Elon Musk tripped up by legal ruling over Tesla's $2.6B acquisition of SolarCity

Kevin McCoy | USA TODAY

Show Caption Hide Caption Tesla reaches deal to buy SolarCity Tesla announced on Monday that it has reached an agreement to buy SolarCity which can help Tesla become a renewable energy products company.

Billionaire tech entrepreneur Elon Musk's bad month just got worse — courtesy of a new Delaware Chancery Court decision.

Investors in Musk's Tesla electric-car company may press on with their lawsuit that challenges the firm's 2016 acquisition of SolarCity on grounds that the $2.6 billion deal was flawed by potential conflicts of interest involving Musk and other company directors, the court ruled late Wednesday.

The investors provided sufficient evidence to prove it was "reasonably conceivable" that Musk, though a minority stakeholder in his electric-car company, "controlled the Tesla Board in connection with the acquisition," Vice Chancellor Joseph Slights wrote.

In what he characterized as a close legal call, Slights denied Tesla's motion to dismiss the lawsuit and allowed the legal battle to continue. The ruling means the case will continue to be a financial and legal challenge for Musk.

"We do not agree with the decision and will be taking appropriate next steps," Tesla said in a statement responding to the decision. "It’s important to emphasize that this was a motion to dismiss in which the court was required to assume as true all of the allegations that are made in the complaint. We, of course, contend the allegations in the complaint are false."

The decision came during a month in which Musk and Tesla are coping with a crisis sparked by a fatal crash in California involving one of the company's Model X cars. Shares of Tesla (TSLA) are down 4% from this time last year and are 14.5% lower year-to-date. The stock closed up 3.2% at $266.13 on Thursday.

The National Transportation Safety Board is conducting field research into the March 23 accident, in which a Model X SUV struck a highway median near Mountain View, Calif. and flipped into oncoming lanes, where it was struck by two vehicles.

NTSB officials said it was "unclear if automated control system was active at (the) time of crash," a reference to Tesla's Autopilot system.

Tesla issued a March 23 statement that said the company had "proactively reached out to the authorities to offer our assistance in investigating."

Moody's Investors Service downgraded Tesla's corporate family debt rating on Tuesday, citing concern about "the significant shortfall in the production rate of the company's Model 3 electric vehicle."

Tesla is trying to ramp up the model's production in a bid to meet predicted goals and prove "haters" of the company wrong, Bloomberg News reported Thursday.

The Delaware court ruling focuses on Tesla's controversial acquisition of SolarCity, a solar energy system installer in San Mateo, Calif., founded by Musk and his cousins, Peter and Lyndon Rive.

At the time of the deal, Musk owned approximately 22.1% of Tesla’s stock, records in the court case showed. He also chairs Tesla's board, serves as the chief executive officer and is the company's chief product architect.

Musk was a vocal public booster of the SolarCity deal. During a June 2016 conference call with investors, he called the proposed acquisition a "no-brainer” that is "legally and morally correct," as well as a "zero-doubt" move that "we should have done sooner."

During an August 2016 conference call on the day Tesla announced the proposed SolarCity deal, Musk repeatedly referred to Tesla as "my company," the Delaware court ruling noted.

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Musk served as chairman of SolarCity's board since the company's 2006 formation and held roughly 21.9% of the firm's stock prior to the proposed acquisition by Tesla, the court records show.

Tesla investors cited potential conflicts involving some of the company's other directors, who endorsed the SolarCity acquisition. The officials include Kimbal Musk, Elon Musk's brother and cousin of Lyndon and Peter Rive. At the time of the proposed acquisition, he beneficially owned 147,541 shares of SolarCity stock, records in the lawsuit show.

Additionally, SolarCity's debt increased thirteen-fold, to $3.56 billion, during the three years that preceded Tesla's acquisition, the court records show. "By any measure, SolarCity was in the midst of a liquidity crisis" that required financial assistance at the time Tesla's acquisition was announced," Slights wrote in his ruling.

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Contributing: Marco della Cava

Follow USA TODAY reporter Kevin McCoy on Twitter: @kmccoynyc