Happy Friday! Happy Happy Hour!
Elon Musk was back home this week after testifying in court. Not the first time he’s been sued, probably not the last.
When Musk entered the Delaware Court of Chancery, though, something unusual happened.
He came in the door usually reserved for criminal defendants who are wearing handcuffs.
“I haven’t seen the court do that before,” said Tom Hals, Delaware Bureau Chief for Reuters, who covered the trial. “I’ve seen other CEOs testify, and they’ve always come down the public hallway.”
This is the sort of detail I love hearing about, one that doesn’t make the final cut in most news stories. I wanted to talk to Hals. I wanted to get the flavor of the proceeding.
As you probably know, Musk is being sued by former Tesla shareholders over the $2.6 billion purchase of SolarCity in 2016. Musk was SolarCity’s chairman and largest shareholder, and the plaintiffs claim he basically used his influence to coerce the Tesla board to buy the nearly insolvent solar company and pay way too much for it. They also claim he misled shareholders about SolarCity’s awful financial situation.
Elon Musk testified he did no such thing. He had nothing to do with it! The board made the call!
He also revealed he doesn’t even like being CEO of Tesla. He’d rather just be an engineer.
The best part of being a reporter is seeing stories unfold with your own eyes, so I reached out to Tom Hals. I expected him to tell me the courtroom was packed.
“The whole trial was kind of lightly attended,” he said. “The court prepared as if there would be thousands of people coming, and I counted 50 in the courtroom at one point. Most of them were attorneys and associates.” That included one attorney who threw up while sitting in the jury box as Musk testified. The proceeding had to be recessed as a sanitation crew cleaned up the mess. Hals said the delay took two hours, “given Covid and all that.”
The scene could not have been more different than when I covered Musk’s defamation trial in Los Angeles in December 2019. Back then he was sued by British cave expert Vernon Unsworth for $190 million after Musk tweeted Unsworth was “a pedo guy” in a series of insults by both sides over the rescue of a Thai soccer team.
The L.A. courthouse was packed, and Elon had to enter from the street, walking past reporters.
He succeeded in convincing 12 jurors that he did not defame Unsworth. The jury took only about an hour to deliberate before finding Elon Musk not liable.
The most memorable thing about the defamation case for me was Unsworth’s attorney, Lin Wood. Wood made a name for himself clearing Richard Jewell after the security guard was accused of bombing the 1996 Summer Olympics in Atlanta.
Wood’s southern, courtly style was an odd fit in front of a Los Angeles jury, along with his dramatic flourishes, loudly calling Musk “a liar” and “a billionaire bully!” In the end, it didn’t play well. He lost.
Fast forward to 2021, and Wood’s latest career moves aren’t playing well, either. As an attorney working on behalf of Donald Trump, he’s propagated so many outlandish theories about the 2020 election that he may lose his law license in Georgia, where the state bar wants him to undergo a mental health evaluation.
While the L.A. trial was all theater, as befits Hollywood, this week’s trial in Delaware was all staid decorum, as befits a court of chancery. The court focuses on non-jury trials mainly involving corporate spats. It’s a unique type of court which I don’t fully understand, but it describes itself as a place “to provide relief suited to the circumstances when no adequate remedy is available at law.”
Whatever that means.
The concept goes back to medieval times, and Tom Hals said proceedings are very formal. There are no raised voices, no Perry Mason moments. Instead, “Judges often trace a concept to the 1400s in England.”
Elon Musk was here because he refused to settle the shareholder lawsuit, even though other Tesla board members agreed to pay the plaintiffs $60 million. In his testimony, Musk said he pushed for the SolarCity deal, but he did not participate in any decision-making.
The plaintiffs’ success relies on whether their attorneys can convince the judge that Musk was the controlling shareholder, even though he only owned 22% of shares at the time. Usually, a controlling shareholder owns at least 50% of shares and can therefore vote out the board.
Plaintiffs need to make the case that Musk is the heart and soul of Tesla, someone with so much influence that board members and large institutional shareholders feared if they didn’t give Elon what he wanted, he would walk away. That could destroy Tesla.
“I think it will come down to his credibility,” Hals said about Musk. As a reporter for Reuters, he’s watched a lot of CEOs testify over the years. How does Musk rate? “He’s nothing like anybody else I’ve ever seen.”
Elon wasn't always a great witness. He showed flashes of temper during cross-examination by attorney Randall Baron. Hals said Baron remained calm. “He let Elon Musk just kind of run for a bit and really beat up on (Baron), saying, ‘You were mentored by criminals,’ and ‘You’re a bad human being.’”
Hals thinks Baron scored some points, but he was surprised the attorney didn’t always follow up to emphasize inconsistencies in Musk’s testimony.
For example, Musk had sent out an internal email at Tesla saying, “SHAREHOLDER SENTIMENT IS VERY NEGATIVE ON THIS DEAL,” as the car company considered buying SolarCity. Elon then apparently orchestrated a media event showing off attractive solar roof panels which looked like cedar shingles in order to make it look like SolarCity was a great company, a perfect fit for Tesla as part of a larger sustainable energy enterprise.
However, the solar panels didn’t work. “They were just mock-ups,” Hals said, “but Musk never made that clear.” On the witness stand, Musk said, “Hey, I never said they were real tiles.“
Hals wondered why attorney Baron didn’t hammer home moments like this, and he asked him about it outside court. Baron told him, “It’s for a judge. He gets it.”
The attorney doesn’t have to convince 12 jurors. He just has to convince one man with a lot of experience.
One of the most fascinating parts of my conversation with Tom Hals involved Kimbal Musk, Elon’s brother and a Tesla board member. Hals says Kimbal was a great witness when questioned by his own attorneys, presenting himself as someone who really looked out for shareholders. “He seemed like his brother, almost better than his brother… less distracted.”
But when it came to cross-examination, Kimbal wasn’t so great. Hals said Elon’s brother had a tough time explaining concepts like the exchange ratio used to figure out the value of the all-stock deal to buy SolarCity. “He started to become kind of incoherent.”
It got worse.
Hals says Kimbal revealed “he’d been essentially begging his brother for millions of dollars for years to keep his restaurant venture afloat. He was highly leveraged.” Kimbal Musk also had a huge margin call on his SolarCity shares as they lost value.
The testimony reminded Hals of day traders involved in meme stocks, but on a much grander scale. “How did a guy like Kimbal Musk, who had millions of dollars, how does he wind up so beholden to his brother that he’s essentially begging for money?”
Yet Kimbal also testified, “You know, I’m a great negotiator.”
Later, he was asked about hitting up his brother for a loan. Tom Hals said, “He was asked, ‘Did your brother extend you a loan?’” Kimbal replied, “No, he turned me down.”
Ouch. If you can’t negotiate with your own fantabulously wealthy brother...
— When Randall Baron told Musk that board members didn’t think some of his social media antics were funny, Elon replied, “Oh well, I think I’m funny.”
Which is kinda funny.
— A security guard briefly thought Grimes was in the courthouse. (Google her if you have to. Geez, even I know who Grimes is, and I'm 100 years old! She’s a musician and Elon’s baby mama.) However, no one saw her. “Seems ridiculous that she would come down,” Hals said with a laugh.
— When Musk objected to Baron’s questions, calling them tricky and loaded, Baron replied, “That’s my job.” Hals said Elon’s shoulders sank a little, and he said, “Well, in that case, you’re doing a good job.”
— When presented with evidence that SolarCity was very late in paying invoices to conserve cash, Hals said Musk “made no bones about it — ‘Yeah, we just cut off vendors. That’s what we did with Tesla.’”
One could argue that even if Elon Musk had told shareholders in 2016 he wanted to buy SolarCity despite its terrible financial situation, a majority of shareholders would have approved it! He’s Elon F’ing Musk, right?!
Hals spoke to one Tesla shareholder at the courthouse who seemed to prove this point. The shareholder called the trial “stupid,” and told Hals, “Who cares? Elon Musk should be controlling everybody.”
One could also argue it’s ironic to sue over the deal when Tesla shares have skyrocketed more than 1,600% since the SolarCity acquisition closed. That’s not the point, said Hals. If there had been no deal, “Maybe (shares) would have been up 3,000%.”
The case won’t be over for months, but Tom Hals expects changes will come out of it. “Delaware corporate law is made in cases like this.” The judge may come up with a new description of what it means to be a controlling shareholder.
No matter who wins, the Reuters reporter — who’s covered a lot of these trials — thinks the final decision will have a lasting impact. “I think Wall Street dealmakers will look to the case and bring it to boards of directors in the future when they have a shareholder who’s domineering like this and say, ‘Well, you know, you don’t want to be like Elon Musk, look at the mess he created.’”
As Musk’s testimony ended, Tom Hals said the CEO of Tesla, a man worth an estimated $161 billion, left the courtroom the way he came in, via the inmate door. “If you look down that hallway where they bring them in, there’s cells in that hallway.” Is that where Elon Musk stayed during breaks, in a cell? Hals wondered the same thing. “We were all joking, ‘Here’s one of the richest men on earth and he’s treated like a criminal.’”
Correction: an earlier version of this story misspelled Randall Baron’s name.
Next chapter: Equal Outrage. Strong reaction to the Omar Qazi interview leads to an interview with someone who feels very differently about Tesla and its CEO.
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