Tesla CEO Elon Musk knew at the time of the 2016 acquisition of SolarCity that the solar installer was facing a liquidity crunch, according to newly unearthed emails between Musk and ex-SolarCity finance chief Brad Buss.
On Friday, legal transparency advocates PlainSite published thousands of pages of unsealed court documents, including depositions of Musk and other Tesla board members, shedding light on how and why the electric car company spent $2.6 billion to acquire SolarCity, where Musk was chairman and the biggest shareholder.
The documents, which were originally obtained by Think Computer Foundation, are part of a lawsuit originally filed in September 2016, by Tesla shareholders who alleged that the SolarCity deal amounted to a bailout for Musk and his other businesses, including SpaceX.
Investors were skeptical of the deal when Tesla proposed it in June 2016, with the stock plunging more than 10% on the announcement. According to the emails that have just been disclosed, Musk wrote to Buss a few months later, on Sept. 18, that to get investors on board, Tesla needed to get a handle on its liquidity problem and sign a letter of intent for a contract with Panasonic.
"Three things need to happen to change investor sentiment: SolarCity solving its liquidity crisis, an LOI with Panasonic to address solar cell production risk, and a joint product demo," Musk wrote. "Should be able to do all those before the shareholder vote."
The lawsuit is just part of the blowback that Tesla and Musk are now receiving, three years after acquiring SolarCity, whose business has since deteriorated. Walmart is also suing Tesla for breach of contract, gross negligence and failure to live up to industry standards over solar installations that caught fire on the rooftops of some stores.
Prior to the acquisition, there were all sorts of entanglements between Tesla, SolarCity and SpaceX, Musk's aerospace company.
Among the documents just unsealed is a proxy analysis from Institutional Shareholder Services, which provides guidelines on corporate governance. The plaintiffs in the suit — Tesla Motors, Inc. Stockholder Litigation — are using the analysis as part of their case to illustrate the web of conflict and to show that Musk was desperate to save all three companies when SolarCity's growth slowed and debts mounted.
Here's what ISS wrote:
"Of Tesla Motors' seven directors, six have (or had until recently) relationships with SolarCity Corp. and/or Space Exploration Technologies Corp. (SpaceX) as directors, officers or investors. Tesla CEO Elon Musk is the largest shareholder in all three companies, and serves as Chairman of SolarCity and CEO of SpaceX; and these companies have extensive business and financial relationships with each other. For example, SolarCity raises funds from SpaceX through bond sales, and purchases batteries from Tesla. SolarCity has an agreement to supply solar power to Tesla facilities. While these relationships have the potential to benefit all three companies, they also expose shareholders of Tesla to the risks of companies in different industries."
The plaintiffs allege that Musk was able to get the SolarCity acquisition approved only by misrepresenting the financial well-being of the solar installer, saying it should be cash-flow positive within six months. No other financial experts agreed with that assessment, the plaintiffs argued, and due diligence by outside firms including Evercore was rushed to hide SolarCity's troubles.
Shareholders also allege in the suit that Musk planned the unveiling of a product that didn't yet function — glass solar roof tiles — to convince investors that there was real intellectual property and a product close to commercial viability.
A Delaware Chancery Court is now weighing pre-trial motions from both sides in the suit.
Musk's email to Buss came after the CEO learned of investor resistance to the deal.
In a chain of emails starting in mid-September 2016, after the acquisition was agreed upon but before shareholders had voted, Musk was informed of the apprehension by Jeff Evanson, the company's former vice president of global investor relations, and Todd Maron, who was general counsel at the time.
Maron wrote to Musk that T. Rowe Price stood unanimously against the SolarCity deal because it was concerned about capital requirements and added financial risk, wasn't sold on the "technological innovation" that the combination would produce and found the SolarCity model "vulnerable" because it was tied to net metering and tax credits.
The newly unredacted documents also provide details from Musk's depositions. They show that he spent time berating the plaintiff's attorney, calling him "reprehensible," "a bad human being," "a shameful person," and a "trickster." He asked if the lawyer's only motivation in life was money, said he should rethink his life choices, and claimed that by representing the plaintiff, he was "attacking sustainable energy."
During Musk's first deposition on June 1, 2019, Musk acknowledged to the court something he had never disclosed to shareholders — that the company reallocated every possible employee from the solar division (formerly SolarCity) to work on the Model 3 car, a moved that effectively starved the solar business and ruined its chance to grow.
"I took everyone from solar and said, 'Instead of working on solar, you need to work on the Model 3 program.' And as a result, solar suffered as you would expect," Musk said. "That would include engineering, management, sales, service. Everything that could possibly be redirected towards the Model 3 program was so redirected. This was the right course of action for the company."
Musk also revealed that even by June 2019, Tesla hadn't made the glass solar roof tiles into a viable commercial product.
"The solar roof is itself a difficult product, a very difficult product," he said. "Nobody has yet succeeded in such a product. Many people have tried, many companies have tried and none have succeeded."
On Friday afternoon, Musk announced version 3 of the Tesla Solar Roof tile, which would supposedly fulfill the company's original promises made back in 2016, and hosted a webcast to discuss it.
Tesla is currently accepting orders, and customers have to pay a $100 non-refundable fee. Tesla didn't say on the call when or where the tiles would first be installed. It plans to manufacture them at its factory in Buffalo, New York.