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Last August, Elon Musk had tweeted that he had "secured funding" to privatize Tesla. This turned out to be false, and he eventually had to settle his securities fraud charges with the Securities and Exchange Commission.
Musk is still fighting the SEC for the same settlement, and he may be found in contempt of court for his alleged violation. With the decision ahead, it's worth asking: had aligned financing? What does Musk have to gain from transforming Tesla, a NYSE-listed company since 2010, into a private company?
How could he do it?
Musk could have taken Tesla privately in different ways. One of the most common ways would be to obtain funds from a small group of institutional investors to buy back the shareholders of the company. Shareholders usually want a premium on the stock price at a time (for example, $ 420!) And must also approve the transaction at a vote. Investors then get a stake in the company in return, but the total number of owners would be below the thresholds set by the Securities and Exchange Commission for reporting.
At first it sounded like the way Musk wanted to go, but his later tweets complicated things, according to Stephen Diamond, a professor of law at the University of Santa Clara and an expert in securities law and governance. 39, especially the one where Musk expressed his hope. this "* all * current investors stay with Tesla even if we are private. "
"It would be very difficult for him to bring together a subgroup of several thousand shareholders in a sort of entity that the SEC would consider below these thresholds," Diamond said.
Another way to remove Tesla from the public purse would be to run a "buyout," according to Ann Lipton, an associate professor of corporate law at Tulane University. Here, the goal is the same: buy back the shareholders, so there are only a few left – but the source of money is different. Instead of trading in equity for financing, Tesla would borrow money from entities such as banks to buy back shareholders. Types of financing often call for debt influence because it seems less dangerous; therefore, a "buyout" instead of "debt-backed buyout".
The problem with that, says Lipton, is that Tesla has already had a lot Debt – about $ 11 billion at the time of the "secured financing" tweet – and not a lot of cash available.
"The theory of a leveraged buyout is that you take a business with a lot of money and you use it to pay off the debt, but it 's not Tesla," she says.
So, if Tesla was private today, that would probably not have happened through a buyout. More likely, he would have taken the first path, from a small group of investors. If that had been the case, it would have cost tens of billions of dollars and would have been "one of the largest and most complex private equity games," according to Diamond. As Musk does not have Actually If the funds were from Saudi Arabia, it should probably have been obtained from existing or external institutional investors and then used to buy back the shareholders in a transaction they had to approve.
Many shareholders would inevitably be upset (as some were August Day), either by the amount offered by Musk, or by the way the agreement was executed, says Gregory Shill, Professor of Law at the University of Iowa. In fact, this often happens. Litigation over the price of transactions is particularly inevitable, he says. But even if Musk "dotted his points and went through them," Shill said, there would likely be a lawsuit about how the process was handled.
To understand why, it's worth looking at Tesla's acquisition of SolarCity in 2016. Musk was president of the solar energy company when he made this offer, which was run by his cousins. He objected to voting on the agreement and 85% of the shareholders approved it. Yet some shareholders have filed lawsuits alleging that the process was corrupted because of Musk's close relationship with his cousins and the fact that Tesla's board of directors was made up of Musk supporters. The case is still going on.
Lipton says Musk "did not even pretend to negotiate at arm's length" in the SolarCity case. It is therefore possible that a similar case would have come up if Tesla had gone private. So, even if Musk had managed his efforts, he and Tesla would probably defend him in court today. (Instead, they continue to defend themselves against shareholder lawsuits over alleged securities fraud.)
What would Musk have gained from taking Tesla privately?
If Musk had deprived Tesla in a more traditional way, he would probably not have been the subject of a lawsuit before the SEC. This means that Musk would still be chairman of the board, would be enriched with $ 20 million and would not have appointed independent directors to the board of Larry Ellison and Kathleen Wilson-Thompson.
If Tesla becomes a private company, fewer people would have access to the company's financial information, as the SEC would no longer require these numbers to be published. (However, Lipton points out that a portion of Tesla's debt is tied to bonds that require disclosure, so the company should pay down this debt to really "sink into the dark," she says.) The automaker would also be less hustled Wall Street analysts who view the stock price of a company as a measure of its performance. The company would also be released from the obligation to report its financial results quarterly, which, according to Musk, puts "tremendous pressure on Tesla".
But that does not mean that Tesla would be free of all control, according to Diamond.
"In a private setting, he would have very difficult co-owners who would represent very sophisticated investors," Diamond said. Consolidation of ownership means that this small group of stakeholders will also exert "considerable influence on the daily life of society".
"He thinks he's going to find some stupid billionaires who are going to leave him free, I think he's making fun of himself," he says.
Musk would have probably more control over the story of the company, says Diamond.
"He would be able to avoid public scrutiny by investors, and he could then, on his own, present the Tesla story to the public as he wishes," Diamond says. "The problem today is that he shares the property with other investors, which forces him to keep them informed of what is happening. And he must be honest. He does not have to tell them everything, but when he speaks, he can not deceive them. "
Tesla's story is crucial to Musk, and he fought to control it. He accused the media of writing stories that distorted what was going on in society, going so far as to shout "shame" during a conference call. He constantly claims that short sellers, people who bet that a company will fail, spread lies about the company. "[S]fashionable sellers are desperately pushing a story that will likely result in the destruction of Tesla, "he told the New York Times. Musk also accused both journalists and short sellers of being funded by the "big oil".
Journalists would have less access to Tesla's financial data, even if they would not stop covering Tesla. But a private Tesla means that short sellers would have no way of placing those wagers against the company, Shill explains.
Tesla's short sellers existed well before the privatization attempt, but their numbers have increased over the past 18 months as the company struggled to increase its model 3 production. They have logged on to Twitter and even created a website where they display their theories and their research, which they say exposes Musk's fraudulent practices. Even if Musk had found a way to take Tesla privately, this community of Internet detectives would probably still be there.
Knowing all this, Shill says that Musk might not want to get away from the SEC any more. To make the company a private business would leave Musk "to stay in the public's imagination, to continue to make headlines". The Wall Street Journal, to be on Twitter, but the cops would not knock on his door in the form of the SEC, "he says.
Musk has been making fun of the SEC several times in the months following the conclusion of an agreement between the two parties, calling it a "short sellers' enrichment commission," and stating outright 60 minutes that he does not respect the agency. Musk also continues to fight with the SEC over the settlement he accepted last year. So it's easy to imagine him trying to get away from the agency.
"It was the real call," says Shill.
The Tesla that has never been
A private Tesla would be less exposed to the public, more under the control of Musk, and freed from the pressure of publishing good quarterly performances. But this control would be opposed to stronger and more interested shareholders. Musk would probably still be his own mercurial (and often pugnacious) individual on Twitter. The company would be stuck in litigation with its former shareholders and people who think Tesla is a fraud would still be proving it.
Meanwhile, Tesla will still lead a fledgling consumer electric car company, a company that needs a lot money just to survive – let alone grow. So, even if Tesla had become private, he probably would not have remained private forever, Diamond said.
"The reason you switch to the private sector is to focus on solving production problems, restructuring the business, and then making it more acceptable to a larger number of investors," he says. "You want a machine that works well."
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