TSLA Tesla Inc

By Ronald Barusch 

Elon Musk's Tesla Motors Inc. and SolarCity Corp. are both relatively new to the public markets and have yet to shake off complexities like interlocking ownership that often characterize private companies. If completed, their merger could simplify some of these matters, but between here and there is a rocky governance road.

With Mr. Musk serving as chairman of both companies, chief executive of Tesla and the largest shareholder and the leading cheerleader/visionary for both, the negotiations are far more complicated than those with Michael Dell and Silver Lake's buyout of Dell Inc. In that deal, which itself presented some potential for conflict, there was only one public company involved.

Here is a look at the interlocking relationships, beyond Mr. Musk's roles, that directors will need to grapple with:

The two companies share another director, Antonio Gracias, who also is on the board of Mr. Musk's third futuristic company, SpaceX, and is the lead independent director of Tesla. In that capacity he is supposed to provide leadership of the independent directors and raise "issues with management on behalf of the independent directors" according to Tesla's proxy statement. But given his multiple roles, that doesn't seem like a job he is going to be able to fulfill on this deal. Mr. Musk and Mr. Gracias are recusing themselves "from voting on this proposal" at each of the two companies.

Meanwhile, two of SolarCity's directors who happen to be cousins of Mr. Musk are the CEO and chief technology officer of the company, which means they arguably work for Mr. Musk. Another board member of SolarCity has been for over two decades a managing director of a venture-capital firm that currently owns around 4% of the solar-panel provider. A different managing director at the same venture-capital firm is a director of Tesla and of SpaceX. That firm is also a "significant stockholder" of SpaceX. Plus Mr. Musk's trust (through which he holds most of his shares) is a limited partner of one of the venture firm's funds.

Two officials at a different venture firm that is a minority investor in SpaceX have board seats -- one at Tesla and one at SolarCity. Mr. Musk's brother is one of the Tesla directors and he sits on the board of SpaceX, too. Finally, one of Tesla's directors was the chief financial officer of SolarCity until he retired in February, and one of SolarCity's directors has been chief technology officer of Tesla for over a decade.

Of seven directors of Tesla and eight directors of SolarCity, only one of each isn't referred to above.

Regulatory filings from the companies (which disclose all of this) indicate that the respective boards have concluded that, other than the Musk brothers and their cousins, all of the directors are independent.

There is a tried and true way under Delaware law of dealing with a transaction that has conflicts. If a deal is negotiated by a committee of independent directors with sufficient authority and approved by a majority of disinterested shareholders after full disclosure, Delaware courts generally won't second guess in the event of litigation. If Mr. Musk isn't deemed to control the companies, only one of those is required. But a determination of lack of control of Tesla and SolarCity could be made more difficult by all the complex relationships.

A spokesman for SolarCity said in an email comment that it was mindful of the need of an independent process and would have a special independent committee of the board.

Tesla in its proposal said it was committed to conditioning the deal on a vote by disinterested shareholders.

Meanwhile, from a governance perspective, in my view the deal isn't off to an auspicious start. That Mr. Musk and Mr. Gracias have committed to recuse themselves doesn't do much if that just means abstaining from the votes. It seems clear that Mr. Musk is behind the deal and not standing on the sidelines.

The boss's message has undoubtedly been heard in the board rooms at both companies and by both sets of shareholders.

-- Mr. Barusch is a retired M&A lawyer who writes about deal making for The Wall Street Journal.

(END) Dow Jones Newswires

June 24, 2016 02:47 ET (06:47 GMT)

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