Lexis Nexis - Case Brief

Not a Lexis Advance subscriber? Try it out for free.

Law School Case Brief

In re Tesla Motors Stockholder Litig. - 2018 Del. Ch. LEXIS 102 (Ch. Mar. 28, 2018)

Rule:

In a complaint seeking to deem a minority stockholder a controlling stockholder, the requisite degree of control can be shown to exist generally or with regard to the particular transaction that is being challenged. Stated differently, when pleading that a minority blockholder is a controlling stockholder, the plaintiff may plead either (or both) of the following: (1) that the minority blockholder actually dominated and controlled the corporation, its board or the deciding committee with respect to the challenged transaction or (2) that the minority blockholder actually dominated and controlled the majority of the board generally. Whether a large blockholder is so powerful as to have obtained the status of a controlling stockholder is intensely factual and it is a difficult question to resolve on the pleadings.

Facts:

Tesla, Inc. (Tesla) acquired SolarCity Corporation (SolarCity) in 2016 (Acquisition). Following the announcement of the proposed transaction, Tesla stockholders filed several derivative and putative class action lawsuits in this Court alleging that the Tesla board of directors (Board) and Elon Musk (Musk), Tesla's Chairman and Chief Executive Officer, as a conflicted controller breached their fiduciary duties by approving the Acquisition for the benefit of SolarCity stakeholders and to the detriment of Tesla stockholders. While it was not required to do so under Delaware law, the Board submitted the Acquisition to Tesla stockholders for approval. A majority voted in favor of the transaction. Following the stockholder vote, Defendants moved to dismiss the now-consolidated complaint under Corwin v. KKR Financial Holdings LLC (Corwin). Plaintiffs oppose the motion, in part, on the ground that Corwin does not apply because the Acquisition involved a conflicted controlling stockholder, Musk. Musk owns less than a majority of Tesla's outstanding voting stock. According to Defendants, Plaintiffs have failed to plead facts that would support a reasonable inference that Musk, as a minority blockholder, exercised either control over Tesla generally or control over Tesla's Board during its consideration and approval of the Acquisition.

Issue:

Have the Tesla stockholders adequately pled that Tesla's chair and CEO, who is a minority shareholder, is a controlling stockholder of Tesla?

Answer:

Yes

Conclusion:

The court held that as Tesla stockholders satisfied their burden to plead that Musk’s status as a controlling stockholder was reasonably conceivable, defendants' motion to dismiss was improper; there were sufficient facts to support a reasonable inference that Musk exercised his influence as a controlling stockholder, with respect to the acquisition, due to Musk’s voting influence, his domination of the Board during the process leading up to the acquisition against the backdrop of his extraordinary influence within the company generally, Board level conflicts that diminished the Board's resistance to his influence, and Tesla’s and Musk’s own acknowledgements of his outsized influence.

Access the full text case Not a Lexis Advance subscriber? Try it out for free.
Be Sure You're Prepared for Class