Musk’s SpaceX-Tesla Merger: $3.5 Trillion Deal Faces Legal Risks
Elon Musk’s proposed $3.5 trillion SpaceX-Tesla merger faces shareholder scrutiny, legal risks and regulatory hurdles as talks remain in the early stages.
Raja Awais Ali
10/22/20265 min read
Musk’s SpaceX-Tesla Merger: $3.5 Trillion Deal Faces Legal Risks
Elon Musk’s public endorsement of a potential $3.5 trillion merger between SpaceX and Tesla has raised concerns among people involved in the discussions, with fears that his comments could intensify shareholder scrutiny and delay the process by several weeks. The proposed combination could create one of the world’s largest industrial and technology groups, but negotiations remain at an early stage, and neither company has confirmed a final agreement.
According to people familiar with the discussions, Musk’s public support has complicated efforts to evaluate the potential transaction fairly. One person with direct knowledge of the talks said the disclosure could raise questions about whether Tesla’s public shareholders would receive adequate protection during the negotiations. The concerns reflect similarities with Tesla’s 2016 acquisition of SolarCity, a deal that triggered years of litigation over Musk’s influence and the fairness of the transaction.
Musk serves as chief executive officer of both SpaceX and Tesla and holds significant ownership stakes in each company. He owns nearly one-fifth of Tesla and just under half of SpaceX, making his position central to any proposed merger. Analysts have suggested that combining the businesses could give him greater control over the resulting company, although the final ownership structure would depend on the terms of any agreement.
The companies have established special committees to examine the potential transaction and have hired advisers to assess the available options. SpaceX approached Tesla in recent weeks, and the discussions have covered several possible structures. One option would involve SpaceX acquiring Tesla, while another would combine the two companies under a newly created holding company. The parties are also considering different forms of payment, including an all-stock transaction in which shareholders would receive shares rather than cash. No final structure has been selected, and the companies have not agreed on definitive terms.
Musk publicly backed the idea during an investor call on October 20, describing a merger as a good idea while acknowledging that the decision rests with the special committees. He also recognised that his position creates a conflict of interest and said he could not participate in their discussions. According to a person familiar with the process, advisers have also been communicating with Musk’s lawyers to ensure that he remains excluded from the merger negotiations.
The central issue is whether the independent committees can evaluate the deal without undue influence from Musk and determine whether its terms are fair to shareholders of both companies. In transactions involving related parties, independent directors typically oversee negotiations to protect investors who do not have the same financial interests as the individuals controlling or leading the businesses. If shareholders believe that one company is receiving a better deal at the expense of the other, the transaction could face legal challenges.
Tesla’s acquisition of SolarCity provides a significant precedent. In 2016, Tesla agreed to acquire the rooftop solar company, in which Musk also held an approximately 22% stake. SolarCity had been founded by his cousins, and shareholders later alleged that Musk had used his influence over Tesla to support a transaction that benefited his investment in a financially struggling business.
The litigation focused on whether Musk effectively controlled Tesla despite holding a minority ownership stake, given his relationships with board members and his influence over the company. Shareholders also challenged the fairness of the acquisition process and questioned the independence of the board’s oversight. The Delaware Supreme Court later upheld the ruling that the acquisition was fair, although the case took several years to resolve. Tesla directors also reached a $60 million settlement concerning allegations related to the transaction.
The SolarCity case is now an important reference point for investors assessing a potential SpaceX-Tesla merger. The previous dispute demonstrated how a major transaction involving Musk could face prolonged legal scrutiny when questions arise about independent oversight and the treatment of public shareholders. However, the outcome of any future case would depend on the specific terms of the new transaction and the evidence surrounding the decision-making process.
Eric Talley, a law professor at Columbia University, said a merger could benefit shareholders by reducing the need for Musk to divide his time between two major businesses. However, he noted that predicting the outcome of a potential legal challenge could be more difficult because Tesla is now incorporated in Texas rather than Delaware. Texas has sought to position itself as a business-friendly alternative to Delaware, but its courts have less precedent for disputes of this particular kind. Talley said the central question would ultimately be which side receives the more favourable terms.
Beyond governance and shareholder approval, the proposed merger could bring together businesses operating across several major technology sectors. Tesla focuses on electric vehicles, energy storage, autonomous driving and robotics, while SpaceX operates in rocket launches, space transportation and satellite communications through its Starlink network. Musk has also highlighted potential cooperation in artificial intelligence, semiconductor design, robotics, connectivity and advanced computing infrastructure.
The companies have already announced plans for Terafab, a semiconductor and AI-computing project intended to support their growing technology ambitions. A closer relationship could help coordinate investment, engineering resources and infrastructure across their businesses. Supporters may also argue that combining the companies would simplify decision-making and allow them to pursue projects that span automotive technology, satellite communications and artificial intelligence. However, these potential benefits would need to be weighed against the financial and operational risks of bringing together businesses with different customers, regulatory obligations and investment requirements.
The transaction would also face significant international regulatory challenges, particularly because of Tesla’s operations in China and SpaceX’s work for the US government and defence sector. SpaceX handles sensitive government and national security projects, while Tesla relies heavily on its Chinese manufacturing operations and must comply with local requirements governing vehicle and driver data. Regulators could examine how a combined company would separate sensitive information, protect technology and maintain compliance with restrictions on data transfers.
One possible challenge would be establishing effective safeguards between Tesla’s Chinese operations and SpaceX’s defence-related activities. Such arrangements would need to address concerns in both Washington and Beijing, where national security, data protection and access to technology could influence the approval process. The scale of the proposed transaction means that regulatory scrutiny could extend beyond the United States to other jurisdictions where the companies operate.
A merger would also build on SpaceX’s earlier acquisition of Musk’s artificial intelligence company xAI, announced in 2026. A combination with Tesla would bring another major business under the same corporate structure and could create an unusually broad group spanning electric vehicles, space technology, satellite communications and AI. However, the size of the proposed transaction would not automatically guarantee financial benefits for investors, and shareholders would still need to assess the valuation, ownership arrangements and risks associated with the combined business.
As of October 22, 2026, the SpaceX-Tesla merger remains under discussion, with no final agreement announced. Musk’s public endorsement has brought additional attention to the negotiations, but the immediate challenge is to establish a process that protects shareholders and withstands legal and regulatory scrutiny. Whether the companies ultimately combine will depend on the terms they negotiate, the conclusions of their independent committees, investor support and the ability to address concerns surrounding Musk’s influence and the businesses’ international operations.
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