Elon Musk Sued By Tesla Shareholders Over Money-Losing Business Founded by Cousins

Musk is summoned to explain why Tesla acquired a money-losing business founded by his cousins.

Elon Musk delivers a speech as SolarCity chairman during the Climate Summit for Local Leaders at the Paris Townhall in Paris, France on December 4, 2015.

While his electric vehicle and rocket businesses are thriving, not every Elon Musk-led business is a wild success. And for some of his bad business decisions, shareholders demand an explanation. This week, the billionaire entrepreneur is summoned to a court to testify about SolarCity, a company that Tesla (TSLA) acquired in 2016 for $2.5 billion for no obvious reason other than the fact that it was founded by Musk’s cousins.

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Musk is called to the Delaware Court of Chancery Monday to answer questions about the 2016 acquisition, a deal that he hailed at the time as a “no brainer” but has failed to turn a profit.

SolarCity was founded by Musk’s cousins, Peter and Lyndon Rive, in 2006. The company generated net losses of $769 million and $375 million in 2015 and 2014, respectively, before being bought out by Tesla.

Seven shareholder lawsuits, merged into one, alleged that the acquisition was rife with conflicts of interest and that Tesla directors had overlooked SolarCity’s financial distress and failed their fiduciary duties in bowing to Musk’s wishes.

The acquisition is a “clear black eye” for Musk and Tesla, Wedbush Securities analyst Daniel Ives told MarketWatch.

“It basically was putting good money after bad. For all the successes and all of the unimaginable heights Musk has achieved, this is one of the lowlights,” Ives said. “I just think Musk and Tesla underestimated the challenges and the hurdles that the business brings.”

In a deposition, reported by The Wall Street Journal, Musk said, “SolarCity I think would have done just fine by itself and Tesla would have done fine by itself, but in the long-term, they are better together. And that is what the future will show.”

Last August, a judge approved a $60 million settlement that resolved claims made against all Tesla directors except Musk without any admission of fault. That left Musk as the sole remaining defendant.

The trial beginning Monday in the Delaware Chancery Court has been delayed for over a year due to the coronavirus pandemic. Plaintiffs include several pension funds that owned Tesla stock.

In its 2020 annual report, Tesla said, “We believe that claims challenging the SolarCity acquisition are without merit and intend to defend against them vigorously. We are unable to estimate the possible loss or range of loss, if any, associated with these claims.”

Elon Musk Sued By Tesla Shareholders Over Money-Losing Business Founded by Cousins