Institutional Shareholder Services (ISS) on Friday recommended that investors in both companies approve Tesla Motors' plan to buy solar panel installer SolarCity for more than $2 billion.
ISS' backing of the deal is a key endorsement at a time when shareholder resistance against the takeover remains high. SolarCity's stock rose 9 percent on Friday to $20.40.
"The transaction is a necessary step toward TSLA���s goal of being an integrated sustainable energy company," said ISS, an influential proxy advisory firm that recommends votes for contested situations and deals to institutional shareholders.
Tesla's shares plunged more than 13 percent immediately after the $2.6 billion all-stock offer was announced in June, as some investors in the electric car maker viewed the deal as a bailout for the struggling solar panel company. SolarCity's stock jumped 18 percent to $25 the day of the announcement.
Tesla Chief Executive Elon Musk, who is chairman of SolarCity and the largest shareholder in both companies, has described their combination as a "no-brainer" and has been on the defense ever since.
ISS called the corporate governance surrounding the arrangement "suboptimal" but said Tesla would be buying SolarCity at a bargain price.
"Additionally, it appears reasonable to assume that TSLA is paying a low to no premium to take over SCTY," ISS said.
Tesla shares rose 2 percent on Friday to $192 per share.
"We very much appreciate that Institutional Shareholder Services (ISS), following an in-depth examination of both companies, recommends in favor of Tesla's acquisition of SolarCity," Tesla said in a statement on its website.
Earlier this week, Tesla held a presentation to still-skeptical shareholders on the merits of the deal, saying it will add $1 billion in revenue.
Tesla, whose shares are down 10 percent since June, is trying to muster support in advance of a Nov. 17 vote on the deal.
While ISS's support is a positive step for Musk, it does not guarantee that he can win the majority of shareholders needed. Musk and other insiders have recused themselves from the vote, which ISS said was the right step.
"The board gave minorities significant leverage by requiring a majority of the minority vote as condition for approval," ISS said in its note.
(Reporting by Michael Flaherty; Editing by Dan Grebler and Jonathan Oatis)