nine Sys. Corp. S’holders Litig., 2014 WL 4383127, at *1 (Del. Ch. Sept. 4, 2014); see also id. at *3 “[A]lthough [the transaction at issue] was approved and implemented at a fair price, [it] was not entirely fair because of the Defendants’ grossly unfair dealing.”) (emphasis added); Ravenswood Inv. Co., L.P. v. Estate of Winmill, 2018 WL 1410860, at *17 (Del. Ch. Mar. 21, 2018) (observing that the court “arguably could end the [entire fairness] analysis” after holding that “Defendants failed to prove fair process”), aff’d, 210 A.3d 705 (Del. 2019) (TABLE); William Penn P’ship v. Saliba, 13 A.3d 749, 756–57 (Del. 2011) (“A party does not meet the entire fairness standard simply by showing that the price fell within a reasonable range that would be considered fair.”).

84 lead a court to hold that a transaction that fell within the range of fairness was

nevertheless unfair compared to what faithful fiduciaries could have achieved.”390

Turning briefly to the burden of proof, when a transaction is subject to entire

fairness review, the burden of persuasion typically rests with the defendant, but the

burden can shift to the stockholder challenging the transaction if the defendant

“show[s] that the transaction was approved either by an independent board majority

(or in the alternative, a special committee of independent directors) or, assuming

certain conditions, by an informed vote of the majority of the minority

shareholders.”391 In this case, the parties dispute who bears the burden of persuasion

and, given the many genuine disputes of material fact at play, I was unable to decide

that issue prior to trial.392 Having now deliberated the evidence, “[f]or reasons of

390 Basho Techs. Holdco B, LLC v. Georgetown Basho Invs., LLC, 2018 WL 3326693, at *37 (Del. Ch. July 6, 2018), aff’d sub nom Davenport v. Basho Techs. Holdco B, LLC, 221 A.3d 100 (Del. 2019) (TABLE); ACP Master, Ltd. v. Sprint Corp., 2017 WL 341142, at *19 (Del. Ch. July 21, 2017) (same), aff’d, 184 A.3d 1291 (Del. 2018). To be clear, given the unitary nature of the entire fairness inquiry, “the fact that the directors did not follow a fair process does not [alone] constitute a separate breach of duty.” Trados, 73 A.3d at 78. Instead, the failure to execute a demonstrably fair process will force the fiduciary “to prove at trial that the [transaction at issue] was entirely fair”––if she succeeds, she will defeat the breach of fiduciary duty claim; if she does not, she will be held liable. Id.; see also Frederick Hsu Living Tr. v. Oak Hill Cap. P’rs III, L.P., 2020 WL 2111476, at *43 (Del. Ch. May 4, 2020) (“Because this decision has found that the defendants’ actions were entirely fair, there was no fiduciary breach . . . .”). 391 In re S. Peru Copper Corp. S’holder Deriv. Litig., 52 A.3d 761, 788 (Del. Ch. 2011), aff’d sub nom. Ams. Mining Corp. v. Theriault, 51 A.3d 1213 (Del. 2012). 392 See SJ Opinion at *7 n.54.

85 efficiency and clarity of logic,” I have determined that I need not decide the burden

of proof question and may, instead, “jump right into the thick of the fairness

inquiry.”393 In my view, the evidence favoring the defense is that compelling. 394

Before addressing the merits, I cannot help but observe that Elon (and the rest

of the Tesla Board members) likely could have avoided this expensive and time-

consuming litigation had they just adopted more objectively evident procedural

protections. Delaware law incentivizes parties “to employ deal techniques that

provide protection to [] stockholders that [are] substantially equivalent to arm’s

length bargaining.”395 That Elon and the Tesla Board failed to follow this clear

guidance and yet prevailed here should not minimize those incentives or dilute the

393 Cysive, 836 A.2d at 553 (noting that “[t]he intermediate issue of burden-shifting might possibly be of moment in some cases but not in this one”); see also In re Dole Food Co., Inc. S’holder Litig., 2015 WL 5052214, at *4 (Del. Ch. Aug. 27, 2015) (stating that “the Delaware Supreme Court has explained that the real-world benefit of burden-shifting is ‘modest’ and only outcome-determinative in the ‘very few cases’ where the ‘evidence is in equipoise’”) (quoting Ams. Mining Corp., 51 A.3d at 1242). 394 I emphasize here that the court’s “judgment concerning ‘fairness’ will inevitably constitute a judicial judgment that in some respects is reflective of subjective reactions to the facts of a case.” Cinerama Inc. v. Technicolor, Inc., 663 A.2d 1134, 1140 (Del. Ch. 1994) (“Technicolor I”), aff’d, 663 A.2d 1156 (Del. 1995). The standard is not “endlessly elastic”; it is, instead, “a standard which in one set of circumstances or another reasonable minds might apply differently.” Id. 395 Lawrence A. Hamermesh & Michael L. Wachter, The Importance of Being Dismissive: The Efficiency Role of Pleading Stage Evaluation of Shareholder Litigation, 42 J. Corp. L. 597, 638 (2017) (collecting cases); see also Andrew F. Tuch, Reassessing Self-Dealing: Between No Conflict and Fairness, 88 Fordham L. Rev. 939, 977 (2019) (observing that “interested directors nevertheless have powerful incentives to invoke exceptions before the transaction occurs”).

86 implications of the onerous entire fairness standard of review. Their choices

constricted the presumptive path to business judgment deference and subjected

Elon’s conduct to post-trial judicial second-guessing. In other words, if Chancery

opinions are “parables,”396 let this be a parable of unnecessary peril, despite the

outcome.397

a. Fair Process

As I begin my review of the evidence regarding the Tesla Board’s deal

process, I am mindful that my assumptions justifying entire fairness review carry

certain implications. In the controlling stockholder analysis, “[t]he requisite degree

of control can be shown to exist generally or with regard to the particular transaction

that is being challenged.”398 In either circumstance, this court has recognized that

396 See William B. Chandler III, Our National Challenge: A Blueprint for Restoring the Public Trust, 6 U. St. Thomas L. J. 421, 423 (Winter 2009) (“[T]he opinions of the Court of Chancery [are] akin to parables; that is, they read like morality stories describing the behavior of directors and managers, both the good behavior and the bad.”). 397 This point cannot be emphasized enough. There was a right way to structure the deal process within Tesla that likely would have obviated the need for litigation and judicial second guessing of fiduciary conduct. First and foremost, Elon should have stepped away from the Tesla Board’s consideration of the Acquisition entirely, providing targeted input only when asked to do so under clearly recorded protocols. The Tesla Board should have formed a special committee comprised of indisputably independent directors, even if that meant it was a committee of one. The decision to submit the Acquisition for approval by a majority of the minority of Tesla’s stockholders was laudable, and had the deal process otherwise been more compliant with the guidance provided by this court and our Supreme Court over many decades, it is likely there would be no basis to challenge the stockholder vote as uninformed. Of course, none of that happened. 398 Carsanaro v. Bloodhound Techs., Inc., 65 A.3d 618, 659 (Del. Ch. 2013).

87 the controlling stockholder brings with him into the boardroom an element of

“inherent coercion.”399 Thus, in keeping with an assumption that Elon possesses

some sort of general “managerial control” over Tesla and the Tesla Board, as

asserted by Plaintiffs,400 I searched during my deliberations for persuasive evidence

that Elon exploited the coercion inherent in his status as a controller to influence the

Tesla Board’s decision-making with regard to this “particular transaction.”401

As discussed below, the evidence reveals that any control Elon may have

attempted to wield in connection with the Acquisition was effectively neutralized by

a board focused on the bona fides of the Acquisition, with an indisputably

independent director leading the way.402 Elon did not “engage[] in pressure tactics

that went beyond ordinary advocacy to encompass aggressive, threatening,

disruptive, or punitive behavior.”403 In other words, even assuming Elon had the

399 See In re Pure Resources, Inc. S’holders Litig., 808 A.2d 421, 436 (Del. Ch. 2002); SJ Opinion at *5–6. 400 POB at 51. 401 Carsanaro, 65 A.3d at 659. 402 See Basho Techs., 2018 WL 3326693, at *28 (“Invariably, the facts and circumstances surrounding the particular transaction will loom large. Probative evidence can include statements by participants or other contemporaneous evidence indicating that a defendant was in fact exercising control over a decision.”). 403 Voigt, 2020 WL 614999, at *13; cf. Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1114, 1119 (Del. 1994) (observing that the controller made threats to the board to get his way); In re Dole Food, 2015 WL 5052214, at *5 (“Criticizing [the controller] was unthinkable. On the rare occasions in the record where [he] was challenged, he responded

88 ability to exercise control over the Tesla Board, the credible evidence produced at

trial shows that he simply did not do so with respect to the Acquisition. 404 To be

sure, his presence in the boardroom, at times, was problematic. In particular, as

described below, Elon’s recusal from deliberations was fluid and the evidence

reveals that, when he was present, he simply could not help but to “voice [his]

opinion, obviously.”405 But the preponderance of the evidence reveals that Elon’s

influence did not degrade the entire fairness of the Acquisition.406

aggressively . . . .”); Basho Techs., 2018 WL 3326693, at *28 (finding that the plaintiffs proved at trial that the controller exercised effective control over the company “for purposes of the decision to consummate the [disputed transaction]” as a result of a combination of factors). I note that none of the factors listed in Basho are present here. 404 See Odyssey P’rs, L.P. v. Fleming Cos., Inc., 735 A.2d 386 (Del. Ch. 1999) (holding that the majority stockholder did not exercise de facto control over the holding company’s board of directors); see also Superior Vision Servs., Inc. v. ReliaStar Life Ins. Co., 2006 WL 2521426, at *4 (Del. Ch. Aug. 25, 2006) (“[T]he focus of the inquiry has been on the de facto power of a significant (but less than majority) shareholder, which, when coupled with other factors, gives that shareholder the ability to dominate the corporate decision-making process. The concern is that the significant shareholder will use its power to obtain (or compel) favorable actions by the board to the ultimate detriment of other shareholders.”). 405 Elon Dep. 284:3–4. 406 See Emerald P’rs v. Berlin, 2003 WL 21003437, at *23 (Del. Ch. Apr. 28, 2003) (“Of greater concern is that Hall and/or Berlin were present at some of those meetings. Where director conduct is reviewed under the entire fairness standard, process laxity of this kind cannot be condoned, and (as this Court has found) it should not have been allowed to occur. Neither Hall nor Berlin should have been present at any of the non-affiliated directors’ meetings or deliberations, or allowed to have any direct contact with their advisors. To the extent that did occur, however inadvertently, it must be regarded as some evidence of unfair dealing. But, in this case, that evidence does not overcome the preponderating force of the other credible evidence which persuades this Court that the

89 I have also assumed that a majority of the Tesla Board was conflicted, either

by self-interest in the Acquisition or by a lack of independence. Elon certainly has

a factual basis to challenge that assumption, but there is also a factual basis to

support it. As I considered the Tesla Board’s process, therefore, I was mindful of

the conflicts and scrutinized carefully each director’s decision-making and rationale

for supporting the Acquisition. Ultimately, under the direction and influence of a

“disinterested decisionmaker,” Denholm, I am satisfied that the Tesla fiduciaries

placed the interests of Tesla stockholders ahead of their own.407

i. Process Flaws

The process flaws flow principally from Elon’s apparent inability to

acknowledge his clear conflict of interest and separate himself from Tesla’s

consideration of the Acquisition. Although the Tesla Board conditioned the

Acquisition on the approval of a majority of disinterested stockholders, for reasons

unexplained, it did not implement the other standard protection—an independent

special committee.408 With no formal independent negotiating body to manage

non-affiliated directors were, in fact, independent-and acted independently-of Hall.”), aff’d, 840 A.2d 641 (Del. 2003). 407 Principles of Corp. Governance § 5.02 (Am. L. Inst. 1994) (“[A] corporation’s interest will be better protected if it is independently represented in negotiating the transaction by a person who has no conflict of interest in the transaction.”). 408 See In re John Q. Hammons Hotels, Inc. S’holder Litig., 2009 WL 3165613, at *12 (Del. Ch. Oct. 2, 2009) (noting that a “majority of the minority vote serves as a complement

90 conflicts, Elon was permitted to participate in the deal process to a degree greater

than he should have been:

- Elon had several communications (undisclosed to Tesla’s Board) with SolarCity’s management about the Acquisition.409 For example, without any approval or knowledge of the Tesla Board, Elon declared to Lyndon that Tesla would acquire SolarCity, and later assured Lyndon that Tesla would extend a bridge loan to SolarCity.410

- Having made the declaration to Lyndon, Elon then pressed the Tesla Board to consider the Acquisition on several occasions.411 And, unbeknownst to the Tesla Board, he directed Tesla’s CFO to prepare a financial analysis of a potential transaction before first presenting his proposal that Tesla acquire SolarCity to the Tesla Board.412

to, and a check on, the special committee,” and emphasizing that the formation of the special committee is still “paramount” in providing procedural protection to stockholders in conflicted transactions). Surprisingly, there is no clear explanation in the trial record for why the Tesla Board elected not to form a special committee. See, e.g., Tr. 2133:1–21 (Denholm) (acknowledging there was no special committee but not explaining why that was so); Foster Dep. 220:17–222:5 (“I have no idea what advice, if any, Wachtell Lipton gave Tesla as regards forming or not forming a special committee.”); Kimbal Dep. 106:18– 107:9 (unable to explain why Tesla did not form a special committee). To the extent Plaintiffs would have me surmise that the failure to form a special committee was somehow Elon’s doing, there is simply no evidence to support that. Indeed, Elon was not asked a single question about the formation of a special committee over the course of two depositions or two days of trial testimony. 409 JX 1451; Tr. 1755:21–24, 1756:11–22 (Lyndon); Tr. 2101:9–2103:5 (Denholm). 410 Tr. 1755:21–24, 1756:11–22 (Lyndon); Tr. 2101:9–2103:5 (Denholm); JX 2789 at 274:4–13. Of course, a bridge loan was not extended. 411 E.g., JX 902; JX 1131. 412 Wheeler Dep. 30:8–31:7. But, as explained both above and below, the Tesla Board rebuffed Elon until it determined the timing was right for Tesla.

91 - Once the Tesla Board agreed to explore the Acquisition, Elon participated in the selection of Tesla’s outside deal counsel.413

- Once the Tesla Board decided to pursue the Acquisition, Elon reviewed Tesla’s offer letter and the blog post announcing the first proposal.414

- Elon was involved in preliminary discussions regarding price during Evercore’s initial presentation and explained why a 30% premium—higher than Evercore recommended but still in the range of fairness—might be needed to close the deal.415

- Elon was in frequent communication with Evercore outside the boardroom throughout the process, obtaining regular updates on timing and diligence.416

- Elon self-published the Master Plan Part Deux in the middle of negotiations in an apparent attempt to garner Tesla stockholder support for the Acquisition while the Tesla Board was still considering Tesla’s options.417

413 Tr. 1755:11–16 (Lyndon); Tr. 162:23–163:12, 265:7–12 (Elon); JX 27; JX 777; JX 3226 at 8. Even though Elon should not have been involved in the selection of counsel to advise the Tesla Board, as explained above, I am convinced that Wachtell was a qualified, independent advisor, not beholden to Elon in any way. 414 JX 1228; JX 1231 at 114–22; JX 1224. According to Elon, he reviewed the materials “to explain to the public . . . the rationale for an acquisition. But this was, of course, premised on a successful negotiation run by independent board members.” Tr. 279:23– 280:6 (Elon). 415 JX 1238 at 1–2; JX 1239 at 5–6. As explained, this conversation ultimately did not set the price paid, as the Tesla Board, led by Denholm, negotiated the price down well below the initial offer range. 416 See Tr. 1521:2–1522:21, 1563:14–1564:4 (McBean). As noted above, the preponderance of the evidence suggests the purpose of these meetings was to speed up diligence, not to influence the bankers regarding substantive aspects of the Acquisition. 417 JX 1618; Tr. 574:8–22, 576:9–19 (Kimbal); JX 1606. Although the Master Plan Part Deux did discuss “a sustainable energy economy” and the integration of “energy generation and storage,” it also focused on self-driving capabilities, electric “heavy-duty trucks” and

92 - When Evercore decided to recommend that the Tesla Board lower its offer, it informed Elon of that advice before its meeting with the Tesla Board.418

- Elon was present for part of a Tesla Board meeting where the Tesla Board discussed the revised offer for SolarCity.419

- Before the Tesla stockholder vote, Elon publicly demonstrated the (inoperable) Solar Roof and made promises about the timing of the product launch to the market.420

high passenger-density urban transport,” along with ride-sharing. JX 1618. And, while the Tesla Board members did not know Elon was going to publish the Master Plan Part Deux, the contents of the plan were well-known to Tesla Board members and the public. See Tr. 600:6–601:15 (Kimbal) (testifying that “[b]efore” Part Deux was published “we talked about it”); Tr. 83:10–84:5 (Elon) (“As for what is in the master plan part deux, these issues were all discussed at the board multiple times. So they were fully aware that this was, in fact, the plan. . . . [I]n fact, if you just summed up prior statements of what we were going to do, I think almost everything, if not everything, that was said in various disparate public statement and was discussed at multiple board meetings was in that secret master plan part deux. Because, in fact, it was not secret.”). Elon’s testimony is corroborated by an Oppenheimer report about the Master Plan Part Deux. See JX 1617 at 1 (“That TSLA plans to move into higher powered vehicles like semi and pick-up trucks, introduce/coordinate a fleet of autonomous driving vehicles, and sell integrated solar and energy storage systems will not surprise many investors.”) (emphasis added). 418 JX 1619; JX 1655; Tr. 1592:20–24 (McBean). This conversation appears to be no more than Evercore providing Elon with an update of its analysis; as noted, Elon did not oppose lowering the price. 419 JX 1673; Tr. 1597:16–1599:14 (McBean). But, as McBean credibly testified, Elon was “not part of the discussion where we made any decisions.” Tr. 1602:13–22 (McBean); see also McBean Dep. 290:6–12 (“I believe his view was that the strategic rationale was still intact and we should take all of the information that we learned during diligence in our perspective on value. But, again, when it came down to the board deliberations on whether and when to go back to SolarCity, he recused himself.”). 420 Tr. 343:2–9 (Elon); JX 2303 at 9. Although the Solar Roof demonstration was intended to garner stockholder support for the Acquisition, these statements either occurred after the stockholder vote, were qualified or were accurate. I am satisfied investors knew the Solar Roof was a part of Tesla’s “vision for the future” and a “goal,” not a ready-for-market product offering. JX 2206; JX 2220.

93 - Elon’s brother, Kimbal, was not recused from Tesla Board discussions or the vote to approve the Acquisition.421 Other arguably conflicted Tesla directors likewise were not recused.422

Elon’s involvement was problematic because Tesla “should have been able to

negotiate [] unhindered” by his “dominating hand.”423 If these facts comprised the

entirety of the deal process, one would be justified in characterizing the process as

broken. But they do not. The Tesla Board’s process included several redeeming

features that emulated arms-length bargaining to the benefit of Tesla stockholders.

ii. Process Strengths

As noted, an inquiry into fair process studies “how [the transaction] was

initiated, structured, negotiated, disclosed to the directors, and how the approvals of

the directors and the stockholders were obtained.”424 I consider these and other

relevant factors below.

Timing. Plaintiffs assert that Elon bailed out SolarCity on a schedule that

worked for him.425 But there was no bailout and the facts illustrate the timing was

421 PTO ¶ 56. 422 See, e.g., JX 2121 at 68–81 (detailing the background of the Acquisition and noting that only Elon and Gracias were recused). 423 Thorpe by Castleman v. CERBCO, Inc., 676 A.2d 436, 442 (Del. 1996). 424 Weinberger, 457 A.2d at 711. 425 POB at 43.

94 right for Tesla. Because of macroeconomic headwinds in the industry, solar

company stocks were trading at historic lows.426 The Tesla Board declined to

explore a transaction when Elon originally asked, choosing instead to pursue the

Acquisition only after Tesla had dealt with the Model X rollout and before it

attempted its biggest launch yet—the Model 3.427 And Tesla was poised to extract

full value from SolarCity to achieve its long-held mission to become a vertically

integrated alternative energy company. Its Gigafactory was massive and well-

positioned to produce batteries that could store electric power to fuel Tesla’s

growing fleet of EVs and larger batteries that could store the energy generated by

SolarCity’s solar power systems.428 The Acquisition allowed Tesla to utilize the

Gigafactory’s massive output to its fullest capacity on both fronts.

Structure. The Tesla Board conditioned the Acquisition on the approval of a

majority of disinterested stockholders.429 As one of the most extolled and powerful

protections afforded Delaware stockholders, such approval is “compelling evidence

426 Tr. 350:24–353:13 (Elon); Tr. 1662:18–1663:1 (Lyndon); Tr. 2390:22–2393:2 (Buss); JX 1234 at 36–38. 427 JX 849 at 2; JX 950 at 4; Tr. 457:4–17, 462:23–463:6 (Kimbal); Tr. 1959:7–1960:13, 1962:18–1963:3 (Denholm); Tr. 2837:23–2838:12, 2872:14–22 (Gracias). 428 JX 169 at 8; JX 2382 at 1–2; Tr. 2216:10–19 (Jurvetson); Tr. 2832:5–2833:2 (Gracias). 429 JX 1233 at 2; JX 2121 at 68; Tr. 1973:22–1974:13 (Denholm).

95 that the price was fair.”430 As noted, Tesla selected independent, top-tier advisors to

represent the Tesla Board in the Acquisition (Wachtell and Evercore). Elon and

Gracias were not involved in Evercore’s selection, but Denholm, an indisputably

independent director, was “directly involved” in the selection.431 Evercore reviewed

the solar industry as a whole before recommending SolarCity as the obvious choice

to be acquired.432 After deliberations, the Tesla Board shared that view.433 Although

Elon and Gracias were not wholly recused from Acquisition-related discussions,

430 ACP Master, 2017 WL 3421142, at *29; see also Gesoff v. IIC Indus., Inc., 902 A.2d 1130, 1148 (Del. Ch. 2006) (“[T]his court has suggested repeatedly that the presence of a non-waivable ‘majority of the minority’ provision is an indicator at trial of fairness because it disables the power of the majority stockholder to both initiate and approve the merger.”). I have given less weight to the Tesla stockholders’ approval of the Acquisition than I might have otherwise in recognition of Plaintiffs’ disclosure arguments and their argument that the magnitude of the approval vote might be overstated given the likelihood that many stockholders who approved the Acquisition also owned SolarCity stock. That being said, the stockholder vote is strong evidence against Plaintiffs’ contention that SolarCity was worth nothing––an overwhelming majority of stockholders, many of them highly sophisticated, likely would not have voted to acquire a worthless company. 431 Tr. 1965:1–14 (Denholm); Tr. 2840:13–18 (Gracias). 432 JX 2121 at 68; Tr. 1374:22–1375:10 (McBean); cf. In re Appraisal of Columbia Pipeline Gp., Inc., 2019 WL 3778370, at *29–*31 (Del. Ch. Aug. 12, 2019) (observing that favoring one buyer during the sale process was not an indicator of unfairness in that case because that party “offered higher and more certain value than the alternatives” and was “the optimal buyer”). 433 See, e.g., Tr. 1968:16–1969:8 (Denholm); Tr. 2399:14–2402:2 (Buss) (testifying that SolarCity was the clear choice and that he would not have supported an acquisition of his former company, SunPower).

96 they were recused from the final decision-making on price and from voting on the

Acquisition.434

Due Diligence Used to Lower Offer. As noted, Denholm led the diligence

and negotiations. The record reflects that Evercore was dutiful in keeping the Tesla

Board apprised of new developments and concerns, including the concerns relating

to SolarCity’s growing liquidity challenges.435 The information discovered during

the due diligence process was used to lower the price substantially—even below the

original offer range. Price increases or decreases that are the products of hard-nosed

negotiations are strong evidence of fairness.436

The Tesla Board Was Not “Dominated” by Elon. As noted, Plaintiffs assert

that the deal process was dominated by Elon,437 but the record contains several

instances where the Tesla Board simply refused to follow Elon’s wishes. Elon

brought up acquiring SolarCity in early 2016 and wanted to move quickly; the Tesla

434 JX 1233 at 5; JX 2121 at 68; Tr. 1969:19–1970:17 (Denholm); JX 1702 at 1 (special meeting where the Tesla Board decided the final offer for SolarCity); JX 1736 at 1 (special meeting where the Tesla Board approved the Acquisition). 435 Tr. 1408:7–21, 1457:3–6, 1466:6–11 (McBean). 436 See, e.g., In re Panera Bread Co., 2020 WL 506684, at *19–20 (Del. Ch. Jan. 31, 2020) (noting that “extraction of multiple price increases” indicated fairness); Dell, Inc. v. Magnetar Glob. Event Driven Master Fund Ltd., 177 A.3d 1, 28 (Del. 2017) (noting one indicium of a fair deal price was that the bid was raised several times). 437 POB at 51–52.

97 Board rebuffed him numerous times, telling him the timing was not right for Tesla.438

Once the Tesla Board agreed to explore an acquisition, Elon proposed an initial offer

above the range initially recommended by Evercore (though still deemed fair); the

Tesla Board declined to extend that offer and used the fruits of due diligence to

negotiate a price well below that mark.439 Elon wanted Tesla to provide a bridge

loan to SolarCity and even promised Lyndon that Tesla would do so; the Tesla Board

declined to provide the loan based on its own assessment and Evercore’s

recommendation.440 The Tesla Board also insisted on a walkaway right in case

SolarCity breached any debt covenant, which was meaningful given what it knew

about SolarCity’s liquidity challenges.441 Elon wanted to expedite the Acquisition;

the Tesla Board and Evercore took their time to do extensive diligence.442 These

facts suggest an ultimately productive board dynamic that protected the interests of

stockholders, despite Elon’s assumed “managerial supremacy” and the assumed

438 See JX 849 at 2; JX 950 at 4; JX 1049 at 6; Tr. 457:4–17 (Kimbal); Tr. 1959:7–1960:13 (Denholm); Tr. 2837:23–2838:12 (Gracias). 439 Tr. 2025:17–2026:24, 2030:5–13, 2037:1–8 (Denholm). 440 Tr. 1702:24–1703:6; 1798:3–1799:12 (Lyndon); Tr. 1517:13–16 (McBean); Tr. 2186:4–18 (Denholm). 441 See JX 2121 at 249–250 (§ 7.02(e)); JX 1588 at 28, 30; Tr. 1573:6–1575:6 (McBean). 442 Tr. 1401:1–1402:10 (McBean) (testifying that the amount of time Evercore spent on the diligence process compared to other deals was “among the highest” and that it was “a very thorough diligence process” that took “[a]bout six weeks”).

98 board-level conflicts.443 Indeed, each Tesla Board member credibly testified as to

why he or she supported the Acquisition.444

443 POB at 51. To be clear, while Elon did not dominate the Tesla Board’s process, he inexplicably was given the opportunity to attempt to influence it. As stated, that should not have happened. 444 Tr. 485:4–21 (Kimbal) (“Q. SolarCity was acquired by Tesla and is now part of the company. Do you think that acquisition made strategic sense? A. Yes. Q. Do you think it made sense for Tesla shareholders? A. Yes, absolutely. Q. Can you explain why? A. We were, at the time, considered a car company, and we had been telling the world forever that we are an alternative energy company. And we needed the world to understand our bigger vision, which we have succeed[ed] at achieving that. But to be honest, the solar industry is going to be the biggest industry in the world. It is much, much bigger than the car industry. We never saw ourselves as purely a car company. And the strategic—it made total strategic sense.”); Tr. 2173:22–2174:11 (Denholm) (“Q. Why did you vote for the transaction? A. Because I believed that it was in the best interests of Tesla shareholders to actually continue the mission of Tesla, which was to accelerate the world towards sustainable energy. And the best way to do that was to have the solar generation capability within the four walls of Tesla so that we could continue in terms of the technology journey that it would take to satisfy the mission, and I believed that it was in the best interests of all Tesla’s shareholders. Q. If you had not believed that, how would you have voted? A. I would not have voted for the deal.”); Tr. 2399:19–2402:15 (Buss) (“Q. Did you personally have a view on which target Tesla should pursue? A. Yes. It was very obvious to me. Q. And what was that view? A. Really was SolarCity. . . . [I]t was the dominant company by far. I mean, it was, I don’t know, 30, 35 percent market share. . . . And they were the lowest-cost provider out there. And they had a very good, solid roadmap for down the road. So to buy something subscale that didn’t have the cost, I wouldn’t have supported it, to be quite honest. . . . [T]he timing was beautiful, in my mind. . . . [T]hings were kind of lining up where it was like, okay, wow, we could really get this really good asset that was part of our long-term vision really at a great price . . . . I think we got it at a discount, personally.”); Tr. 2215:14–2217:15 (Jurveston) (testifying that he “thought it was in the best interests of Tesla shareholders” based on synergies and long-term strategy); Tr. 2873:7–19 (Gracias) (testifying that he was not worried about the “very short blip” in integration because, thanks to the Acquisition, Tesla is “disrupting entire industries” and “remaking the way you produce and consume energy in the world”); Tr. 2262:9–22 (Ehrenpreis) (testifying that because of the Acquisition, Tesla is “uniquely, a fully integrated, sustainable energy company and really the only one of its kind” and is “being valued as such”).

99 Market and Tesla Board Knowledge. The material aspects of the Acquisition

were known to Tesla stockholders. Tesla’s stock was well-covered by analysts and,

when news of the Acquisition hit the market, the analysts reveled in well-publicized

debates and transaction modeling.445 The market generally understood SolarCity’s

liquidity challenges.446 Some analysts called the Acquisition a bail-out;447 others

believed Tesla was getting “a steal.”448 As for the Tesla Board, its members were

well informed by Evercore about the Acquisition generally,449 and

445 See, e.g., Tr. 2653:1–2655:7 (Fischel) (discussing articles about the Acquisition, projected synergies, the motivation behind the deal, etc.); Tr. 1998:11-18 (Denholm) (testifying the public reaction to Tesla’s offer was “mixed”); JX 2839 at 162–65, 170–72 (Fischel report collecting analyst research, recommendations and observations). 446 See, e.g., JX 2852 at 10 (concluding that “[a]nalysts and news articles also discussed SolarCity’s liquidity position at length, both before and after the release of the Tesla S-4”); id. at 39–50 (detailing “SolarCity Analyst Commentary on Liquidity” and “News Commentary on Liquidity”); JX 1068 (Credit Suisse “Decrease Target Price” Report on SolarCity). 447 JX 2237 at 7–9. 448 JX 1390 at 1; see also Tr. 1998:11–18 (Denholm); JX 2839 at 162–65, 170–72. 449 See, e.g., JX 1678 (Evercore materials for July 24, 2016 meeting with Tesla Board); JX 1703 (Evercore materials for July 27, 2016 meeting with Tesla Board); JX 1746 (Evercore materials for July 30, 2016 meeting with Tesla Board).

100 about SolarCity’s liquidity issues specifically.450 The bridge loan request itself

signaled to the Tesla Board that SolarCity was urgently in need of cash.451

Denholm. Denholm emerged as an independent, powerful and positive force

during the deal process who doggedly viewed the Acquisition solely through the lens

of Tesla and its stockholders.452 She had served as chair of Tesla’s audit committee

since 2014 and was acutely aware of Tesla’s financial condition and challenges.453

She directed Evercore in its selection of acquisition targets and was actively engaged

with Evercore with respect to the development and delivery of its fairness opinion.454

450 See, e.g., JX 1588 at 28, 30 (Evercore presentation materials for the Tesla Board detailing SolarCity’s “liquidity situation” and “significant liquidity concerns,” including that “cash balances were projected to be below the revolver liquidity”); JX 1678 at 6–7 (Evercore presentation materials for the Tesla Board explaining that “[d]uring diligence, there were several key discoveries made that impact valuation,” including “liquidity concerns”); Tr. 1408:7–21 (McBean) (“Q. What was Evercore trying to convey to the Tesla board with this slide? A. This is a snapshot of SolarCity’s liquidity and cash flow, and specifically, it shows that at several points SolarCity could potentially go below the [$]116 million required by the revolver if they weren’t able to raise additional capital. Q. So this is information that the Tesla board had during the due diligence process? A. Yes.”). 451 JX 1588 at 28, 30; Tr. 1573:6–1575:6 (McBean); Tr. 2010:20–24 (Denholm) (“Q. First, was there a discussion of why SolarCity needed or was asking for a bridge loan at this point? A. Yeah, for their short-term liquidity needs that we discussed earlier.”). 452 Tr. 2133:15–21 (Denholm) (“Q. You were just one of five directors that considered and voted on the SolarCity transaction; true? A. I was one of five, but I led the process and sort of acted as the sort of corralling force. And I spent a lot of time on the due diligence itself.”). 453 Tr. 2068:19–2069:5 (Denholm). 454 Tr. 1976:20–1977:9, 2039:1–2049:8, 2050:3–20 (Denholm).

101 And, importantly, as a director who was not, and would not be, unduly influenced

by Elon, she served as an effective buffer between Elon and the Tesla Board’s deal

process.455 Her credible and unequivocal endorsement of the Acquisition is highly

persuasive evidence of its fairness.456

* * * * *

Elon was undoubtedly involved in the deal process in ways he should not have

been, but fortunately, the Tesla Board ensured nevertheless that the process led to a

fair price. And Elon did not push back against them—there were no threats, fits or

fights.457 While involved, Elon did not impede the Tesla Board’s pursuit of a fair

455 Tr. 1952:8–19 (Denholm); see also Tr. 2200:10–24 (Denholm) (testifying that she and Tesla’s general counsel “tag team[ed]” to ensure that Elon and Gracias were recused when needed); Tr. 2198:2–4 (Denholm) (testifying that she ensured Elon’s communications with Lyndon had “no impact . . . on what myself or the team or Evercore were doing”). 456 Tr. 2173:23–2174:8 (Denholm) (explaining why she endorsed the Acquisition: “Because I believed that it was in the best interests of Tesla shareholders to actually continue the mission of Tesla, which was to accelerate the world towards sustainable energy. And the best way to do that was to have the solar generation capability within the four walls of Tesla so that we could continue in terms of the technology journey that it would take to satisfy the mission, and I believed that it was in the best interests of all Tesla's shareholders.”). 457 See, e.g., Tr. 2376:18–2378:22 (Buss) (testifying credibly that Elon “never” dictated at Tesla Board meetings and that he was “not at all” worried about “retribution from Elon if [he] or the other board members disagreed with him”); Tr. 2280:24–2281:3 (Ehrenpreis) (“Q. Were you influenced in any way by any fear or concern that Mr. Musk would react negatively if you didn’t vote in favor of the transaction? A. Absolutely not.”); Tr. 2219:12–15 (Jurvetson) (“Q. Did Mr. Musk ever suggest in any way that there would be any repercussions or retribution if you disagreed about this transaction? A. No, not at all. No hint of that.”).

102 price. Tesla declared that it would enter the solar energy industry long before Elon

proposed the Acquisition; the Tesla Board decided the timing was right to acquire a

solar energy company based on an evaluation of legitimate business considerations;

Evercore did a meaningful industry survey and credibly recommended SolarCity as

the target; and the Tesla Board offered a fair price range and negotiated it down to

well below that range. In other words, despite its assumed conflicts, under

Denholm’s leadership, the Tesla Board meaningfully vetted the Acquisition. In sum,

Elon proved that the process did not “infect” the price. And “[t]he proof lies in the

results.”458

b. Fair Price

Unlike determining fair value in an appraisal case, the fair price component

of an entire fairness analysis “is not itself a remedial calculation.”459 Instead of

picking a single number, the court’s task is “to determine whether the transaction

price falls within a range of fairness.”460 This approach provides flexibility

458 Emerald P’rs, 2003 WL 21003437, at *24. 459 Reis, 28 A.3d at 465; see In re Appraisal of Dell Inc., 2016 WL 3186538, at *25–27 (Del. Ch. May 31, 2016) (distinguishing between the task of determining fair value in an appraisal action and assessing fair price in a plenary breach of fiduciary duty action), aff’d in part, rev’d in part sub nom. Dell, Inc. v. Magnetar Glob. Event Driven Master Fund Ltd, 177 A.3d 1 (Del. 2017). 460 In re Dole Foods, 2015 WL 5052214, at *33.

103 “to accommodate the reality that the value of a corporation is not a point on a line,

but a range of reasonable values.’”461

Typically, evaluating the price of a transaction for entire fairness requires the

court to consider whether the transaction was one “that a reasonable seller, under all

of the circumstances, would regard as within a range of fair value; one that such a

seller could reasonably accept.”462 Of course, in this case, the focus is on the other

side of the table; the Court’s task is to determine whether the price the buyer paid

was “a price that is within a range that reasonable men and women with access to

relevant information might [have paid].”463

To determine that range, the Court “assess[es] which [valuation]

methodologies are most appropriate under Delaware law and in light of the particular

461 In re Orchard Enters., 88 A.3d at 30 (internal quotation marks and alterations omitted); see also Reis, 28 A.3d at 466 (“[A] range of fairness permits a court to give some degree of deference to fiduciaries who have acted properly; it is not a rigid rule that permits controllers to impose barely fair transactions.”). 462 Technicolor I, 663 A.2d at 1143. 463 Kahn v. Tremont Corp., 1996 WL 145452, at *1 (Del. Ch. Mar. 21, 1996), rev’d on other grounds, 694 A.2d 442 (Del. 1997); see also Technicolor I, 663 A.2d at 1143 (“A fair price does not mean the highest price financeable or the highest price that fiduciary could afford to pay. At least in the non-self-dealing context, it means a price that is one that a reasonable seller, under all of the circumstances, would regard as within a range of fair value; one that such a seller could reasonably accept.”); see also DFC Glob. Corp. v. Muirfield Value P’rs, L.P., 172 A.3d 346, 370 (Del. 2017) (“[F]air value is just that, ‘fair.’ It does not mean the highest possible price that a company might have sold for had Warren Buffett negotiated for it on his best day and the Lenape who sold Manhattan on their worst.’”).

104 circumstances of this case.”464 “Delaware law does not have a rigid hierarchy of

valuation methodologies, nor does it have a settled formula for weighting them.”465

In our adversarial system, the parties and their experts must convince the law-trained

judge of the reliability and persuasiveness of their proffered methodology, consistent

with the other evidence presented at trial.466 In other words, in a plenary breach of

fiduciary duty action, the court’s function when assessing fair value is not to conduct

its own appraisal but to land where the preponderance of the credible and competent

evidence of value takes it.

Here, Elon presented the most persuasive evidence regarding SolarCity’s

value and the fairness of the price Tesla paid to acquire it. The evidence he presented

revealed that: (1) SolarCity was far from insolvent, as Plaintiffs argue;

(2) discounted cash flow (“DCF”) analyses are not helpful here; (3) market evidence

supports the price Tesla paid; (4) SolarCity’s current and future cash flows support

a finding of fair price; (5) Evercore’s fairness opinion and valuation work accurately

464 S. Muoio & Co. LLC v. Hallmark Ent. Invs. Co., 2011 WL 863007, at *16 (Del. Ch. Mar. 9, 2011), judgment entered, (Del. Ch. 2011), and aff’d, 35 A.3d 419 (Del. 2011). 465 Merion Cap. L.P. v. Lender Processing Servs., Inc., 2016 WL 7324170, at *30 (Del. Ch. Dec. 16, 2016). 466 Cf. In re Appraisal of Jarden Corp., 2019 WL 3244085, at *1–3, 23 (Del. Ch. July 19, 2019) (observing the unusual nature of appraisal litigation where the court must assess fair value to reach an “independent appraisal” of the target even if the parties’ proffered evidence of fair value is deemed unreliable), aff’d sub nom. Fir Tree Value Master Fund, L.P. v. Jarden Corp., 236 A.3d 313 (Del. 2020).

105 captured SolarCity’s value; and (6) the fair price analysis must account for the

substantial synergies flowing to Tesla from the Acquisition.467

For their part, Plaintiffs went “all in” on insolvency, arguing that SolarCity

was worthless when Tesla acquired it, so any price paid by Tesla was too high.468

More specifically, they rested their fair price case on four arguments: (1) SolarCity

was insolvent and lacked a viable business model; (2) SolarCity’s unaffected stock

price did not reflect non-public information regarding its liquidity issues; (3) Tesla

realized no cognizable synergies from the Acquisition; and (4) Evercore’s fairness

opinion was unreliable.469

With the battle lines drawn, I address the parties’ competing fair price

arguments in turn.

467 See DOB at 43–58. 468 See, e.g., POB at 65 (“Musk’s failure to prove solvency precludes a finding of fair price.”); Tr. 696:11–17 (Quintero) (concluding that “on a standalone basis, the equity of SolarCity was worthless”); Tr. 765:4–7 (Quintero) (testifying that SolarCity’s “equity was worthless” as of the merger date); Tr. 789:1–4 (Quintero) (“Q. Okay. So your opinion is that on a net liquidation value, SolarCity’s equity was worthless as of the merger date. Right? A. Yes, sir.”); Tr. 796:10–16 (Quintero) (testifying that SolarCity was “worthless” on a “going-concern basis”). 469 Id. at 60.

106 i. SolarCity Was Not Insolvent

At trial, Plaintiffs placed their valuation case entirely in Quintero’s hands,470

and Quintero, in turn, relied exclusively on a single valuation theory: insolvency.471

In other words, by Plaintiffs’ lights, SolarCity was “worthless” at the time of the

Acquisition.472 To be sure, Quintero offered valuation opinions as alternatives to his

insolvency opinion, but when pressed by the Court at trial, he doubled down on his

sworn testimony that SolarCity was worth nothing.473 Setting aside whether net

liquidation value is a proper methodology to value SolarCity, a point the parties

dispute,474 “[Quintero]’s conclusion that [SolarCity] is worth [] nothing is incredible

470 Plaintiffs’ other experts did not opine on valuation. DOB at 57; see Tr. 2789:10–12 (Beach) (“Q. And you are not offering any valuation opinions to this Court, correct? A. Correct.”). 471 See, e.g., JX 2840 at 6 (“Because SolarCity was not a going concern as of the Merger Date, SolarCity’s value is most appropriately determined based on a net liquidation value. Based on a net liquidation value, SolarCity’s equity was worthless as of the Merger Date.”). 472 Id. 473 Tr. 889:17–891:2 (Quintero). 474 Compare DOB at 76 (“Quintero’s net liquidation valuation, which concededly depends on his insolvency conclusion, should be rejected.”), with POB at 72 (“Plaintiffs produced a liquidation analysis from a certified distressed business valuation expert who has valued hundreds of financially troubled and insolvent companies during his career. That analysis showed SolarCity’s net liquidation value was a negative $1.952 billion.”).

107 on its face.”475 As explained in detail below, the credible evidence persuasively

demonstrated that SolarCity, while cash-strapped to a dangerous degree,476 was

solvent, valuable and never in danger of bankruptcy.477 “In the shadow of

[Quintero’s unequivocal yet unconvincing] testimony [to the contrary], as is often

the case when one swings for the fences, [Quintero] failed to make contact

altogether.”478 By relying so heavily on Quintero, in the eyes of this factfinder,

Plaintiffs undermined the credibility of their fair price case completely.

Aside from Quintero’s testimony and SolarCity’s liquidity issues, Plaintiffs

also point to two pieces of trial evidence to argue SolarCity was worthless—Bilicic’s

testimony that Lazard was “concerned about the company on a stand-alone basis

going forward,”479 and an Ernst & Young (“EY”) report that purportedly stated

475 Bardy Diagnostics, Inc. v. Hill-Rom, Inc., 2021 WL 2886188, at *26 n.244 (Del. Ch. July 9, 2021). 476 See, e.g., Tr. 207:1–3 (Elon) (testifying that “[b]oth SolarCity and Tesla needed cash”); Tr. 160:17–19 (Elon) (testifying that he “was aware that liquidity was going to be difficult in 2016 for SolarCity” and “the same is true of Tesla”). 477 Tr. 1731:22–1734:18, 1737:16–1738:7 (Lyndon); Tr. 997:18–998:9 (Serra); Tr. 2393:3–2396:2 (Buss); Tr. 1835:5–10 (Peter); Tr. 376:7–15 (Elon). 478 Bardy Diagnostics, 2021 WL 2886188, at *26; see also Trados, 73 A.3d at 68 (“[T]he threat of bankruptcy, the viability of the business plan, and the size of [the company’s] market were all concerns, but the [Plaintiffs]’ portrayal at trial was overly strident. In evaluating fairness, I have taken these issues into account, but as risks rather than mortal crises.”). 479 Tr. 429:15–430:1 (Bilicic).

108 SolarCity was not viable as a standalone entity.480 Neither dilutes Elon’s persuasive

evidence to the contrary.481

First, Bilicic’s “concern[]” that a liquidity event could “risk []damaging the

overall business” does not suggest that Lazard thought SolarCity was worthless.482

On the contrary, Lazard made clear its view that SolarCity had significant positive

value that it would transfer to Tesla in the Acquisition.483

Second, as Elon points out, “[t]he draft EY analysis on which Plaintiffs rely—

from January 2017, months after the Acquisition closed—concluded that, if

SolarCity were a standalone entity in 2017 (it was not), it might face a going concern

issue in 2017 (the year after the Acquisition closed)” in the event of certain

contingencies.484 The EY report does not prove insolvency at any time, and certainly

not as of the Acquisition.

480 JX 2398. 481 See, e.g., JX 2420 at 4 (contemporaneous valuation done by KPMG showing SolarCity was not insolvent); JX 2443 at 76–77 (Tesla’s 10-K reporting an $89 million gain on the Acquisition); JX 1599 at 9 (Evercore presentation reporting that SolarCity was not worthless); Tr. 2486:11–16 (Fischel) (testifying that “obviously, the [Tesla] directors didn’t believe [that SolarCity was worthless]”); Tr. 2497:23–2498:3 (Fischel) (“Q. And did the market believe SolarCity to be worthless? A. No. Q. Or insolvent? A. No.”). 482 Tr. 429:15–430:1 (Bilicic). 483 JX 2121 at 97–104. 484 DAB at 15 (citing JX 2398).

109 To reiterate, Plaintiffs’ failed attempt to prove insolvency did nothing to dilute

Elon’s persuasive valuation evidence. If anything, it diluted the persuasive force of

their other proffered evidence of fair price.

ii. The DCF Analyses Were Unhelpful

Quintero and Fischel both performed DCF valuations.485 I recognize that, in

certain situations, “[p]roperly conducted DCF analyses can be a useful valuation tool

to ‘corroborate’ market prices and evidence.”486 Here, however, neither expert

persuaded me that a DCF analysis is the proper method by which to value SolarCity

given the facts of this case, and so I decline to rely on the DCFs when analyzing

whether the Acquisition price was fair to Tesla’s stockholders.487 In any event, the

485 Highfields Cap., Ltd. v. AXA Fin., Inc., 939 A.2d 34, 53 (Del. Ch.), judgment entered, (Del. Ch. 2007) (explaining that a “DCF assigns a value to an enterprise by adding (1) an estimation of net cash flows that the company will generate over a period of time to (2) a terminal value equal to the future value, as of the end of the projection period, of the company’s cash flows beyond the projection period”). 486 DOB at 50 (citing In re Jarden Corp., 2019 WL 4464636, at *4 (Del. Ch. Sept. 16, 2019)). 487 Tr. 868:19–24 (Quintero) (“Q: So to be clear, you regard DCF in this case as an unreliable valuation approach? A: Yes, sir. Q: Okay. And your opinion is that, in this case, it is a highly speculative approach? A: Yes, sir.”); Tr. 2516:15–21 (Fischel) (“Q: Are you relying on a DCF for valuation here? A: I think it's relevant, but I think there’s enough market evidence, certainly, to reject the claim that SolarCity was insolvent. As I said, I don’t believe there is any evidence to support that claim.”); Tr. 2579:14–21 (Fischel) (Q: “And you believe your market values in this case are more reliable than your DCF values; right? A: Again, it depends on which value you’re talking about, but, overall, yes, I do. I believe the market evidence in this case is more probative, more reliable than an after-the-fact DCF analysis conducted by me or anybody else.”).

110 parties did not focus on DCF at trial or in their post-trial briefs, so I choose not to

dwell on it further here.488

iii. The Market Evidence of Fair Price

Delaware courts recognize that “[m]arket prices are typically viewed [as]

superior to other valuation techniques because, unlike, e.g., a single person’s

discounted cash flow model, the market price should distill the collective judgment

of the many based on all the publicly available information about a given company

and the value of its shares.”489 Market evidence is a reliable indicator of fair price,

however, only when “the evidence reveals a market value forged in the crucible of

objective market reality.”490

After a careful review of the market-based evidence presented at trial, I am

satisfied that the market was sufficiently informed to reach a reliable assessment of

488 See In re Emerging Commc’ns, Inc. S’holders Litig., 2004 WL 1305745, at *12 (Del. Ch. May 3, 2004) (“This Court views the parties’ virtual non-treatment of the comparable company valuation as a tacit concession that that alternative valuation is a ‘throwaway’ of no material significance.”); compare DOB at 54 (“Even Plaintiffs’ expert Quintero, for his now-abandoned ex post DCF analysis, employed a cost of equity below the midpoint of this range.”), with PAB at 59 (“In his Opening Brief, Musk ignores Fischel’s abandoned DCF analysis . . . .”). 489 DFC Glob., 172 A.3d at 369–70; see also id. at 366 (“[S]econd-guessing the value arrived upon by the collective views of many sophisticated parties with a real stake in the matter is hazardous.”); In re Loral Space & Commc’ns Inc., 2008 WL 42937819, at *27– 32 (Del. Ch. Sept. 19, 2008) (giving “substantial weight to the actual trading price”). 490 In re PetSmart, Inc., 2017 WL 2303599, at *27 (Del. Ch. May 26, 2017) (internal citation marks omitted).

111 SolarCity’s value. And that evidence also supports Elon’s argument that Tesla paid

a fair price for SolarCity.

The Market for SolarCity Was Efficient. Experts for both parties testified that

SolarCity traded in an “efficient market.”491 Despite that agreement, Plaintiffs

maintain that SolarCity’s stock price cannot be trusted as a proxy for value because

the market lacked information regarding the full extent of SolarCity’s liquidity

crisis.492 I disagree.

The trial evidence reveals that SolarCity accurately disclosed the existence

and terms of its debt covenants, that its covenant compliance margins decreased in

Q1 and Q2 of 2016, the potential consequences of a breach, its quarterly cash

balances and its debt maturities.493 Indeed, Plaintiffs’ expert witnesses, Moessner

and Beach, conceded that market participants were aware of the risk that SolarCity

might breach its Liquidity Covenant.494

491 Tr. 1155:3–5, 2790:10–21 (Beach); Tr. 2653:1–3 (Fischel). 492 POB at 55–57, 66 (arguing that the market did not appreciate how close SolarCity was to tripping its Liquidity Covenant, that it was deferring accounts payable, that it was delaying the release of guidance on megawatts deployed and suffering credit downgrades). 493 JX 2121 at 66–79, 83–92, 97–114, 190–92; JX 536 at 4; JX 780 at 64; JX 1072 at 4, 42; JX 1854 at 4, 50; JX 2268 at 4. 494 See Tr. 686:9–20 (Moessner); Tr. 1146:9–22 (Beach).

112 As for the deferral of accounts payable, Plaintiffs overstate the implications

of deferral on SolarCity’s overall financial health. At trial, Serra credibly testified

that the cash management strategies implemented by SolarCity reflected how

SolarCity “manag[ed] working capital appropriately” in the ordinary course of its

business.495 These strategies included working with vendors to negotiate net

payment terms.496 As always, SolarCity paid its bills.497

Plaintiffs’ argument that the market was not informed of SolarCity’s reduced

MW guidance fails because it is not true. The unrebutted trial evidence establishes

that SolarCity appropriately and timely disclosed guidance reductions consistent

with its internal projections.498

Finally, given the credible evidence presented at trial, SolarCity’s failure to

disclose information related to its credit downgrades was immaterial. After

SolarCity’s credit rating was downgraded, Bank of America (SolarCity’s principal

lender) reacted by not only continuing to transact business with SolarCity but

495 Tr. 1055:5–10, 1058:20–1059:13, 1064:11–1065:7 (Serra). 496 Tr. 1791:1–1792:10 (Lyndon); JX 794. 497 Tr. 1834:15–20 (Peter). 498 Tr. 1692:7–1699:1 (Lyndon); JX 1010 at 5, 23, 29; JX 1858 at 4; JX 3228; Tr. 887:6– 13 (Quintero) (conceding that the guidance reductions were all public before the stockholder vote).

113 seeking to deepen the lender/borrower relationship.499 If SolarCity’s largest lender

was undeterred by the change in credit rating, it is difficult to see how or why the

market would have viewed the information differently.

The Market’s Pre-Acquisition View of SolarCity. When Tesla announced its

Acquisition offer (after the market closed on June 21),500 SolarCity’s stock was

trading at $21.19 per share,501 and SolarCity had a market capitalization of

approximately $2.1 billion.502 As explained above, the market understood that

SolarCity, like many solar companies, was facing a number of headwinds, in

addition to its own liquidity crisis, and yet, despite these issues, SolarCity had value

as a stand-alone entity.503

Ultimately, the exchange ratio for the Acquisition resulted in Tesla acquiring

SolarCity for $20.35 per share of SolarCity common stock—which represents a

discount of 84 cents per share compared to SolarCity’s unaffected stock price.504

499 JX 1355 at 7–8; JX 1430 at 27; Tr. 1235:1–1238:8; 1347:24–1348:24; 1351:19–1352:7 (Van Zijl); Tr. 998:1–9 (Serra). 500 PTO ¶ 159. 501 PTO Ex. C at 11. 502 PTO Ex. D at 14. 503 Tr. 1155:3–5, 2790:10–21 (Beach) (acknowledging SolarCity operated in an efficient market); Tr. 2653:1–3 (Fischel). 504 JX 2839 ¶ 12. The parties dispute whether rumors that Elon was considering taking SolarCity private kept SolarCity’s stock price inflated until the Acquisition. Compare POB

114 This means that, even ignoring synergies, Tesla paid no premium for SolarCity as

of closing.505

At best for Plaintiffs, as Fischel persuasively testified, the Acquisition price

offered by Tesla’s Board reflected, at most, a modest premium when measured at

the time of contracting:506

at 18 (“[I]nvestment websites and newspapers reported the potential transaction, causing SolarCity’s stock price to rise nearly 25%, from $18.01 on March 1 to $22.49 on March 3. Beach found that this increase was highly statistically significant, no other information could explain the increase except for the leaks, and SolarCity’s stock price continued to be affected through June.”), with DAB 36 (“The evidence demonstrated that any increase in SolarCity’s stock price resulting from those unsubstantiated rumors dissipated over the more than three months between March 2016 and the June 2016 initial offer. As Fischel testified, the correct unaffected date for SolarCity is June 21, 2016; between March and June 2016, there were ‘all kinds of events, but no merger-related announcements.’”) (citing Tr. 2608:3–2609:4, 2656:2–2656:16 (Fischel)). McBean credibly testified that Evercore “did not believe that there was a market rumor impacting the stock price in June” because “the stock price was in decline that entire period.” Tr. 1494:2–1496:2 (McBean). Lazard, Evercore, Bank of America, J.P. Morgan, Morningstar, Oppenheimer and others used the June date (as Fischel did) for the unaffected stock price. See Tr. 2743:3–2756:22 (Beach) (relying on JX 2121 at 94; JX 1264; JX 1311; JX 1270; JX 1272; JX 2237; JX 2249; JX 3001). I am likewise persuaded that the June date is the appropriate date upon which to set SolarCity’s unaffected stock price. 505 JX 2249 at 11 (ISS Report) (“These values imply no premium for SCTY at the 0.110 exchange ratio.”); JX 2839 at 17 (“After discounting, the median price target implies a value for SolarCity stock of $24.55 as of July 31, 2016 . . . .”); id. at 130 (comparing the announced merger consideration and the actual merger consideration to standalone price targets by analysts). 506 Fischel credibly established that the premiums implied by his analysis were consistent with comparable industry transactions and comparable stock transactions. JX 2839 at 20– 21, 141–44.

115 - At the time of contracting (as opposed to closing), the merger consideration reflected a modest 14% premium to SolarCity’s unaffected stock price.507

- Analysts covering SolarCity prior to the announcement of definitive Acquisition terms valued it at a median price target of $24.55 per share (as discounted to account for forward price targets), a price that effectively implies no premium to Tesla’s offer.508

- Comparing the actual Acquisition price to estimates of SolarCity’s standalone value at the time of closing (based on comparable companies and indexing) shows Tesla paid only a small premium for SolarCity.509

Stockholder Approval Weighs in Favor of Fair Price. Absent a disclosure

violation, this court has found that approval of a merger by disinterested

507 Id. at 21. 508 Id. at 16–17, 129–30. 509 Id. at 16–17, 20–21, 36, 128, 132, 168, 208. Plaintiffs attack Fischel’s stock indexing methodology, pointing out that “this Court has rejected it” in past opinions. POB at 66 (citing Emerald P’rs, 2003 WL 21003437, at *35–36; Highfields Cap. Ltd. v. AXA Fin., Inc., 939 A.2d 34, 58 n.34 (Del. Ch. Aug. 17, 2007)). In Emerald Partners, the court called the method “counterintuitive” and remarked that “[i]t may be that the approach represents sound finance theory,” but “Emerald [] made no effort to cite any finance authority” in which “that theory [was] validated.” Emerald P’rs, 2003 WL 21003437, at *35. In Highfields Capital, the court remarked that the event study and volume study conducted by an expert was based on a “highly speculative” assumption and that a competing expert “testified that such an indexing technique was not commonly relied upon in the financial community.” Highfields Cap., 939 A.2d at 58. I need not determine whether this court has definitively rejected Fischel’s stock indexing methodology, as Plaintiffs say, or whether the decisions cited by Plaintiffs simply rejected the methodology as applied under the specific facts of those cases, as Elon says, because I have not relied upon stock indexing to find that the Acquisition price was entirely fair.

116 stockholders is “compelling evidence that the price was fair.”510 Here, nearly 85%

of the votes cast by Tesla stockholders—largely extremely sophisticated institutional

investors511—were in favor of the Acquisition.512

Against the backdrop of Plaintiffs’ insolvency hypothesis, Fischel persuasively

testified that the Tesla stockholder vote is “the ultimate market test”: “anybody who

believed that Tesla was purchasing an insolvent company, all they had to do was

reject the offer . . . [a]nd, similarly, for Tesla shareholders who thought that it was a

good deal, they could vote in favor of the offer.”513 Fischel explained that the

affirmative vote of Tesla’s minority stockholders was particularly compelling

evidence of fairness given the extensive pre-vote disclosure regarding SolarCity’s

financial condition (including a “voluminous discussion” of liquidity) and the

robust, mixed public commentary,514 including Glass Lewis’ characterization of the

deal as a “bailout” of SolarCity with a process “steeped in conflicts.”515

510 ACP Master, 2017 WL 3421142, at *29; see also Technicolor II, 663 A.2d at 1176 (stockholder approval constitutes “substantial evidence of fairness”). 511 JX 2237 at 2; Tr. 2529:9–2530:1 (Fischel). 512 JX 2320 at 2. 513 Tr. 2518:12–2519:22 (Fischel). 514 Tr. 2490:7–2491:14, 2494:3–16, 2495:2–14 (Fischel); JX 2839 at 6–7, 26, 162–65; JX 2852 at 38–50, 59–62. 515 JX 2237 at 4, 7. Here again, I acknowledge Plaintiffs’ arguments regarding the quality (or not) of the Tesla stockholder vote. Even with these issues in mind, however, I cannot,

117 While Plaintiffs have identified several disclosure deficiencies they say tainted

the Tesla stockholder vote, they seem particularly troubled by the fact that Elon

“made false statements and withheld material information about the Solar Roof.”516

Specifically, Plaintiffs contend Elon “secured stockholder approval with false claims

that the Solar Roof would be deployed at ‘volume’ in less than a year from the

Acquisition.”517 The argument betrays Plaintiffs’ temporal confusion. Elon’s

remark about the Solar Roof, made at a Tesla stockholder meeting, could not have

influenced stockholder approval because he made the remark after the special

election voting polls had closed.518 Tesla filings and press releases regarding the

Solar Roof presentation were qualified with language that made clear the product

was part of Tesla’s “vision for the future”519 and something “the combined company

will be able to create.”520 Elon’s statements, including his tweet, were optimistic—

as factfinder, conclude that such a large majority of Tesla’s stockholders would have voted to approve a transaction whereby Tesla would acquire an insolvent solar energy company, as Plaintiffs would have me believe. 516 POB at 58. 517 PAB at 2. 518 JX 2313 at 2, 4 (edited transcript of November 17, 2016 Tesla stockholder meeting). 519 JX 2220 at 2. 520 JX 2128 at 1; JX 2156 at 1.

118 perhaps overly so—but Tesla did, in fact, expect a product launch in mid-2017.521

Importantly, SolarCity had been working on the Solar Roof since late 2015; it was

not a prop created to secure the vote.522 And it is fully functional today.523

iv. SolarCity’s Cash Flows Support a Finding of Fair Price

SolarCity has also provided and will continue to provide valuable cash flows

to Tesla. As noted, part of SolarCity’s value came from the long-term cash flows it

generated.524 The moment Tesla acquired SolarCity, it became the beneficiary of

521 JX 2197 at 6 (“Production to start in mid-2017”); Tr. 1857:15–18 (Peter); JX 2241 (Elon tweet from November 4, 2016: “first solar roof deployments will start next summer”). 522 Tr. 1848:23–1849:1 (Peter); see also JX 2128 at 1; JX 2156 at 1; JX 2206 at 2, 4, 7; JX 2220 at 2; JX 2197 at 6; Tr. 342:6–344:24 (Elon). 523 See JX 2899. 524 See, e.g., JX 2853 at 16 (“In exchange for incurring [] upfront costs, SolarCity received long-term cash flows . . . .”); id. (“SolarCity was consistently financed through the capital markets in order to continue its growth and to generate long-term cash flow streams.”). Tr. 930:3–4 (Serra) (testifying that the “cumulative amount of cash flow would be $2.2 billion value today”; Tr. 964:4–7 (Serra) (“Q. So of that 2.2 billion that we talked about, how much of that did you think SolarCity could monetize? A. All of it.”) Tr. 1216:2–1217:1) (Van Zijil) (“Q. So the actual cash flow stream that that equates to is more than 2.2 billion? A. Yeah. It would probably be upwards of 3 billion by my reckoning. But I focused on the present value number, which was 2.2. . . . . Q: So by the time the acquisition closed, had that 2.2 billion retained value been diminished by any newer transactions? A. Not to my knowledge, no. Q. Was this 2.2 billion encumbered money? A. My understanding is it was not encumbered in any way. Q. Was it available for monetization? A. In my judgment, yes.”); Tr. 2844:2–19 (Gracias) (“Look, we were - - if I remember correctly, it was about $2 billion, a little over $2 billion Tesla paid for the company. And I knew the financials of SolarCity because I was a director there. They had about -- assets worth about $3 billion. And on the balance sheet there were leases, solar leases, that were worth about 3 billion. And Tesla was going to get those leases, plus it

119 these cash flows. In fact, Tesla has already realized approximately $1 billion in

nominal cash flows and expects to realize at least $2 billion more from the legacy

SolarCity systems.525 As Elon noted, “even if we shut down the business, the

$3 billion in cash flow is 50 percent higher than the acquisition price that we paid.”526

v. Evercore’s Fairness Opinion Supports a Finding of Fair Price

Evercore credibly opined that the Acquisition was fair to Tesla

stockholders.527 While this court has been understandably skeptical of fairness

opinions in certain circumstances,528 there is no reason to doubt Evercore in this case.

Evercore’s analysis and projections were based on “extensive discussion and

analysis” between Tesla and Evercore, as well as weeks of due diligence.529 Indeed,

if Evercore was beholden to Elon, as Plaintiffs assert, it is difficult to see why it

was going to get all the other infrastructure, the factory in Buffalo, all their assets, and get the customer base, which was -- remember, this is a 20-year lock-in on the customer base that we can then integrate with the rest of our business. That struck me as a very good deal for us, to pay 2-, $2-1/2 billion for a business that, on its face, was going to cash flow to us 3 billion off of leases alone.”). 525 Tr. 349:4–350:23, 404:6–16 (Elon); Tr. 2309:24–2310:4 (Ehrenpreis); JX 2971 at 40, 58; Tr. 2857:2–21 (Gracias). 526 Tr. 349:4–350:1 (Elon). 527 JX 2121 at 83.

POB at 67 (citing Gerber, 67 A.3d at 420; In re El Paso P’rs, L.P. Deriv. Litig., 2015 528

WL 1815846, at *21–22 (Del. Ch. Apr. 20, 2015)). 529 Tr. 1459:12–17, 1461:16–1464:2 (McBean).

120 would immediately inform the Tesla Board about SolarCity’s liquidity problems and

recommend lowering Tesla’s offer to below the initial offer range (and the range

endorsed by Elon) before SolarCity had even responded to Tesla’s initial

overtures.530 McBean credibly testified that Evercore and its fairness committee

would “never sign off on a deal or fairness opinion . . . for a fee” because Evercore’s

“reputation . . . is far too important to us.”531 While one would expect any banker to

make that claim, Evercore’s conduct, in this case, backed up that bold assertion. The

fairness opinion is further evidence of fair price.

vi. The Price is Justified by Potential Synergies

“The components of value in an acquisition might be considered to be two:

the going concern value of the firm as currently organized and managed and the

‘synergistic value’ to be created by the changes that the bidder contemplates

(e.g., new management, cost efficiencies, etc.).”532 “This second component will

530 JX 1471; JX 1588 at 28, 30; JX 1619; Tr. 1513:18–1515:24, 1573:6–1575:6, 1592:20– 24 (McBean). 531 Tr. 1466:16–1467:19 (McBean). 532 Technicolor I, 663 A.2d at 1143; see also Weinberger, 457 A.2d at 711 (holding that “fair price relates to the economic and financial considerations of the proposed merger, including all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company’s stock”) (emphasis added).

121 vary to some extent among bidders. It is the expectation of such synergies that

allows a rational bidder to pay a premium when he negotiates an acquisition.”533

Plaintiffs assert that “[t]he Court should not consider synergies at all because

they are speculative and Defendant provided no evidence that Tesla has actually

realized any synergies.”534 While I agree that “speculative elements of value” should

not be considered when appraising a company or assessing fair price,535 “Delaware

law is clear that ‘elements of future value, including the nature of the enterprise,

which are known or susceptible of proof as of the date of the merger and not the

product of speculation, may be considered.”536

At trial, Fischel credibly explained that “the relevant economic question in

this case is the value of the purchased assets, what Tesla acquired in the SolarCity

transaction, [and] what the value of those assets were to Tesla.” 537 I agree and am

533 Technicolor I, 663 A.2d at 1143. As McBean credibly testified, paying a premium for synergies is standard in M&A deals, especially for a high-growth target like SolarCity. Tr. 1393:2–16 (McBean). 534 POB at 67. 535 Cede & Co. v. Technicolor, Inc., 684 A.2d 289, 299 (Del. 1996) (citing Weinberger, 457 A.2d at 713) (emphasis in original). 536 In re Dole Food, 2015 WL 5052214, at *36 (quoting Del. Open MRI Radiology Assocs., P.A. v. Kessler, 898 A.2d 290, 314 (Del. Ch. 2006)). 537 Tr. 2483:12–16 (Fischel).

122 convinced synergies were a strong rationale for the Acquisition and they are properly

considered in assessing the value of SolarCity in Tesla’s hands.

Plaintiffs argue there is no contemporaneous evidence to support cognizable

synergies.538 On the contrary, synergies were a focus of the Tesla Board from the

very beginning of its consideration, and there is evidence to support them. At trial,

numerous directors testified they were laser-focused on the potential synergies

throughout the deal negotiations.539 Evercore carefully analyzed and discussed

538 POB at 67. 539 JX 1228 at 3; JX 1238 at 1; Tr. 1982:12–1983:9 (Denholm); Tr. 1389:20–1390:6 (McBean) (testifying that the Board did not approve the deal “to bail out SolarCity” but was “really focused on the strategic rationale and the combination of solar and storage”); Tr. 485:4–21 (Kimbal) (“Q. SolarCity was acquired by Tesla and is now part of the company. Do you think that acquisition made strategic sense? A. Yes. Q. Do you think it made sense for Tesla shareholders? A. Yes, absolutely. Q. Can you explain why? A. We were, at the time, considered a car company, and we had been telling the world forever that we are an alternative energy company. And we needed the world to understand our bigger vision, which we have succeed[ed] at achieving that. But to be honest, the solar industry is going to be the biggest industry in the world. It is much, much bigger than the car industry. We never saw ourselves as purely a car company. And the strategic—it made total strategic sense.”); Tr. 2173:22–2174:11 (Denholm) (“Q. Why did you vote for the transaction? A. Because I believed that it was in the best interests of Tesla shareholders to actually continue the mission of Tesla, which was to accelerate the world towards sustainable energy. And the best way to do that was to have the solar generation capability within the four walls of Tesla so that we could continue in terms of the technology journey that it would take to satisfy the mission, and I believed that it was in the best interests of all Tesla’s shareholders. Q. If you had not believed that, how would you have voted? A. I would not have voted for the deal.”); Tr. 2399:19–2402:15 (Buss) (testifying that “the timing was beautiful” for Tesla to “get this really good asset that was part of our long- term vision really at a great price”); Tr. 2215:14–2217:15 (Jurveston) (testifying that he “thought it was in the best interests of Tesla shareholders” based on synergies and long- term strategy); Tr. 2873:7–19 (Gracias) (testifying that he was not worried about the “very short blip” in integration because, thanks to the Acquisition, Tesla is “disrupting

123 potential synergies with the Tesla Board prior to the Acquisition,

contemporaneously projecting $122 million to $235 million in synergies in 2017

alone.540 And prior to the close of the Acquisition, Tesla identified and disclosed to

stockholders three categories of synergies that it expected to realize: (1) cost

synergies (from “[s]ales and marketing efficiencies” and “corporate and overhead

savings”); (2) revenue synergies (from leveraging Tesla’s retail capabilities and the

companies’ overlapping customer bases); and (3) global strategic synergies (by

creating the “world’s only integrated sustainable energy company”).541

Internally, Tesla expected the Acquisition to result in cost synergies of at least

$150 million per year,542 which Fischel confirmed was supported by comparable

industry deals and empirical studies.543 Even if it is not reasonable to assume that

entire industries” and “remaking the way you produce and consume energy in the world”); Tr. 2262:9–22 (Ehrenpreis) (testifying that because of the Acquisition, Tesla is “uniquely, a fully integrated, sustainable energy company and really the only one of its kind” which is “being valued as such”). 540 JX 1735 at 21. 541 JX 2220 at 1, 4–5; Tr. 2542:16–2543:6 (Fischel). 542 Tr. 2483:12–16 (Fischel). Evercore contemporaneously confirmed that the $150 million estimate was below the middle of a $122–$235 million range of the “most ‘easily identifiable’” cost synergies. JX 1735 at 21. 543 JX 2839 at 21–24, 145–48.

124 Tesla will enjoy these synergies in perpetuity, the anticipated annual synergies alone

support the relatively modest (if any) premium Tesla paid for SolarCity.544

The combined company has also achieved revenue synergies through cross-

selling its EV, solar and energy storage products. As Reicher testified, the

Acquisition allowed Tesla to “capitalize on the solar company’s customer base and

core competencies in serving those customers.”545 Tesla reported in 2020 that it has

seen “an increase in cross-selling within the energy business as more than 40% of

our residential solar customers opt for at least one Powerwall.”546

Plaintiffs point to facts that demonstrate Tesla and SolarCity have yet to

combine completely and effectively. For example, post-acquisition, Tesla

terminated thousands of its solar employees,547 including the installation

workforce,548 and solar deployments lowered after Elon repurposed former

SolarCity employees to assist with the Model 3 rollout.549 And Tesla still relies on

544 JX 2220 at 4–5. 545 JX 2841 at 8. 546 JX 3182 at 13. 547 JX 2731 at 5. 548 Tr. 660:22–661:23 (Moessner). 549 JX 2863 at 8 (“[F]or about 18 months, almost 2 years, we had to divert a tremendous amount of resources—well, we had to basically take resources from everywhere else in the company and apply them to the Model 3 production, fixing the Model 3 production ramp . . . . So for about 1.5 years, we unfortunately stripped Tesla Energy of engineering

125 other companies to supply certain parts for its solar business.550 All true. But the

fact that SolarCity has yet to be fully integrated into Tesla does not diminish the

substantial synergies already achieved, to say nothing of the massive potential for

synergies yet to be achieved.551 Nor does it account for SolarCity’s long-term cash

flows that Tesla now collects.

As a final note, while the synergistic effects of the Acquisition are still

unfolding, the astronomic rise in Tesla’s stock price post-Acquisition is noteworthy.

Although the relevant inquiry in an entire fairness analysis is whether the acquisition

target was worth the price paid when the deal was consummated,552 hindsight

suggests that Elon is right when he asserts that, once valued as a car company, Tesla

and other resources and even took the cell production lines that were meant for Powerwall and Powerpack and redirected them to the car because we didn’t have enough cells.”); Tr. 347:8–21 (Elon); Tr. 486:12–487:17 (Kimbal). 550 See Straubel Dep. 54:6–24; JX 2147; Tr. 660:19–21, 661:24–662:20 (Moessner). 551 Reicher’s expert report extensively detailed the immense growth potential of the solar industry in particular. See JX 2841 at 9–28. 552 See, e.g., Ryan v. Tad’s Enters., Inc., 709 A.2d 682, 690 (Del. Ch. 1996) (noting that “the defendants have failed to carry their burden of demonstrating the entire fairness of the Asset Sale and Merger at the time the board approved them”) (emphasis added), aff’d, 693 A.2d 1082 (Del. 1997) (TABLE); Oliver, 2006 WL 1064169, at *29 (“The BU Defendants have failed to demonstrate that the price paid . . . was fair at the time of the merger.”) (emphasis added).

126 is now valued as “a first-of-its-kind, vertically integrated clean energy company.”553

Whether the Acquisition played a large or small part in Tesla’s impressive growth is

not clear, but there can be no doubt that the combination with SolarCity has allowed

Tesla to become what it has for years told the market and its stockholders it strives

to be––an agent of change that will “accelerate the world’s transition to sustainable

energy” by “help[ing] to expedite the move from a mine-and-burn hydrocarbon

economy towards a solar electric economy.”554

In instances where there are process infirmities, the Court is obliged to study

fair price even more carefully. I have done that here. After careful consideration, I

am persuaded Elon presented credible evidence that Tesla paid a fair price for

SolarCity. Plaintiffs answered by proffering incredible testimony that SolarCity was

insolvent, and then provided some “also ran” theories on value that their experts did

not ultimately endorse, or at least not persuasively so. Given this, I have no credible

basis in the evidence to conclude that a “fairer price” was available, and therefore,

553 DOB at 40. To the extent Plaintiffs are critical of this hindsight look, I note that they have also looked in the rearview mirror to support their fair price argument as they recount the post-Acquisition integration challenges discussed above. 554 JX 12 at 1; Tr. 86:18–20 (Elon). As of this writing, Tesla’s market cap was nearly a trillion dollars. Tesla, Inc. (TSLA), Yahoo! Finance (last accessed Apr. 27, 2022), https://finance.yahoo.com/quote/TSLA/.

127 no basis to conclude that the price paid was not entirely fair. 555 Indeed, the price

was, in my view, not “near the low end of a range of fairness,”556 but “entirely” fair

in the truest sense of the word. That conclusion is not consistent with a finding that

Elon breached his fiduciary duty.557 Accordingly, I am satisfied he did not.

B. Plaintiffs’ Other Surviving Claims

Plaintiffs’ other surviving claims against Elon include derivative claims for

unjust enrichment and waste. I address them in turn.

555 Conceivably, given the process flaws, a price “near the low end of a range of fairness” might not have satisfied entire fairness review. In re Nine Sys., 2014 WL 4383127, at *47; see also In re Dole Food, 2015 WL 5052214, at *2 (holding that stockholders were entitled not only to a fair price but a “fairer price”). But I need not entertain that possibility here. With the Tesla Board’s deal process front of mind, and after careful consideration, for the reasons just explained, Elon’s compelling “evidence on price fairness was ultimately persuasive,” such that I can conclude the Acquisition was entirely fair. Trados, 73 A.3d at 66; see also Valean Pharm. Int’l v. Jerney, 921 A.2d 732, 748–49 (Del. Ch. 2007) (“The court’s finding that ICN’s management and board used an unfair process . . . does not end the court’s inquiry because it is possible that the pricing terms were so fair as to render the transaction entirely fair.”) (emphasis added); Oak Hill Cap. P’rs, 2020 WL 2111476, at *36–43 (finding that the transaction was entirely fair despite a process that “fell short” of being fair). 556 In re Nine Sys., 2014 WL 4383127, at *47. 557 I note that while defense verdicts after an entire fairness review of fiduciary conduct are not commonplace––hence the advisability of structuring transactions to avoid such scrutiny as a matter of law––this court and scholars have emphasized that the standard of review is not necessarily outcome-determinative. See, e.g., Ezcorp Inc. Consulting Agreement Deriv. Litig., 2016 WL 301245, at *28 (Del. Ch. Jan. 25, 2016) (“[E]xperience . . . has shown that the application of entire fairness is not outcome-determinative and that defendants prevail under this standard of review with some degree of frequency.”); id. at *28 n.21 (collecting extensive case law and commentary).

128 1. Unjust Enrichment

Plaintiffs allege the Acquisition unjustly enriched Elon because the

Acquisition “was specifically intended to bailout SolarCity and spread across all of

Tesla’s stockholders the loss that would otherwise be experienced only by

Defendant[] Elon Musk.”558 The elements of unjust enrichment are: (1) an

enrichment; (2) an impoverishment; (3) a relation between the enrichment and

impoverishment; (4) the absence of justification; and (5) the absence of a remedy

provided by law.559

This claim essentially mirrors Plaintiffs’ breach of fiduciary duty claims.560

Because the Acquisition was entirely fair, there was no underlying impoverishment.

And “[i]f there is no underlying [impoverishment], there is no unjust enrichment.”561

The claim fails.

2. Waste

Plaintiffs also allege the Acquisition is wasteful, or “so one-sided that no

business person of ordinary, sound judgment could conclude that Tesla received

558 Compl. ¶ 304. 559 Cantor Fitzgerald, L.P. v. Cantor, 724 A.2d 571, 585 (Del. Ch. 1998). 560 SJ Opinion at *3 n.11. 561 Tornetta v. Musk, 250 A.3d 793, 813 (Del. Ch. 2019).

129 adequate value in the transaction.”562 To prevail on this claim, Plaintiffs were

obliged to prove that “no person of ordinary sound business judgment could view

the benefits received in the transaction as a fair exchange for the consideration paid

by the corporation.”563 “[I]f there is a good faith judgment that in the circumstances

the transaction is worthwhile, there should be no finding of waste, even if the fact

finder would conclude ex post that the transaction was unreasonably risky.”564

In this case, the Acquisition was entirely fair and therefore cannot be considered

wasteful.565

C. Fees and Costs

“Delaware follows the ‘American Rule,’ which provides that each party is

generally expected to pay its own attorneys’ fees regardless of the outcome of the

562 Compl. ¶ 323. 563 Harbor Fin. P’rs v. Huizenga, 751 A.2d 879, 892 (Del. Ch. 1999) (quoting Michelson v. Duncan, 407 A.2d 211, 224 (Del. 1979)). 564 Brehm v. Eisner, 746 A.2d 244, 263 (Del. 2000) (quoting Lewis v. Vogelstein, 699 A.2d 327, 336 (Del. Ch. 1997)). 565 See, e.g., Freedman v. Adams, 58 A.3d 414, 417 (Del. 2013) (“To recover on a claim of corporate waste, the plaintiffs must shoulder the burden of proving that the exchange was so one sided that no business person of ordinary, sound judgment would conclude that the corporation has received adequate consideration.”) (quoting In re the Walt Disney Co. Deriv. Litig., 906 A.2d 27, 74 (Del. 2006)); Quadrant Structured Prods. Co., Ltd. v. Vertin, 102 A.3d 155, 193 (Del. Ch. 2014) (“It is hard to conceive of a situation where the challenged transactions would not constitute a breach of fiduciary duty, but would constitute waste.”).

130 litigation.”566 While he has asked for his counsel fees to be reimbursed, Elon has

not provided a reason to stray from the American Rule here. Each party will pay

their own attorneys’ fees per the terms of counsels’ engagement. As for costs, as

noted, Elon likely could have avoided the need for judicial review of his conduct as

a Tesla fiduciary had he simply followed the ground rules of good corporate

governance in conflict transactions. He declined to do so. For that reason, I decline

to award him prevailing party costs.567

III. CONCLUSION

For the foregoing reasons, my verdict is for the defense on all claims. A final

order and judgment to this effect will be entered today.

566 Shawe v. Etling, 157 A.3d 142, 149 (Del. 2017). 567 Ct. Ch. R. 54(d) (“Except when express provision therefor is made either in a statute or in these Rules, costs shall be allowed as of course to the prevailing party unless the Court otherwise directs.”) (emphasis added); Donovan v. Del. Water and Air Res. Comm’n, 358 A.2d 717, 722–23 (Del. 1976) (“Determining when costs are awarded and when they are not is, in our judgment, a matter of judicial discretion . . . .”).