WILMINGTON, Delaware — A Delaware judge heard arguments Monday on a massive and unprecedented attorneys’ fee claim. They successfully argued that a massive and unprecedented pay package for Tesla CEO Elon Musk was illegal and should be thrown out.
Lawyers for a Tesla shareholder who challenged Musk’s 2018 compensation package are asking Chancellor Kathaleen St. Jude McCormick to award them legal fees in the form of stock in the electric vehicle company, worth more than $7 billion at current trading prices. Musk’s 2018 compensation package that was tossed out by the judge was potentially worth more than $55 billion.
After a full day of expert testimony and attorney arguments, McCormick gave no indication when it would rule on the request for compensation.
The amount of fees requested by the plaintiffs’ lawyers is much higher than the amount of the current record $688 million in legal fees awarded in 2008 in lawsuits arising from the collapse of Enron.
Lawyers for the Tesla shareholder argue that their work resulted in the “enormous” benefit of returning shares to Tesla that otherwise would have gone to Musk, diluting the shares of other Tesla investors. They estimate that benefit at $51.4 billion, using the difference between the stock price at the time of McCormick’s January ruling and the exercise price of about 304 million stock options granted to Musk.
Attorney Greg Varallo told McCormick that he and his fellow attorneys were simply asking for “a piece of the value pie that we have created.”
“We’ve been fighting with the best of the best,” Varallo added. “Taking legal action against Tesla is never easy. There are companies that play by the rules every day, and then there are companies like Tesla.”
The plaintiffs’ attorneys argue that their request for compensation is “conservative” under Delaware law. Instead of a typical 33% compensation, they note that they are seeking only 11% of the shares now available to Tesla as a result of Musk’s forfeiture of options by McCormick’s statement. The judge agreed with the shareholder lawyers’ argument that Musk designed the groundbreaking 2018 pay package sham negotiations with directors who were not independent.
Following the court ruling, Tesla shareholders met and ratified in June Musk’s 2018 pay package for the second time. However, McCormick made it clear that the June vote would not be considered in determining the request for attorney fees. Instead, it will be the subject of a separate hearing in early August.
Meanwhile, some opponents of the request for indemnification argue that the plaintiffs’ attorneys don’t deserve compensation at all because they provided Tesla with no economic benefit and may have actually harmed the company instead. Opponents argue that the alleged reversal of stock dilution among Tesla shareholders provides no benefit to the Austin, Texas-based company itself and cannot be used to justify the request for indemnification. They also note that the request for indemnification fails to quantify or discount the potential negative consequences of the ruling, including the need to find a new way to compensate Musk for six years of non-salaried service at Tesla since 2018.
“The market did not react as if there was any benefit to this termination measure,” defense attorney John Reed told McCormick, noting that Tesla’s market cap fell by $15 billion following her ruling.
Some critics argue that a fee should be based solely on the number of hours the plaintiff’s attorneys work and a reasonable hourly rate. Adding a multiplier to incentivize attorneys who work on a contingency basis in commercial litigation might also be appropriate, they have suggested. That approach could still result in fees in the tens of millions of dollars. The current fee request amounts to an hourly rate of about $288,000 for plaintiff’s attorneys and would result in an “unhealthy windfall,” opponents say.
The plaintiffs’ attorneys acknowledge the criticism the fee request has received and proposed an alternative fee structure in a recent court filing. In that scenario, they would be willing to accept $1.44 billion in cash, which equates to an hourly rate of about $74,000.
