Elon Musk publicly supports the merger of SpaceX (SPCX.US) and Tesla (TSLA.US); insiders worry negotiations might change.

According to Trading Economics APP, reports indicate that Elon Musk publicly expressed his support this week for a potential $3.5 trillion merger between SpaceX (SPCX.US) and Tesla (TSLA.US), a move that has unsettled some internal participants in the discussions. They fear Musk’s comments could prompt heightened shareholder scrutiny and delay the deal’s progress by several weeks.

People familiar with the negotiations revealed that this disclosure has caused “confusion” in the negotiation process because it may trigger questions from the outside, such as how the interests of Tesla shareholders will be fully represented. These concerns reflect that some participants see similarities to Tesla’s 2016 acquisition of SolarCity—a deal that led to years of litigation due to Musk’s involvement.

Musk serves as CEO of both SpaceX and Tesla, and holds substantial equity stakes in both companies. He told investors this week that the two companies are actively exploring what would become the largest corporate deal in history, and disclosed that both have already formed special committees for evaluation.

According to three informed sources, both sides have appointed advisors, but discussions are still in the early stages. One source stated that SpaceX proactively reached out to Tesla in recent weeks, and the two sides have been discussing various deal structures, including acquisition by SpaceX or merging under a newly established holding company. The source added that both sides are weighing different forms of merger consideration, including an all-stock transaction. These details had not previously been reported.

Precedent: The SolarCity Deal Triggered Years of Litigation

For related-party transactions such as a SpaceX-Tesla merger, the entire process is typically overseen by independent directors to protect the interests of public shareholders.

This issue was especially prominent during Tesla’s 2016 acquisition of SolarCity. At that time, shareholders accused the world’s richest man of influencing the process to rescue his investment in the struggling rooftop solar company, leading to years of lawsuits. Back then, Musk held about 22% of both Tesla and SolarCity, the latter founded by his cousins.

Shareholders argued that Musk’s involvement and public endorsement impaired the fairness of the transaction. At the core of the case was the claim that, though Musk had minority stakes, his relationships with board members and assertive influence made him a de facto controlling shareholder of Tesla.

The Delaware Supreme Court later noted that the plaintiff’s claims about the lack of an independent committee, along with “certain other facts about Musk’s involvement and public support of the transaction,” indicated the deal was unfair.

The court ultimately ruled the acquisition was fair and reasonable, but the case took years to resolve, with Tesla’s directors paying $60 million to settle the charges.

Conflict of Interest: Musk Must Recuse Himself from Talks

Musk holds nearly one-fifth of Tesla’s shares and just under half of SpaceX’s shares. Analysts say the merger would leave him in control of the combined entity. On an investor conference call Tuesday, Musk admitted that, as a conflicted party, he cannot participate in special committee discussions. According to insiders, advisors are also in touch with Musk’s lawyers to ensure he recuses himself from merger discussions.

Columbia Law School Professor Eric Talley said the merger could benefit shareholders by eliminating the need for Musk to split his time between the two companies. He added that any legal challenges could be harder to predict than in the SolarCity case, as Tesla is now incorporated in Texas rather than Delaware.

“Texas is a wild card. No one knows how Texas will handle such cases, as Texas has never dealt with this type of matter,” Talley said, noting that Texas aims to position itself as a business-friendly alternative to Delaware, and that Musk's public statements so far may not constitute an issue.

He said ultimate litigation risk will depend on the specifics of any deal. “Who stands to gain most from the transaction? That's usually what triggers litigation,” Talley said.

Public Comments Could Intensify Shareholder Scrutiny, Affect Negotiations

According to informed sources, those involved in the negotiations worry that Musk’s public support for the merger and disclosure of the talks could intensify investor scrutiny, as stakeholders usually avoid public comments while independent directors review a deal.

The source added that if advisors fail to shield the special committee from Musk’s influence, the SolarCity case could serve as a reference point for investors and courts when evaluating any future SpaceX-Tesla deal.

A merger between Tesla and SpaceX would be the largest transaction in history, creating one of the world’s largest industrial and technology conglomerates. It would surpass SpaceX's acquisition earlier this year of Musk’s artificial intelligence company xAI, which itself ranked among the largest corporate deals ever.

A deal of such magnitude would also face global regulatory scrutiny, particularly given Tesla’s operations in China and SpaceX’s roles in U.S. defense and artificial intelligence sectors.