By Milana Vinn
NEW YORK, Oct 22 (Reuters) - Elon Musk's public endorsement this week of a potential $3.5 trillion merger between SpaceX and Tesla has rattled some insiders involved in the discussions, who worry his comments could invite shareholder scrutiny and delay the process by several weeks, according to a person with direct knowledge of the talks.
The disclosure created a "mess" for the process, as it could lead to questions about how well Tesla shareholders' interests would be represented, the person
said. The concerns reflect similarities some participants see with Tesla's 2016 acquisition of SolarCity, which sparked years of litigation over Musk's role in the deal.
Musk, who serves as CEO of both SpaceX and Tesla and owns significant stakes in each company, this week told investors that the two companies were examining what would be the largest corporate transaction in history and revealed that both had formed special committees to evaluate it. The backlash to those remarks is reported here for the first time.
The parties have hired advisers, but discussions are at an early stage, three sources familiar with the matter said. SpaceX approached Tesla in recent weeks, and the companies have been discussing a range of transaction structures, including a SpaceX acquisition of Tesla or a merger under a newly formed holding company, the person familiar with the matter said. They are weighing different forms of merger consideration, including an all-stock deal, the person said. These details of the talks have not been previously reported.
Tesla, SpaceX and Musk did not respond to requests for comment.
SHAREHOLDER LITIGATION OVER TESLA'S SOLARCITY DEAL
In related-party transactions such as a SpaceX-Tesla merger, independent board members typically oversee the process to safeguard public shareholders' interests.
That issue loomed large in Tesla's 2016 acquisition of SolarCity, which triggered years of litigation after shareholders alleged the world's richest man had influenced the process to bail out his investment in the struggling rooftop solar company. At the time, Musk owned roughly 22% of both Tesla and SolarCity, which was founded by his cousins.
Shareholders argued that Musk's involvement and public support undermined the deal's fairness. Central to the case were claims that despite his minority stake, Musk was a controlling shareholder of Tesla due to his ties to board members and domineering style.
The Delaware Supreme Court later noted that plaintiffs' contention of the absence of an independent committee, together with "certain other facts concerning Musk's involvement in and public support for the transaction," warranted the finding of unfair dealing.
The courts ultimately upheld the acquisition as fair, though it took several years for the case to be resolved and Tesla directors settled allegations for $60 million.
MUSK CANNOT BE INVOLVED IN TALKS
Musk owns nearly a fifth of Tesla and just under half of SpaceX, and analysts have said a merger would give him control of the combined entity. On Tuesday's call with investors, Musk acknowledged that as a conflicted party he cannot be part of the discussions of the special committees. Advisers are also in contact with his lawyers to ensure Musk is recused from the merger discussions, the source familiar with the talks said.
Eric Talley, a law professor at Columbia University, said a merger could benefit shareholders by eliminating the need for Musk to divide his time between the two companies. He added that any legal challenge may be harder to predict than the SolarCity case because Tesla is now incorporated in Texas rather than Delaware.
“The Texas thing is a wild card. No one knows how Texas deals with cases like this because Texas never dealt with cases like this,” Talley said, noting that Texas has sought to establish itself as a business-friendly alternative to Delaware, and Musk’s comments so far were not necessarily problematic.
Ultimately, he said, litigation risk would hinge on the terms of any transaction.
"Who's going to get the better side of this deal? And that's usually what gives rise to litigation," Talley said.
MUSK'S COMMENTS COULD AFFECT DISCUSSIONS
People involved in the process worry Musk's public endorsement of the merger and disclosure of talks could intensify investor scrutiny, as interested parties typically avoid expressing views publicly while independent directors evaluate a deal, the source said.
The SolarCity case could become a reference point for investors and courts assessing any future SpaceX-Tesla transaction if advisers fail to fully insulate the special committees from Musk's influence, the source added.
A tie-up between Tesla and SpaceX would be the biggest deal in history, creating one of the world's largest industrial and technology groups. It would surpass Musk's acquisition earlier this year of his artificial intelligence company xAI by SpaceX, which ranks among the largest corporate transactions ever announced.
A deal of this size would also face scrutiny from global regulators, especially due to Tesla’s business in China and SpaceX’s work in US defense and AI.
(Reporting by Milana Vinn in New York, additional reporting by Akash Sriram; Editing by Echo Wang, Paritosh Bansal and Shri Navaratnam)
