Shareholders of Tesla Motors (NASDAQ:TSLA) and SolarCity (NASDAQ:SCTY.DL) will decide on Nov. 17 if the companies will merge into one renewable energy-automotive giant. And with questions surrounding Elon Musk's role in the plan, and the overlap on their boards of directors, the outcome is not assured.
This isn't a normal merger vote either. Elon Musk owns 18.4% of Tesla's shares and 21.9% of SolarCity's shares, and other insiders hold large percentages of both companies. But Musk won't be voting all of his shares, which gives three mutual fund companies an outsized say in whether this deal goes through or not.
SolarCity's vote won't have much suspense
To get a baseline of what this vote is about, let's lay out the details. SolarCity has 100,730294 shares outstanding, and a majority need to be voted in favor of the deal for it to move forward. Musk owns 21.9% of those shares, and among them, all the company's executives and officers (including Musk) hold 34.7% of the shares outstanding.
Musk has already said he's voting for the merger; assuming all executives and officers vote yes as well, that means that 76.6% of all other shares would have to vote against the deal to block it. Fidelity controls a 11.9% stake -- the biggest outsider stake -- but that's a long way from enough to blocking the merger from the SolarCity side.
Given the fact that Musk will be voting his SolarCity shares, there's really not much suspense from this side of the deal; it's highly likely it will pass. It's the Tesla side that investors should be watching.
The Tesla vote could be interesting
Tesla has 149,792,626 shares outstanding, of which Elon Musk owns 18.4%. But Musk, CTO Jeffrey Straubel, and Antonio Gracias, who all have conflicts of interest due to involvement with both companies, have agreed not to vote their Tesla shares, meaning a total of 34,769,446 shares will be on the sidelines. For the deal to be approved, a majority of the remaining Tesla shares -- 57,511,591 out of 115,023,180 -- must be voted in favor.
Three shareholders will play a very large role in this vote. Fidelity owns 13,341,827 Tesla shares, or 11.6% of the shares needed to pass the deal. Baillie Gifford & Co. and T. Rowe Price Associates own 10,714,449 and 7,780,816 shares respectively, accounting for 16.1% of the votes needed to pass.
If those three fund managers do vote for the deal, Tesla needs just 30.9% of the shares beyond those to move the deal through.
But if those three funds vote against it, 69.1% of the remaining shareholders would need to vote for the merger for it to pass.
Mutual fund companies could decide the fate of Tesla and SolarCity
In unusual shareholder votes like these, it's important to understand the mechanisms that will drive the outcome. In the case of the SolarCity vote, so many shares are already pledged to vote for the deal that it's highly unlikely the company will block the merger.
But in the case of Tesla Motors, the results isn't so easy to predict. Fidelity, Baillie Gifford, and T. Rowe Price each have a significant voice in determining whether the deal becomes very likely or very unlikely. And Musk and team will be counting on their votes to get it over the top.