Tesla’s $2.6 billion purchase of SolarCity was controversial from the beginning. CEO Musk held 22 percent of Tesla’s stock, making him the largest shareholder. He was also the largest shareholder of SolarCity, holding around 22 percent of its shares. The deal saw his personal investments converted to about $500 million in Tesla stock, writes Ars Technica. Additionally, SolarCity was founded by brothers Lyndon and Peter Rive, who are Musk’s cousins, and several Tesla board members at the time, including Musk’s brother, were directly connected to the company.
In a lawsuit filed in 2016 by shareholder Ellen Prasinos on behalf of all Tesla shareholders against Musk and Tesla’s board of directors, it’s alleged they failed to disclose “troubling facts” related to the deal, and that Musk used his influence to push it through without doing sufficient due diligence.
One of the claims is that SolarCity hid information from auditors Ernst & Young about payments due to lenders that would have been used to determine its financial state. It’s also claimed that close relations between itself and Tesla resulted in decisions that didn’t benefit shareholders.
"Almost immediately after the acquisition closed, SolarCity's auditors [Ernst & Young] confirmed that SolarCity was, in fact, insolvent," states the filing. It goes on to claim that SolarCity was only able to function because of money from SpaceX, another of Musk’s companies, which bought $225 million worth of bonds that violated SpaceX’s own internal policy. “SolarCity was the only public company in which SpaceX made any investments,” reads the suit.
“These allegations are based on the claims of plaintiff’s lawyers looking for a payday, and are not representative of our shareholders who support our mission and ultimately voted in favor of the acquisition,” Tesla said, in a statement. “The accusations made in the plaintiff’s brief are false and misleading, as Tesla and SolarCity published all material information in its proxy and other public filings for all shareholders to consider before deciding on the transaction.”