Elon Musk's public endorsement this week of a potential $3.5 trillion merger between SpaceX and Tesla has unsettled some people involved in the discussions, who fear his comments could invite shareholder scrutiny and delay the process by several weeks, according to a person with direct knowledge of the talks.
The disclosure created a "mess" for the process, as it could raise questions about how well Tesla shareholders' interests would be represented, the person said. The concerns reflect similarities some participants see with Tesla's 2016 acquisition of SolarCity, which sparked years of litigation over Musk's role in the deal.
Musk, chief executive of both SpaceX and Tesla and a major shareholder in each company, told investors this week that the companies were examining what would be the largest corporate transaction in history. He also revealed that both had formed special committees to evaluate the proposal. The backlash to his remarks is reported here for the first time.
The companies have hired advisers, but discussions remain at an early stage, three sources familiar with the matter said. SpaceX approached Tesla in recent weeks, and the companies have been considering several transaction structures, including a SpaceX acquisition of Tesla or a merger under a newly formed holding company, the person familiar with the matter said.
They are also weighing different forms of merger consideration, including an all-stock deal, the person said. These details of the discussions have not previously been reported.
Tesla, SpaceX and Musk did not respond to requests for comment.
Shareholder litigation over Tesla's SolarCity deal
In related-party transactions such as a SpaceX-Tesla merger, independent board members typically oversee the process to protect public shareholders' interests.
That issue was central to Tesla's 2016 acquisition of SolarCity, which triggered years of litigation after shareholders alleged that the world's richest man had influenced the process to bail out his investment in the struggling rooftop solar company. At the time, Musk owned roughly 22% of both Tesla and SolarCity, which was founded by his cousins.
Shareholders argued that Musk's involvement and public support undermined the deal's fairness. Central to the case were claims that, despite his minority stake, Musk controlled Tesla through his ties to board members and his domineering style.
The Delaware Supreme Court later noted that the plaintiffs' contention that there was no independent committee, together with "certain other facts concerning Musk's involvement in and public support for the transaction", supported the finding of unfair dealing.
The courts ultimately upheld the acquisition as fair, although the case took several years to resolve. Tesla directors also settled allegations for $60 million.
Musk cannot be involved in talks
Musk owns nearly a fifth of Tesla and just under half of SpaceX. Analysts have said a merger would give him control of the combined entity.
During Tuesday's investor call, Musk acknowledged that, as a conflicted party, he could not participate in discussions by the special committees. Advisers are also in contact with his lawyers to ensure he is excluded from the merger discussions, the source familiar with the talks said.
Eric Talley, a law professor at Columbia University, said a merger could benefit shareholders by removing the need for Musk to divide his time between the two companies. However, he added that any legal challenge could be harder to predict than the SolarCity case because Tesla is now incorporated in Texas rather than Delaware.
"The Texas thing is a wild card. No one knows how Texas deals with cases like this because Texas never dealt with cases like this," Talley said.
He noted that Texas has sought to establish itself as a business-friendly alternative to Delaware, adding that Musk's comments so far were not necessarily problematic.
Ultimately, Talley said, the risk of litigation would depend on the terms of any transaction.
"Who's going to get the better side of this deal? And that's usually what gives rise to litigation," he said.
Musk's comments could affect discussions
People involved in the process fear Musk's public endorsement of the merger and disclosure of the talks could intensify investor scrutiny. Interested parties typically avoid expressing views publicly while independent directors evaluate a deal, the source said.
The SolarCity case could become a reference point for investors and courts assessing any future SpaceX-Tesla transaction if advisers fail to fully shield the special committees from Musk's influence, the source added.
A tie-up between Tesla and SpaceX would be the largest deal in history, creating one of the world's biggest industrial and technology groups. It would surpass Musk's acquisition earlier this year of his artificial intelligence company xAI by SpaceX, which ranks among the largest corporate transactions ever announced.
A deal of this size would also face scrutiny from global regulators, particularly because of Tesla's business in China and SpaceX's work in US defence and artificial intelligence.