Musk publicly stands on SpaceX (SPCX.US) merger with Tesla (TSLA.US), insiders worry about changes in negotiations

The Zhitong Finance App learned that according to reports, Elon Musk publicly expressed support for the potential $3.5 trillion merger between SpaceX (SPCX.US) and Tesla (TSLA.US) this week. This move made some insiders involved in the discussions uneasy. They are concerned that Musk's remarks may attract scrutiny from shareholders and delay the deal process for weeks.

People familiar with the negotiations revealed that this disclosure caused “confusion” in the negotiation process because it may trigger questions from the outside world: how the interests of Tesla shareholders will be fully represented. These concerns reflect that some participants believe the deal is similar to Tesla's 2016 acquisition of SolarCity — a deal that led to years of lawsuits over Musk's role in it.

Musk is the CEO of SpaceX and Tesla at the same time, and holds significant shares in both companies. He told investors this week that the two companies are studying what will become the largest corporate deal in history, and revealed that both parties have set up special committees to evaluate it.

According to three people familiar with the matter, the two parties have hired consultants, but discussions are still in the early stages. A person familiar with the matter said that SpaceX has taken the initiative to approach Tesla in recent weeks, and the two sides have been discussing various deal structures, including the acquisition of Tesla by SpaceX or a merger under a newly established holding company. The source said that the two sides are still weighing various forms of merger consideration, including full stock trading. The details of these negotiations have not been reported before.

Lessons from the past: SolarCity deal sparked years of lawsuits

In related party transactions such as SpaceX's merger with Tesla, independent directors usually oversee the entire process to protect the interests of public shareholders.

This problem was particularly prominent when Tesla bought SolarCity in 2016. Shareholders at the time accused the world's richest man of influencing the deal process to save his investment in the troubled rooftop solar company, leading to years of lawsuits. At the time, Musk held about 22% of Tesla and SolarCity's shares each, which were founded by his cousin.

Shareholders believe that Musk's participation and public endorsement hurt the fairness of the deal. The central claim of the case is that although Musk only holds a minority stake, he is actually Tesla's controlling shareholder due to his relationship with board members and strong style of work.

The Delaware Supreme Court later stated that the plaintiff's claim about the lack of an independent commission, plus “certain other facts about Musk's participation in and public support for the deal”, found that there was an unfair deal.

The court finally ruled that the acquisition was fair and reasonable, but the case took years to resolve, and Tesla directors finally paid 60 million US dollars to settle the charges.

Due to a conflict of interest, Musk must avoid negotiations

Musk holds nearly one-fifth of Tesla's shares and slightly less than half of SpaceX's shares. Analysts said the merger would give him control over the merged entity. On Tuesday's investor conference call, Musk acknowledged that as a party with a conflict of interest, he could not participate in the Special Committee's discussions. Advisors are also in touch with Musk's lawyers to ensure Musk's avoidance from merger discussions, according to people familiar with the matter.

Columbia University law professor Eric Tully said the merger could benefit shareholders by eliminating Musk's need to allocate time between the two companies. He added that any legal challenge is probably harder to predict than the SolarCity case because Tesla is now registered in Texas rather than Delaware.

“Texas is an uncertain factor. “No one knows how Texas handles these types of cases because Texas has never handled such cases,” Tully said. He pointed out that Texas has been trying to position itself as a business-friendly alternative to Delaware, and Musk's remarks so far have not necessarily posed a problem.

He said the ultimate risk of litigation will depend on the specific terms of any deal. “Who will have the upper hand in this deal? This is usually what triggers lawsuits,” Tully said.

Public statements or intensified shareholder scrutiny, affecting the negotiation process

People familiar with the matter said that those involved in the negotiations feared that Musk's public support for the merger and disclosure of the negotiations might intensify investors' scrutiny because stakeholders usually avoid publicly expressing opinions during the period when independent directors evaluate the deal.

The source added that if advisors fail to completely insulate the Special Committee from Musk's influence, the SolarCity case could become a reference point for investors and courts to evaluate future SpaceX deals with Tesla.

The merger between Tesla and SpaceX will become the largest deal in history, creating one of the world's largest industrial and technology groups. This will surpass SpaceX's deal earlier this year to acquire Musk's artificial intelligence company XAI, which is already among the largest corporate deals in history.

A deal of this size would also face scrutiny from global regulators, particularly given Tesla's operations in China and SpaceX's work in the US defense and artificial intelligence fields.