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Colin Rush (“[w]e believe investors are likely to view this transaction as a bailoutfor SCTY and a distraction to TSLA’s own production hurdles[;])” MorganStanley’s Paul Coster (“we are struggling to see brand, customer, channel, productor technology synergies, ”), and Raymond James analyst Pavel Molchanov(“Because Elon Musk is the largest shareholder of both Tesla and SolarCity, aswell as CEO of Tesla and Chairman of SolarCity, it goes without saying that thisproposal carries the potential for conflict of interest. To minimize that risk, Muskformally recused himself from board voting on both the Tesla side and theSolarCity side. But let’s not be naïve: the proposed merger could not possibly beinitiated or realized without his backing.”).15.Also on June 22, 2016, in an article entitled “Tesla Bear Ronnie MoasHas No Reason To Change His Sell Rating Just Yet,” Benzinga commentatorJayson Derrick stated that “[t]his was a bail-out of a company that Musk owns 20percent of. SolarCity was on life support 24 hours ago.”5 On June 28, 2016,Investor’s Business Daily writer Brian Deagon quoted Argus Research in anarticle: “[T]he proposed transaction is ill-timed, shareholder-unfriendly andunnecessarily risky.”65See son-to-change-his-sell.6See ries.9

16.Commentators also raised the issue of share dilution. Teslashareholders saw their shares diluted in May 2016 when the Company raised 1.4billion for its Model 3 car, Tesla’s next big production model, styled as theaffordable electric sports sedan to the average consumer. But the dilution that willresult from a deal with SolarCity is worse because it is connected to savingSolarCity – not moving the Company’s business forward. To that end, a June 21,2016 article by Ben Levisohn in Barron’s entitled “Wait, Tesla wants to BuySolarCity!?!?!” reported:7Then there’s the matter of share dilution. Everyone knew Teslawould have to sell more shares to raise money for the Model 3build, so investors didn’t flinch when that happened back inMay. Now they’re being diluted again–to the tune of nearly 12million shares by my quick calculation 17.On August 4, 2016, Barclays noted that such a capital raise couldequal about 1.5 billion which would further dilute Tesla shareholders. Likewise,in an August 5, 2016 article entitled “Yes, Tesla Needs More Money And It JustDoesn’t Matter,” Barron’s writer Ben Levisohn stated that Elon Musk recentlynoted that, if the deal is successful, the combined company could do “a smallequity raise meaning low to mid single digit percentages7See 6/21/wait-tesla-wants-tobuy-solar-city.10

18.On June 27, 2016, SolarCity announced that it had formed a specialcommittee, composed of two of SolarCity’s eight board members, Donald R.Kendall, Jr. and Nancy E. Pfund, chaired by Kendall, to examine the OriginalProposal. Pfund is managing partner at the venture capital company DBLInvestors, a related party to DBL Partners. DBL Investors was an early backer ofboth Tesla and SolarCity. Pfund’s investment firm partner Ehrenpreis is on Tesla’sboard. Pfund also served as an observer on the Tesla Board before its initial publicoffering. Thus, only one (Kendall) of the two special committee members appearsto have no relationship to Tesla and Elon Musk.19.Importantly, in connection with this self-dealing transaction, Teslaformed no such special committee to safeguard the interests of Tesla and itsshareholders. Moreover, even though Elon Musk recused himself from the vote onthe deal, according to the Form S-4 (defined below), he was consulted numeroustimes during the negotiation of the deal regarding his views and expectations aboutSolarCity and the combined company. Given his conflicting interests in the deal,he should have completely stayed out of the process. See, e.g., S-4 at pages 64-65.20.This glaring failure was not lost on investors. The day after theOriginal Proposal was announced, on June 28, 2016, CtW Investment Group(“CtW”), which works with union-based pension funds and holds 200,000 sharesof Tesla, demanded in a letter to Defendant Gracias that the Company, inter alia,11

form its own independent committee. In total, CtW requested that Teslaimplement five steps it said would remedy Tesla’s “underlying governancedeficiencies.” CtW asked that Tesla add two permanent independent directors andseparate the chairman and CEO roles, as well as for two independent directors toform a special committee to review the proposed SolarCity deal. “The fiercelynegative reaction to the Proposal only highlights the flawed [corporate governance]process and underscores our continuing concern about governance at thecompany,” CtW Executive Director Dieter Waizenegger wrote in the letter.21.CtW summarized its letter by stating that Elon Musk “continues todominate the [Tesla] board and sits at the heart of a complex web of relationshipsamong board members and other companies controlled by him and/or familymembers . Such conflicts and behavior put at risk the ability of those directors toengage in the independent judgment they must exercise as fiduciaries of outsidestockholders.”22.Even after CtW publicly requested that Tesla form an independentcommittee to ensure that the Original Proposal was fair to Tesla and itsshareholders, the Tesla Board did nothing.23.On August 1, 2016, Tesla announced that it reached an agreement toacquire SolarCity (the “Merger Agreement”). Under the agreement, SolarCitystockholders will receive 0.110 Tesla common shares per SolarCity share (the12

“Final Proposal”). Thus, the Final Proposal’s terms were slightly better than theOriginal Proposal – offering SolarCity shareholder 0.110 Tesla shares perSolarCity share, rather than between 0.122 and 0.131x Tesla shares. This smallreduction in offering price was clearly intended to assuage a market that was angryabout every aspect of the deal. However, Tesla is still overpaying for SolarCity.24.Under the agreement, SolarCity has a 45-day ‘go shop’ period torequest other offers and the deal is subject to SEC review, but otherwise, theagreement will be brought to a shareholders vote after September 14, 2016.However, this go-shop is illusory due to Elon Musk’s domination of Tesla andSolarCity.25.The overwhelmingly negative market response continued unabatedbecause a slight price reduction did not change the fact that the Tesla Board hadagreed to bail out a failing, debt-laden company – and could articulate nolegitimate business reason for doing so – that would only distract Tesla from itsown business. For example, UBS wrote on August 1, 2016 that “[w]e continue toremain cautious on the deal given lack of compelling synergies , and the fact thisis an unneeded distraction for TSLA management which already faces challengeswith the Model 3 launch and significant production targets.” UBS also noted that“most [synergies] could seemingly be achieved through a [joint venture;]”; thatTesla provided no specific synergy estimates on the conference call discussing the13

Original Proposal, and that Elon Musk did not even know how many Teslacustomers used solar power.26.Similarly, The Street reported on August 1, 2016 in an article entitled“Tesla Motors’ (TSLA) SolarCity Deal Makes No Sense” that “Musk has sketchedout this idea that Tesla is better when customers can get solar installation andbattery installation in a very seamless way and tied together to their cars. What’sunclear is why they can’t do that right now, why SolarCity can’t do that right nowand what makes it better these two companies are together.”827.On August 6, 2016, in an article entitled “Elon Musk Says the ExactOpposite of What Analysts Say About the SolarCity-Tesla Merger,” Chris White ofthe The Daily Caller stated that “[i]nvestment analysts were not buying Musk’sarguments”:9Salome Gvaramia, the COO of tech company research group DevonshireResearch Group, told the Daily Caller News Foundation that Musk’sjustification for the merger is badly flawed.“If the goal is to facilitate seamless collaboration between the twocompanies in order to increase production efficiency, reduce carbonfootprint, etc.” Gvaramia said, “it can be achieved on contractual basisbetween two independent entities.”The merger itself, she added, makes it look like Tesla is propping up thebeleaguered solar panel company.8See rs-tell-cnbc.html.9See larcity-tesla-merger.14

28.Moreover, Tesla is at a critical phase in its corporate developmentwith its new Model 3 car on the horizon. Numerous analysts have opined that theFinal Proposal will be an inevitable, and significant, distraction from Tesla’s realbusiness.29.The decision of Tesla’s Board to pursue the Final Proposal constituteda breach of their fiduciary duties to Tesla and its stockholders and, in particular,their duty of loyalty, by pursuing a course of action structured to bail out anotherElon Musk company, SolarCity, to the detriment of the Company and itsshareholders.30.Musk owns 18.4% of Tesla and 22.1% of Solar City. Thus, toapprove the Final Proposal, approximately 40.9% of Tesla shareholders must votein favor of it. The entire fairness standard applies to the Final Proposal becauseMusk stands on both sides of the Final Proposal and dominates both companies.31.In addition, the seven largest Tesla shareholders – excluding ElonMusk’s 20% holdings – hold over two-thirds of Tesla’s stock. One of these seven,Fidelity Investments (“Fidelity”) – which owns 12,005,684 SolarCity shares(11.9%) worth approximately 252 million – has purportedly already thrown itssupport (Fidelity holds 8.2% of Tesla shares) behind Tesla acquiring a solar15

company. See Forbes, Jay Somaney, “Tesla’s Elon Musk Usually Gets What HeWants,” Forbes, June 28, 2016.1032.Three others of the seven largest Tesla holders also own substantialamounts of SolarCity stock. Vanguard Group, Inc., Bank of Montreal, andBlackrock, hold 5.2 million, 4.1 million, and 2.5 million shares of SolarCity,respectively, worth approximately 100 million, 84 million, and 51 million,respectively. Because these three entities (and Fidelity) stand to lose hundreds ofmillions of dollars if SolarCity goes bankrupt, they are incentivized to vote theirTesla shares in favor of the deal. That four of the largest Tesla investors stand tolose over half a billion dollars if SolarCity goes bankrupt substantially weakens themajority of the minority vote provision of the deal.1133.In light of SolarCity’s profound financial problems, staggering debt,and the lack of any compelling benefit to Tesla from an acquisition of SolarCity,the Final Proposal is also unfairly priced. SolarCity stock has been in free fallsince December 2015 when it traded at a high of 57.26 per share. It currentlytrades in the low 20’s. Accordingly, the price Tesla is offering SolarCity10In addition, SpaceX sold a 10% stake in its company to Fidelity and Google for 1 billion in May 2010, so Fidelity has had prior dealing with Musk companies.See http://www.forbes.com/ y-gets-what-he-wants/#1278e52f41f0.11“Majority of the minority” here means a majority of the vote of the non-Muskaffiliated shareholders.16

shareholders is materially higher than any third party buyer would pay in a truearms-length transaction.34.On July 11, 2016, Seeking Alpha contributor David Trainer summedit up:12Investors need to hold management accountable for intelligentcapital allocation, or else they can expect companies to continueto destroy shareholder value without feeling any accountabilityto their investors. Given the analysis above, we think it’s fair toask both management teams how this deal is fair to theirinvestors. The answer for SCTY investors appears easy. On theother hand, TSLA investors must ask why they should acceptsuch an overpayment for a profitless company. (Emphasisadded).35.In addition, Straubel, Lyndon Rive, and Peter Rive’s negotiation ofand participation in the Final Proposal as, inter alia, SolarCity board membersaided and abetted the other Defendants’ breaches of fiduciary duty.36.On or about August 31, 2016, Tesla filed a Form S-4 RegistrationStatement with the SEC (the “S-4”) in connection with the deal. As set forthherein, the S-4 contains materially false and misleading information.37.In this stockholder derivative action, Plaintiff seeks to “holdmanagement accountable” for the waste of corporate assets suffered by Tesla innegotiating the Original and Final Proposals, and for the irreparable damage toTesla if the Final Proposal is consummated. Plaintiff seeks to recover damages17

and other relief on behalf of nominal defendant Tesla against the Tesla Board forbreach of fiduciary duty and waste and against Straubel, Lyndon Rive, Peter Rive,D Subsidiary, Inc., and SolarCity for aiding and abetting the Tesla Board’sbreaches of fiduciary duty relating to the negotiations and decisions that led to theFinal Proposal.PARTIES38.Plaintiff City of Riviera Beach Police Pension Fund holds shares ofTesla common stock and has owned shares of Tesla common stock throughout theentire relevant period.39.Nominal Defendant Tesla is a Delaware corporation headquartered inPalo Alto, California. Tesla designs, develops, manufactures and sells highperformance fully electric vehicles and energy storage products.40.Defendant Elon Musk has served as Tesla’s Chief Executive Officersince October 2008 and as Chairman of its Board of Directors since April 2004.Elon Musk has also served as Chief Executive Officer, Chief Technology Officerand Chairman of Space Exploration Technologies Corporation, a company whichis developing and launching advanced rockets for satellite and eventually humantransportation (“SpaceX”), since May 2002, and as Chairman of SolarCity sinceJuly 2006. Elon Musk owns a large portion of the stock of SpaceX.12See larcity-costs-tesla18

41.Defendant Antonio J. Gracias has been a member of Tesla’s Board ofDirectors since May 2007 and has served as the Company’s “Lead IndependentDirector” since September 2010. Gracias is also a member of SolarCity’s Board ofDirectors, as well as that of SpaceX.42.Defendant Stephen T. Jurvetson has been a member of Tesla’s Boardof Directors since June 2009. Since 1995, Jurvetson has been a Managing Directorof Draper Fisher Jurvetson, a venture capital firm.43.Defendant Kimbal Musk has been a member of Tesla’s Board ofDirectors since April 2004. Kimbal Musk is Elon Musk’s brother.44.Defendant Brad W. Buss has been a member of Tesla’s Board ofDirectors since November 2009. From August 2014 until his retirement inFebruary 2016, Buss served as the Chief Financial Officer of SolarCity.45.Defendant Ira Ehrenpreis has been a member of Tesla’s Board ofDirectors since May 2007. Since 2015, Ehrenpreis has also been a ManagingPartner of the venture capital firm of DBL Partners, which was an early investor inTesla. DBL currently owns SolarCity shares.46.Defendant Robyn M. Denholm has been a member of Tesla’s Boardof Directors since August 2014.investors-7 4-billion.19

47.Defendant J.B. Straubel is the Chief Technology Officer of Tesla, itsCo-Founder, and a member of SolarCity’s Board of Directors.48.Defendant SolarCity is a provider of energy services headquartered inSan Mateo, California. Among SolarCity’s primary services, the company designs,finances and installs solar power systems.49.Defendant Lyndon Rive is the Co-Founder, Chief Executive Officer,and a director of SolarCity. Lyndon Rive is the first cousin of Elon Musk.50.Defendant Peter Rive is the Co-Founder, Chief Technology Officer,and a director of SolarCity. Peter Rive is the first cousin of Elon Musk.51.Defendant D Subsidiary, Inc. is a wholly owned subsidiary of Tesla.D Subsidiary is a Delaware corporation that was formed on July 21, 2016 for thepurpose of effecting the merger. Upon completion of the merger, D Subdidiarywill be merged with and into SolarCity, with SolarCity surviving as a whollyowned subsidiary of Tesla.52.Non-party John H. N. Fisher is a member of SolarCity’s Board ofDirectors. Fisher is also a Managing Director of DFJ, of which DefendantJurvetson is also a Managing Director.53.Non-party Nancy E. Pfund is a member of SolarCity’s board ofdirectors. Pfund has previously served on the Tesla Board. Pfund is also the20

Founder and Managing Partner of DBL Partners, of which Defendant Ehrenpreis isalso a Managing Partner.54.Non-party Donald R. Kendall, Jr. is a member of SolarCity’s Board ofDirectors.SUBSTANTIVE ALLEGATIONSBackground55.Elon Musk is the Co-Founder and Chairman of the Board of SolarCityand the CEO and Chairman of the Board of Tesla. Elon Musk dominates thesecompanies and is the ultimate authority over all of his many companies.56.Elon Musk dominates his family of companies principally through hisdynamism and cult following. Indeed, a Yahoo Finance article dated July 27,2015, entitled “How Elon Musk Controls Tesla Motors While Owning Only 27Percent” by John Voelcker stated that “Elon Musk [] has a huge personalfollowing that eagerly hangs on his every word.”13 As detailed herein, the twoElon Musk companies at issue, Tesla and SolarCity, are thoroughly intertwined.This interrelated governance structure permits Elon Musk to dominate and exercisecontrol over both Tesla and SolarCity.13See a-motors-whileowning-only-130000986.html.21

Tesla57.Tesla designs, develops, manufactures and sells high-performancefully electric vehicles and energy storage products. Tesla has established its ownnetwork of vehicle sales and service centers and Supercharger stations globally toaccelerate the widespread adoption of electric

noted that Tesla would be inheriting SolarCity's staggering debt if the deal went through:3 Last week, Tesla announced that it was pursuing an acquisition of SolarCity, the troubled solar-panel leasing company that is run by Tesla CEO Elon Musk's cousin Lyndon Rive SolarCity is a 3 billion bite for Tesla in an all-stock transaction