Musk Publicly Endorses Merger of SpaceX (SPCX.US) and Tesla, Inc. (TSLA.US); Insiders Worry Talks Could Take an Unexpected Turn

Reportedly, Elon Musk this week publicly endorsed a potential $3.5 trillion merger between SpaceX (SPCX.US) and Tesla, Inc. (TSLA.US), a move that has unsettled some insiders involved in the discussions. They worry that Musk's remarks could invite shareholder scrutiny and delay the transaction process by weeks. People familiar with the negotiations said the disclosure has caused "chaos" in the negotiation process because it could raise questions about how the interests of Tesla, Inc. shareholders will be adequately represented. These concerns reflect some participants' view that the transaction bears similarities to Tesla, Inc.'s 2016 acquisition of SolarCitya deal that spawned years of litigation over Musk's role in it. Musk serves as chief executive of both SpaceX and Tesla, Inc. and holds substantial stakes in both companies. He told investors this week that the two companies are exploring what would be the largest corporate transaction in history, and disclosed that both sides have formed special committees to evaluate it. According to three people familiar with the matter, both sides have hired advisers, but discussions remain at an early stage. One person said SpaceX approached Tesla, Inc. in recent weeks, and the two sides have been discussing various deal structures, including SpaceX acquiring Tesla, Inc. or a combination under a newly formed holding company. The person said they are also weighing different forms of merger consideration, including an all-stock transaction. These negotiation details have not been previously reported. Lessons from the Past: The SolarCity Deal Sparked Years of Litigation In related-party transactions such as a SpaceXTesla, Inc. merger, independent directors typically oversee the entire process to protect the interests of public shareholders. This issue was particularly prominent in Tesla, Inc.'s 2016 acquisition of SolarCity. At the time, shareholders alleged that the world's richest man influenced the process to rescue his investment in the struggling rooftop CECEP Solar Energy company, triggering years of litigation. At the time, Musk held roughly 22% stakes in both Tesla, Inc. and SolarCity, the latter founded by his cousins. Shareholders argued that Musk's involvement and public support undermined the fairness of the deal. The core claim of the case was that although Musk held only a minority stake, he was effectively Tesla, Inc.'s controlling shareholder by virtue of his relationships with board members and his forceful style. The Delaware Supreme Court later noted that the plaintiffs' claims regarding the lack of an independent committee, combined with "certain other facts regarding Musk's involvement in and public support of the transaction," established that there was unfair dealing. The court ultimately ruled the acquisition was fair and reasonable, but the case took years to resolve, with Tesla, Inc. directors eventually paying $60 million to settle the allegations. Conflicts of Interest Require Musk to Recuse Himself from Negotiations Musk holds nearly one-fifth of Tesla, Inc. and slightly less than half of SpaceX. Analysts said the merger would give him control of the combined entity. On a Tuesday investor call, Musk acknowledged that, as a party with a conflict of interest, he cannot participate in the special committee's discussions. People familiar with the matter said advisers are also in contact with Musk's lawyers to ensure Musk recuses himself from the merger discussions. Eric Talley, a law professor at Columbia University, said the merger could benefit shareholders by eliminating the need for Musk to divide his time between the two companies. He added that any legal challenge could be harder to predict than the SolarCity case because Tesla, Inc. is now incorporated in Texas rather than Delaware. "Texas is a wild card. No one knows how Texas would handle these kinds of cases because Texas has never handled these kinds of cases," Talley said. He noted that Texas has sought to position itself as a business-friendly alternative to Delaware, and that Musk's remarks so far do not necessarily constitute a problem. He said the ultimate litigation risk will depend on the specific terms of any deal. "Who comes out on top in this deal? That's usually what triggers litigation," Talley said. Public Endorsement Could Heighten Shareholder Scrutiny and Affect Negotiations People familiar with the matter said those involved in the negotiations worry that Musk's public endorsement of the merger and disclosure of the talks could heighten investor scrutiny, since interested parties typically avoid publicly commenting while independent directors evaluate a transaction. The person added that if advisers fail to fully shield the special committee from Musk's influence, the SolarCity case could become a reference point for investors and courts in assessing a future SpaceXTesla, Inc. transaction. A merger of Tesla, Inc. and SpaceX would be the largest transaction in history, creating one of the world's largest industrial and technology conglomerates. It would surpass SpaceX's acquisition earlier this year of Musk's artificial intelligence company xAI, which already ranks among the largest corporate transactions ever. A deal of this scale would also face scrutiny from regulators worldwide, especially given Tesla, Inc.'s operations in China and SpaceX's work in U.S. defense and artificial intelligence.