SolarCity Corp (NASDAQ:SCTY)’s potential merger with Tesla Motors Inc (NASDAQ:TSLA) could be very messy. Not only are investors not thrilled over the possible bailout, many analysts don’t see a bright future. Also, various reports are coming out about what exactly happened before the announcement.
SolarCity Corp’s Messy Tesla Merger
Just before the market-rattling Brexit, one of the biggest business headlines was Elon Musk wanting to merge SolarCity and Tesla. The primary idea in Musk’s head is to integrate SolarCity’s solar panels and the Tesla Powerwall home battery system.
The “no-brainer” $2.8 billion all-stock deal wasn’t met with much enthusiasm from investors. Tesla shares crumbled more than 20 percent, while SolarCity shares didn’t exactly set the world on fire.
Nevertheless, it’s going to move ahead. But it could be very messy for Musk and the two firms.
One of the glaring problems is the potential conflict of interest that may dog the merger. Musk is the chairman and largest shareholder of both firms. His cousin, Lyndon Rive, is the CEO of SolarCity. Also, it is apparent to analysts that Musk wants to milk Tesla’s brand power to increase SolarCity’s market value.
Most important of all, what could make the merger even messier is investor resistance. They aren’t happy with the proposal at all. Their displeasure could be amplified if the merger goes ahead based on the votes of the three directors: Peter Rive, CTO of SolarCity, Lyndon Rive and Musk.
The fact that Musk has lost more than $1 billion on the news could make him rethink the merger altogether, which many doubt.
Because of these potential conflicts, Wall Street analysts downgraded the stocks. For instance, Morgan Stanley analyst Adam Jonas downgraded Tesla and lowered his target price on the shares by 26 percent to $245.
SolarCity shares were up 1.22 percent at $22.47 during Monday’s trading session. Tesla shares jumped one percent to $195.05
Bylaws Changed Amid Fight by SolarCity Corp Shareholders
If a merger goes ahead then the litigation backlash could become gigantic, especially with the latest behind the scenes reports.
Musk and Tesla apparently prepared for shareholder upheaval. It was reported that Tesla’s board amended its corporate bylaws, which would mandate that future lawsuits must take place solely inside Delaware courts. This is reportedly becoming common among publicly-traded companies.
The amendment applies to lawsuits accusing it of breaching fiduciary duty and other claims made during merger challenges. Experts say this is why Tesla was motivated to adopt such an amendment.
Why exactly would the board select Delaware courts to be the venue of choice? Well, it’s not so much that Delaware is an important state. Instead, it’s because the provision would reduce the company’s risk of facing lawsuits in different states by different shareholders. This would force complainants to make their claims in Delaware.
Moreover, shareholders could file a lawsuit claiming that the bidding process for SolarCity wasn’t competitive since Musk wants to own both firms.
Despite the possible roadblocks, Musk is warning investors to vote for the merger:
“Anyone who doesn’t vote in favor of this is going to be voting against their best interests,” Musk warned on the recent conference call with analysts.