$2.6B Musk-Solar City Trial To Test Chancery COVID-19 Rules

By Jeff Montgomery
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Law360 (June 15, 2020, 9:20 PM EDT) -- A suit over the role tech trailblazer Elon Musk and Tesla Motors Inc. played in an allegedly conflicted, $2.6 billion acquisition of SolarCity in 2016 appears headed for one of the first Delaware Chancery Court tests of COVID-19 safety rules during a multiday public trial, after a Monday hearing.

Vice Chancellor Joseph R. Slights III sketched out the still evolving game plan during a teleconference Monday, noting early on that few seats will be open for legal team members or the public at any one time when the 10-day trial begins on July 27.

Delaware's courts, largely closed since March 16 due to COVID-19, only began the second step of a four-phase reopening on Monday. The vice chancellor said expectations are that the Chancery will move ahead one step more — still short of a full reopening — by the start of trial on July 27.

That would mean only eight attorneys and six members of the public will be allowed in the Chancery's largest Wilmington courtroom for the kind of high-stakes, high-profile proceedings ordinarily expected to draw shoulder-to-shoulder, jammed-to-overflow crowds.

"I thought it would be helpful to let you know at least the vision of how this could work, understanding the size of your trial teams," Vice Chancellor Slights said.

The potential trial workout for one of the nation's most-important business law courts includes a mashup of public, YouTube and Zoom proceedings. Fully in-court activities would occur for live witness testimony, including from Musk in the first week, with a potential fallback to remote Zoom arguments or other remote options during the second week.

YouTube would stream the proceedings live throughout to assure public access given the six-person limit for public courtroom benches, and potentially to keep legal team members updated on when they need to make a summertime hike to the courthouse for their turn at trial. No conference rooms or public spaces will be open for use as staging areas in late July and early August under the current court reopening schedule.

"As a practical matter, I think what that means is, except for the folks who are in the courtroom conducting examinations or supporting those examinations, the rest of your teams are going to be off-site as you're preparing for whatever roles they will be playing in the trial," the vice chancellor said. "You can call them from the courtroom or they'll just know, based on what they're seeing on the screen, that it's time to start making their way over."

The direct and derivative suit claims that Musk exercised conflicted control over Tesla to orchestrate a bailout of the solar energy company, co-founded by Musk and two cousins, after a June 2016 blog post announcing the deal, despite holding only 22% of Tesla stock. Stockholders have argued that SolarCity was financially on its heels and potentially insolvent at the time, with the deal wrongly burdening Tesla and its investors.

The case had been scheduled to go to trial on March 16, on what proved to be the same day Delaware Chief Justice Collins J. Seitz Jr. put a court systemwide COVID-19 emergency in effect.

Uncertainties about the Tesla trial and other Chancery Court proceedings abound. Chief Justice Seitz, in a statement to the state judiciary and members of the Delaware Bar on Friday, said that the Supreme Court and Court on the Judiciary could resume hearings.

But activities for the general court system under phase two of the courts' four-step COVID-19 plan are expected to last for weeks, with continued limitations on court staffing, occupancy of courthouses and courtrooms, and convening of nonemergency proceedings. Courthouse visitors and occupants will continue to be screened for health status and will be obliged to wear masks or other nose-and-mouth-coverings.

"Unless circumstances change dramatically, I intend to enter another emergency order in early July to continue Phase 2," the Chief Justice said.

Randall J. Baron of Robbins Geller Rudman & Dowd LLP, counsel for the Tesla stockholders, told the vice chancellor on Monday that attorneys on his side could work to eliminate the need for paper copies for witnesses during the trial.

He also said both sides had been discussing workarounds for courtroom restrictions, which will include plexiglass screens between the vice chancellor and his clerks, and between witnesses and court reporters. Although masks must be worn by all, attorneys will be permitted to remove them while speaking.

"I think we can get all the live witnesses done in the first week, although it might be tight," Baron said. "The question is, is there a way we might be able to get a few extra minutes a day, or one day that goes longer, just in case."

Evan R. Chesler of Cravath Swaine & Moore LLP, counsel to Musk and the other directors, asked the vice chancellor if the court had chosen a particular remote platform for the second week.

"I'm hesitant to point to a particular vendor," Vice Chancellor Slights said. "We have been using Zoom, and it has been working very well, I think, across the board."

Six Tesla directors named in the suit, including Musk's brother Kimbal Musk, agreed to a separate, insurance-funded, $60 million settlement of the claims. That left Musk to fend for himself in litigation the vice chancellor determined in February could be judged under a more plaintiff-friendly "entire fairness" standard of review.

Among other counts, the suit accused Musk of breaching his duty to Tesla by pursuing a SolarCity bailout that would protect him from losses on loan guarantees and protect favored investors.

"Plaintiffs claim they will show at trial that SolarCity was worth almost nothing when the merger was consummated," Vice Chancellor Slights wrote in a February opinion denying Musk's motion for summary judgment on all claims and partial summary judgment sought by the other directors.

The investors are represented by Jay W. Eisenhofer, Christine M. Mackintosh, Kelly L. Tucker, Vivek Upadhya and Daniel L. Berger of Grant & Eisenhofer PA, Lee D. Rudy, Eric L. Zagar, Robin Winchester and Justin O. Reliford of Kessler Topaz Meltzer & Check LLP, and Randall J. Baron, David T. Wissbroecker and Maxwell R. Huffman of Robbins Geller Rudman & Dowd LLP.

Elon Musk and the other director defendants are represented by David E. Ross, Garrett B. Moritz and Benjamin Z. Grossberg of Ross Aronstam & Moritz LLP, and Evan R. Chesler, Daniel Slifkin, Vanessa A. Lavely and Helam Gebremariam of Cravath Swaine & Moore LLP.

The case is In re: Tesla Motors Inc. Stockholder Litigation, case number 12711, in the Court of Chancery of the State of Delaware.

--Additional reporting by Rose Krebs. Editing by Jack Karp.

For a reprint of this article, please contact reprints@law360.com.

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