The proposed merger of Tesla Motors Inc. and SolarCity Corp. has received an endorsement from an influential shareholder proxy service, an important show of confidence for entrepreneur Elon Musk's plan ahead of a Nov. 17 vote.

Institutional Shareholder Services Inc., advising large investors on corporate governance issues, said Friday "the transaction is a necessary step towards (Tesla's) goal of being an integrated sustainable energy company." The firm's report recommended Tesla shareholders approve the deal and said "it appears reasonable to assume that (Tesla) is paying a low to no premium to take over (SolarCity)."

SolarCity shares shot up 10% to $20.44 in morning trading, while Tesla traded up 2.8% at $192.62.

In a separate report, the firm recommended that SolarCity shareholders approve the merger as well, saying it provides the option of selling the more liquid Tesla stock or to participate in the possible gains of the merger.

Mr. Musk, chairman of both companies, has proposed turning Tesla into a company that expands beyond car making to also offer customers fashionable home solar panels that can generate power that is stored at home in batteries to charge the electric vehicles. The proposal, however, has led to fear a larger mandate for Tesla that will distract management during the complicated and important introduction of the Model 3 next year.

Tesla expects the Model 3, a more affordable electric car than the luxury Model S sedan and Model X SUV, to fuel a production increase of 500,000 in 2018 from about 50,000 last year.

ISS tamped down concerns about Tesla's ability to access the capital markets after the SolarCity merger.

"It seems likely that (Tesla), a company with currently almost $30 billion in market cap, could bridge a financing gap, albeit at a high financing cost, if conditions are very adverse until capital markets open up," the firm said.

"We very much appreciate that Institutional Shareholder Services, following an in-depth examination of both companies, recommends in favor of Tesla's acquisition of SolarCity," Tesla said in a statement.

"The combined company will become the world's only integrated sustainable energy company, ranging from clean energy generation to storage to transportation, resulting in a better outcome for shareholders, customers and the environment."

Write to Tim Higgins at Tim.Higgins@WSJ.com

(END) Dow Jones Newswires

November 04, 2016 12:45 ET (16:45 GMT)

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