Thursday, June 23, 2016
So, Elon Musk of both SolarCity and Tesla fame has announced a "no-brainer": the merger of SolarCity and Tesla. you can find a copy of SolarCity's offer to acquire Tesla here. Obviously, with Musk on both sides of this deal, he is conflicted, as is his fellow director Antonio Gracias. But, as we know, being on both sides of a deal isn't necessarily damning. SolarCity's offer lays out a basic strategy for trying to ensure a deal, should it proceed, gets the business judgment presumption (from the offer):
To help ensure that, Tesla is prepared to make the consummation of a combination of our companies subject to the approval of a majority of disinterested stockholders of both SolarCity and Tesla voting on the transaction. In addition, as a result of their overlapping directorships, Elon Musk and Antonio Gracias have recused themselves from voting on this proposal at the Tesla board meeting at which it was approved, and will recuse themselves from voting on this proposal at the SolarCity board as well. We believe that any transaction should be the result of full and fair deliberation and negotiation by both of our boards and the fully-informed consideration of our respective stockholders.
So, the basic structure will include a requirement that the deal be approved by a majority of disinterested stockholders and also recusals from interested directors - as both directors and stockholders. That's usually enough to ensure business judgment, especially since Musk's position is short of that of a controller (approximately 20% or so of SolarCity and 25% of Tesla). Given that Musk's position will be sterilized through recusal a decision whether this deal turns out to be a no brainer or not will fall on the shoulders of disinterested stockholders. Delaware courts have leaned heavily on this kind of process to remedy defects of transactions involving interested directors/stockholders. Dell followed a similar path in its going private transaction. The process it adopted sought to ensure that Michael Dell would not have a direct effect on vote of stockholders by sterilizing his shares and recusing himself from board deliberations. The deal got done. But, two years plus later, in an appraisal action the court determined the price stockholders received in that deal fell short of a "fair value". That leaves one to wonder whether these procedural safeguards are as effective as the court hopes.