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A Delaware judge heard arguments Monday over a massive and unprecedented fee request by lawyers who successfully argued that a massive and unprecedented pay package for Tesla CEO Elon Musk was illegal and should be voided.
Attorneys for a Tesla stockholder 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 valued at more than $7 billion at current trading prices. The 2018 compensation package for Musk that was rescinded by the judge was potentially worth more than $55 billion.
After a full day of expert-witness testimony and arguments by attorneys, McCormick gave no indication on when she would rule on the fee request.
The fee amount sought by plaintiffs’ attorneys dwarfs the current record $688 million in legal fees awarded in 2008 in litigation stemming from the collapse of Enron.
Attorneys for the Tesla shareholder argue that their work resulted in the “massive” benefit of returning shares to Tesla that otherwise would have gone to Musk and diluted the stock held by other Tesla investors. They value that benefit at $51.4 billion, using the difference between the stock price at the time of McCormick’s January ruling and the strike price of some 304 million stock options granted to Musk.
Attorney Greg Varallo told McCormick that he and his fellow plaintiff lawyers were simply asking for “a slice of the value pie we created.”
“We did battle with the very best,” Varallo added. “Litigation against Tesla is never easy. There are companies who play by the rules every day, and then there are companies like Tesla.”
The plaintiff attorneys argue that their fee request is “conservative” under Delaware law. Instead of a typical 33% fee recovery, they note that they are seeking only 11% of the shares now available to Tesla as the result of Musk’s options being rescinded by McCormick’s ruling. The judge agreed with the shareholder lawyers’ argument that Musk engineered the landmark 2018 pay package in sham negotiations with directors who were not independent.
Following the court ruling, Tesla shareholders met in June and ratified Musk’s 2018 pay package for a second time. McCormick made clear, however, that the June vote would not be considered in determining the request for attorney fees. It instead will be the subject of a separate hearing in early August.
Meanwhile, some opponents of the fee request argue that the plaintiff attorneys deserve no fee at all because they did not bestow any economic benefit on Tesla and instead may have even harmed the company. Opponents contend that the purported reversal of share dilution among Tesla stockholders is not a benefit to the Austin, Texas-based company itself and cannot be used to justify the fee request. They also note that the fee request fails to quantify or subtract potential negative consequences of the ruling, including the need to find a new way to compensate Musk for six years of non-salaried service to Tesla since 2018.
“The market did not react like this rescission remedy bestowed any benefit,” defense attorney John Reed told McCormick, noting that Tesla’s market capitalization dropped by $15 billion after her ruling.
Some critics argue that any fee award should be based only on the number of hours the plaintiff attorneys worked, and a reasonable hourly rate. Adding a multiplier to incentivize attorneys who work on a contingency basis in corporate disputes might also be appropriate, they have suggested. That approach could still result in a fee award of tens of millions of dollars. The current fee request equates to an hourly rate of about $288,000 for plaintiff attorneys and would result in an “unwholesome windfall,” according to opponents.
Acknowledging the criticism that the fee request has received, plaintiff attorneys in a recent court filing proposed an alternative fee structure. Under that scenario, they would be willing to accept $1.44 billion in cash, equating to an hourly fee of about $74,000.
