Tesla Motors Inc Changes Bylaws To Avert SolarCity Corp Shareholder Fight

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Tesla’s offer to buy SolarCity ignited a lot of criticism about conflicts of interest, and it’s possible there will be a lawsuit about it. However, Tesla is prepared for that. CEO Elon Musk is also the chairman of SolarCity and the largest shareholder of both companies, owning more than 20% of each.

Do shareholders have real power?

According to critics, the deal is everything from a “corporate form of a West Virginia wedding” to a “corporate governmental mess.” Investors are not really sure whether the acquisition is in their interest given Musk’s personal financial interests in each company and the overlap between SolarCity’s and Tesla’s boards.

In a research note, Oppenheimer analyst Colin Rusch said they expect a robust shareholder fight centered on corporate governance over this acquisition. Meanwhile, Tesla’s CEO defended the bid and promised to reduce concerns by abstaining from voting on the deal. The transaction will require approval by a majority of the remaining shareholders of both companies.

On a conference call with analysts on Wednesday, Musk said they will certainly abide by the shareholder vote, so if there is a great deal of unhappiness, they said they would not move forward. But behind the scenes, the electric car maker and Musk are making moves indicating they will try to push this deal even in the event of objections by shareholders.

Tesla makes it difficult for shareholders to block the deal

On Monday, the same day the electric car maker made its offer to SolarCity, Tesla’s board amended its corporate bylaws. According to the amended bylaws, future lawsuits against the automaker will take place exclusively in Delaware courts. Minor Myers, a professor at Brooklyn Law School specializing in M&A lawsuits, says such “forum selection” provisions have become increasingly common among publicly-traded firms, which adopt them when they believe litigation might be on the horizon.

Experts told Fortune that the amendment by the automaker applies specifically to lawsuits alleging breach of fiduciary duty and other claims that are typical of merger challenges. This was probably something that motivated the electric car maker to adopt the amendment. Such a provision reduces the risk of the company being sued in multiple states by different shareholders and forces plaintiffs to concentrate their claims in Delaware.

If shareholders believe the bidding process was not competitive enough because Musk wanted to own both companies, they will likely sue the solar firm, claiming it has a fiduciary duty to seek the highest price for the company and solicit competing offers.

Joe Grundfest, a professor at Stanford Law School and its Rock Center on Corporate Governance, says, “There is a very high probability of litigation if the Tesla-Solar City deal becomes real. It’s a virtual certainty.”

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