More information has now emerged on Mr. Musk’s tweet since our last post.
After reviewing Regulation FD and Rule 10b-5, we had concluded that Mr. Musk’s should be fine as long as the funding was truly secured, meaning that there was a signed (i.e. irrevocable) financing commitment to back the statement “funding secured”. While going to Twitter to make such an announcement was unusual, we did find a precedent (i.e. Netflix CEO Reed Hastings making an announcement on Facebook). The SEC has also since stated that under certain circumstances, this should be fine. As long as Mr. Musk’s statement did not mislead the market, there should be no dire consequences for him and Tesla.
But what a week.
Reuters and the New York Times (NYT) indicated that the SEC has since sent subpoenas to Tesla in connection with its take-private plans and Mr. Musk’s statement that funding for the privatization was secured. The SEC has launched a formal probe into the matter and is now seriously investigating the privatization plans.
In a blog post, Mr. Musk tried to explain what he meant by “funding secured.” The Saudi Arabian wealth fund recently bought close to 5% of Tesla stock. Shortly thereafter, on July 31, Mr. Musk met with the managing director of the fund. At this meeting, the managing director “expressed regret” that Mr. Musk had not moved forward with the privatization of Tesla. According to Mr. Musk, the managing director “expressed his support for funding a going private transaction for Tesla.” Mr. Musk understood that “no other decision makers were needed and that they were eager to proceed.” Mr. Musk concludes:
“ I left the July 31stmeeting with no question that a deal with the Saudi sovereign fund could be closed, and that it was just a matter of getting the process moving. This is why I referred to “funding secured” in the August 7thannouncement.”
Let’s pause here for a second. All there is, at best, is a handshake agreement. Note that this is Mr. Musk’s reading of the situation. I’m not aware of any formal and public commitment of the Saudi sovereign fund since this announcement. In fact, the NYT indicated that the Saudi wealth fund declined to comment. During the meeting referenced by Mr. Musk, there is no formal commitment and many details still have to be finalized. This is actually further confirmed by Mr. Musk’s post:
“Following the August 7thannouncement, I have continued to communicate with the Managing Director of the Saudi fund. He has expressed support for proceeding subject to financial and other due diligence and their internal review process for obtaining approvals. He has also asked for additional details on how the company would be taken private, including any required percentages and any regulatory requirements.”
The post discusses various other considerations regarding the privatization of Tesla. Mr. Musk also indicates that he is having further discussions with a number of other investors.
Three things shocked me:
- Funding is not secured when there is still due diligence to be done. Due diligence is problematic because this is fully within the control of the parties to the transaction. Subject to material changes, due diligence is usually completed by the end of the commitment stage. Regulatory approvals are also an unknown: the Saudi investment would be a foreign investment that will probably require CIFIUS approval. Unlike due diligence, which should be finalized by signing, it is, however, common to sign a commitment letter subject to obtaining regulatory approvals.
- The details of this blog post are incredibly vague. It was only following the announcement on Twitter that the fund requested further information on how the transaction would be structured. In a standard transaction, there would be a step plan or tax memorandum showing all the steps of the transaction. The memorandum can change but at least there is a sketch on how the transaction would be structured. This also forms part of the due diligence process. None of that work has been done.
- The Tesla blog post implies that funding is secured with the Saudis. But then, Mr. Musk admits that he is also discussing the matter with other parties. Therefore, there is a possibility that the deal could be done with investors other than the Saudi fund. As a matter of fact, the Saudi fund may not even take part in the deal depending on how it is structured. When the source of your funding may change, then it is hard to say that funding is secured.
From this blog post alone, which is the most tangible and official explanation offered by Mr. Musk, there is no secured funding. The Saudi commitment is not binding at all. What Mr. Musk has secured so far is a vague handshake agreement at best, which could be thrown out the window if there are issues during the due diligence process or if a deal is structured on better terms with other investors.
I thought that this quote from a Bloomberg columnist summed up pretty well Wall Street’s feeling regarding Mr. Musk’s tweet:
“How secured was the Saudi funding? So secure that preliminary non-binding abstract discussions of a hypothetical deal continue.”
As a securities lawyer, I view Mr. Musk’s tweet as incredibly misleading. It was misleading to claim that funding was secured when there was no binding commitment. It was also misleading to claim that the only thing standing in the way of Tesla’s privatization was a shareholders’ vote because the details of the transactions and source of funding were still unknown.
Keith Higgins, a Ropes & Gray partner who previously spearheaded the SEC’s corporation finance division said that “a cautious lawyer would have said you shouldn’t have said ‘funding secured’ unless you had a commitment letter.” I agree and this is in line with the conclusion of our previous blog post.
Since this blog post, further developments confirmed that the funding was not so secured.
First, Mr. Musk has lined up Goldman Sachs and Silver Lake as advisors to help him take Tesla private. One would have hoped that he had already hired advisors when discussing such important matters with the Saudi fund. Worst, according to Bloomberg, Silver Lake had not even formally accepted the role when Mr. Musk tweeted that he was working with them.
Second, the board of directors came out with polished statements. While those statements did not directly contradict Mr. Musk’s statement, they did indicate that Mr. Musk had jumped the gun. The most striking indication is the board’s formation of a committee to evaluate the merits of the privatization of Tesla. The board was probably blindsided by Mr. Musk’s tweets. If that wasn’t the case, the committee would have already been formed. And if the funding was secured and the only thing standing in the way of the transaction was a shareholders’ meeting, the committee and the full board would have at least first approved the transaction and its details. None of this has occurred. Worst, it seems that two separate law firms are now advising the board and individual board members, which shows a degree of concern by board members. Latham & Watkins is acting as counsel for the committee. The formation of the committee was formally announced in an 8-K filing with the SEC, the more traditional route of making public announcements as previously explained.
Third, Tesla’s stock price stands at approximately $305 at the time of this post. We are far from the $420 price tag announced by Mr. Musk. This simply means that the market is not convinced by Mr. Musk’s claims. If it were, the stock price would be closed to $405 or $410 (it would not reach $420 so that uncertainties such as regulatory approvals are priced in).
Fourth, the recent stock decline was partly triggered by a recent NYT interview of Mr. Musk. During the interview, an emotional Mr. Musk confirmed that the tweet was not vetted by anyone, including the board of directors or legal counsel. Mr. Musk sent the tweet from his car on his way to the airport. Clearly, no blueprint of a deal even existed as no one knew about the possible take-private transaction. The New York Times even concludes that the funding was not secured, a conclusion that is in line with most reports.
It seems that Mr. Musk is under a lot of pressure and trying to battle short-sellers. This tweet probably went too far. His last argument saying that he was showing transparency to all investors is pretty weak as there was nothing concrete, and therefore nothing to be really transparent about. And this disclosure could have been done through proper channels in a more measured fashion, before or after market hours.
In the end, it looks like the funding to take Tesla private is not secured. Don’t get me wrong: taking Tesla private could end up happening. But, at this stage, Mr. Musk jumped the gun and his tweet was misleading. It ended up massively moving the stock price of Tesla that day and many short sellers suffered significant losses. It will still be an uphill battle for short-sellers suing Mr. Musk and Tesla to show scienter and damages. But the SEC is actively probing the matter and I won’t be surprised if those lawsuits and investigations end up depressing Tesla’s stock price and diverting Mr. Musk’s attention from other more important matters.
Leave a Reply Cancel reply