Jason M. Halper, Joshua Apfelroth, and William P. Mills are partners at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader publication by Mr. Halper, Mr. Apfelroth, Mr. Mills, James Fee, and Winnie Chen, and is part of the Delaware law series; links to other posts in the series are available here.
Related research from the Program on Corporate Governance includes Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).
On March 28, 2018, in In re Tesla Motors, Inc. Stockholder Litigation, the Delaware Court of Chancery denied a motion to dismiss a lawsuit brought by stockholders of Tesla Motors, Inc. (“Tesla” or the “Company”). The plaintiffs alleged that Tesla’s Board of Directors, along with its Chairman and CEO, Elon Musk, breached their fiduciary duties by approving the $2.6 billion acquisition of SolarCity, which allegedly benefitted SolarCity stockholders to the detriment of Tesla stockholders. At the time of the transaction, Mr. Musk was the Chairman of the Board, Chief Executive Officer and Chief Product Architect of Tesla, and owned approximately 22.1% of Tesla’s outstanding common stock. He was also Chairman of the Board of SolarCity and SolarCity’s largest stockholder, owning approximately 21.9% of SolarCity’s outstanding common stock. In their motion to dismiss, the defendants argued that Mr. Musk was not a controlling stockholder of Tesla and that, because the transaction was approved by an uncoerced, fully informed majority vote of disinterested stockholders, the transaction should be reviewed under the deferential business judgment rule in accordance with Corwin v. KKR Financial Holdings LLC. The Court denied the motion to dismiss and found that “it is reasonably conceivable that Musk, as a controlling stockholder, controlled the Tesla Board in connection with the Acquisition.” If so proven, the transaction will be reviewed under the more stringent entire fairness standard. The decision is the latest in a line of cases (as discussed in our prior post) in which Delaware courts have found that minority stockholders can, in certain circumstances, exercise corporate control.
