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Elon Musk's U-turn won't resolve Tesla's legal woes

August 27, 2018

The Tesla boss has abruptly pulled the plug on taking the electric-car maker private. The stunning turnaround may not be enough to ward off US regulators and pacify angry investors.

Tesla CEO Elon Musk unveils the Roadster 2 during a presentation in Hawthorne, California, U.S., November 16, 2017
Image: Reuters

Tesla's maverick chief executive, Elon Musk, has abandoned his plans to take his $55 billion (€47 billion) company private, just over two weeks after he dropped a bombshell, tweeting that he had "funding secured" for a go-private deal.

"It's apparent that most of Tesla's existing shareholders believe we are better off as a public company," Musk wrote in a blog post late Friday, explaining his reversal. "I knew the process of going private would be challenging, but it's clear that it would be even more time-consuming and distracting than initially anticipated," he added.

But Musk's U-turn is not likely to resolve his growing regulatory and legal troubles that the August 7 go-private announcement invited. Musk and Tesla are facing a spate of securities lawsuits from shareholders and a probe by the US market regulator, Securities and Exchange Commission (SEC).

"Musk's decision will not stop the SEC's investigation. The SEC will keep investigating until it feels that it has obtained all relevant facts and understands in detail what actually happened," Stephen Crimmins, an attorney with Murphy & McGonigle who spent 14 years at the SEC, told DW. "This investigative process could easily take months."

"The SEC's investigation will explore whether Musk had a reasonable basis for his statements about taking Tesla private at the time Musk made those statements," Crimmins said.

"If it appears that Musk did not have such a reasonable basis for his statements, he could be charged with making a misleading statement to his shareholders and the markets, particularly if the statements impacted the company's share price."

Crimmins said the SEC's probe will include reviewing emails and other documents, as well as interviewing individuals inside and outside the company.

Read moreMusk reveals one driver behind taking-Tesla-private plan

Price manipulation?

Musk tweeted on August 7 that he was considering taking his electric-car maker private at a value of $72 billion and that he had secured the requisite funding. The announcement sent Tesla's shares soaring before it became apparent he didn't have financing locked up.

Many suspected, it was Musk's way of getting back at Tesla's short sellers — investors who bet on a company's share price falling — for whom he has no love lost.

Musk on Friday stuck to his original statement that he believed a deal was possible.

"My belief that there is more than enough funding to take Tesla private was reinforced during this process," he said in the blog.

The regulators will be looking into the truthfulness of the eccentric entrepreneur's statement.

M. Ridgway Barker, a partner at law firm Withersworldwide told DW that the SEC would be interested in Musk's discussion with Tesla's board on Thursday, during which they decided to pull the plug on the deal.

He said the regulators could subpoena minutes of the meeting.

"If the discussion at the board meeting that the deal would be difficult to fund, or prohibitively expensive, or adversely affect the company's ability to raise debt for operations, that would undercut the existence of a basis to say funding secured," he said.

Barker said the SEC will also be interested in finding out "whether the communications methods Musk and the company use are so entangled that his "personal" statements are also the "company's" statements for which the company also has responsibility."

"The "U-turns" and "explanations" of what was intended would seem to indicate that basis for his statements was weak and he and the company were not aligned, perhaps so weak and misaligned as to subject him and the company to liability for material misstatements," he said.

'Silver lining'

The end of Musk's buyout fiasco means the investors' scrutiny will once again be on the several issues plaguing the electric car maker, including the company's cash position, its ability to scale production and Musk's excessive workload.

Musk's immediate challenges include ramping up Model 3 sedan production and coming through on his promise to make the company profitable in the second half of the year.

"There is a silver lining, as Musk pointed out in the blog post, that this will allow him to fully focus on Model 3 production," analyst Gene Munster of Loup Ventures wrote in a note.

Read moreWith cash concerns clouding Tesla's future, will the dawn yet break for Elon Musk and Co?

Ashutosh Pandey
Ashutosh Pandey Business editor with a focus on international trade, financial markets and the energy sector.@ashutoshpande85