Everyone’s talking about the possibility SpaceX will acquire Tesla, presumably in a stock merger, likely using the nonvoting shares SpaceX has authorized but unissued in its charter.

If that happens, the question is – who wins, SpaceX shareholders, or Tesla shareholders, or will the price be perfection itself?

If you assume that Elon Musk’s personal interests will play a role here, then part of the pricing will have something to do with his relative financial stakes in each company, which I am in no way going to try to calculate (also, I suppose he might have tax considerations, again, not going to calculate). But legally, there are very good reasons why the price would favor Tesla shareholders.

First, Elon Musk’s pay package at Tesla awards him around 35 million shares when he hits certain market cap milestones, coupled with operational milestones. But if Tesla is acquired, the operational milestones disappear, and the merger price becomes the market cap. Which means, if Tesla is acquired for a nominal price of $2 trillion, he gets an additional 35 million Tesla shares (which, in a stock for stock merger with SpaceX, convert to SpaceX shares). If Tesla is acquired for 2.5 trillion, that’s 70 million shares, and so forth. So he has good reason to want to hit those numbers if Tesla is acquired.

Second, if SpaceX issues stock to buy Tesla, even if doing so requires a SpaceX shareholder vote (which would be under NASDAQ rules, and it’s likely but I’m not sure), Musk controls the votes – he can be sure of SpaceX-side approval. But he doesn’t control the votes at Tesla. He needs to persuade Tesla shareholders, especially if they get no-vote shares, so that suggests a Tesla-favorable price.

Third, assuming Texas law tracks Delaware on this, if SpaceX acquires Tesla, that’s a conflict transaction of the sort shareholders on both sides might sue over (when Shari Redstone caused CBS to combine with Viacom, both sets of shareholders sued, for example). But on the SpaceX side, that’s a derivative lawsuit; shareholders must have 3% to file, and that’s, you know, in excess of $52 billion depending on where SpaceX closes today. But on the Tesla side, it’s not derivative – that’s direct, and that means, there is no 3% barrier to suing. Plus, Tesla has not (yet) attempted to bar class actions the way SpaceX has. So there’s much more litigation risk on the Tesla side, even if the standard of proof would require plaintiff-shareholders to show fraud or intentional misconduct.

Which means, my tentative bet is that the cheapest way to get exposure to SpaceX at this time may be to buy Tesla, and wait for the merger.

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Photo of Ann Lipton Ann Lipton

Ann M. Lipton is a Professor of Law and Laurence W. DeMuth Chair of Business Law at the University of Colorado Law School.  An experienced securities and corporate litigator who has handled class actions involving some of the world’s largest companies, she joined…

Ann M. Lipton is a Professor of Law and Laurence W. DeMuth Chair of Business Law at the University of Colorado Law School.  An experienced securities and corporate litigator who has handled class actions involving some of the world’s largest companies, she joined the Tulane Law faculty in 2015 after two years as a visiting assistant professor at Duke University School of Law.

As a scholar, Lipton explores corporate governance, the relationships between corporations and investors, and the role of corporations in society.  Read more.

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