Elon Musk is in the headlines again as newly released documents show more details of a 2016 shareholder lawsuit against Tesla (TSLA).
The electric-vehicle manufacturer is being sued over the $2.6 billion SolarCity merger, just one in a myriad of other legal claims currently involving the Twitter-loving billionaire. TSLA stock has fallen steadily throughout the day since this story broke on national newswires, and closed Monday at $241.23 per share, roughly $4 of its daily high.
It isn’t hard to see why Tesla investors are concerned about the Solar City deal. The accusations made in the lawsuit are severe and paint a complex picture of how Elon Musk’s business dealings intertwine between SpaceX and Tesla. As expected, the primary issue with Tesla’s SolarCity merger is that the company was hemorrhaging cash at an astonishing rate, as the filing reads,
“SolarCity was never profitable and incurred massive and growing operating losses. During the five years leading up to the Acquisition, SolarCity reported over $2.2 billion in net losses… SolarCity turned to the capital markets to fund these losses. From 2012 to 2014, SolarCity was able to raise more money than it lost. In 2015, SolarCity’s capital raises could no longer keep up, and discretionary cash flow deficits outpaced the net funds raised. This deficiency continued into 2016.”
Such a deal hardly seems like the sort of acquisition that the already debt-laden Tesla need endure. However, Musk’s lawyers do provide a compelling defense to these accusations. The defendants claims that Tesla used an outside agent to find the perfect solar panel partner to fuel their push for fully sustainable fuel, stating,
“Evercore identified SolarCity as the market leader in both the U.S. residential and nonresidential market, with 35% and 14% of those markets, respectively, and with the highest gross margins when benchmarked against the three other most attractive targets.”
The defense goes on to state that Musk also recused himself from making the ultimate decision with his board, though he has admitted this year he was unable to avoid all discussions.
If there is one word that alarms investors in any stock, it is “pyramid.” In the lawsuit, Tesla shareholders allege Musk used these very words to describe his situation as CEO of Tesla and SpaceX and principal shareholder and Chairman of SolarCity in the following quote,
“Prior to the Acquisition, Musk described Tesla, SolarCity, and SpaceX as a “pyramid” atop which he sat; it was “important that there not be some sort of house of cards that crumbles if one element of the pyramid . . . falters”
When you oversee one of the most heavily shorted stocks in the Nasdaq, that many investors believe to be a ticking time-bomb of debt, this kind of language is undoubtedly going to alarm holders of TSLA. Things are especially worrisome when the CEO’s compensation package is also under serious scrutiny from shareholders.
Tesla stock is well off its lows this year but is now looking more bearish on the technical chart having failed to rally through psychological resistance at $250. With plenty of good things happening for its Model 3 and some positive progress in China, TSLA bulls didn’t need all this drama around such a crucial inflection point in the stock’s fledgling up-trend.