In brief: Tesla’s shareholders are heading to court today to contest a legal bill. The lawyers who fought against Elon Musk’s $56 billion Tesla compensation by successfully arguing it was excessive are asking to be given the equivalent of around $7.6 billion in the EV giant’s stock. It’s up to the judge who stopped Musk’s pay package to decide whether this demand is “outlandish” and should not be paid.
More than five years after shareholder Richard Tornetta filed suit against Tesla over claims it breached its fiduciary duty by unjustly enriching its CEO to the tune of $56 billion, Delaware Judge Kathaleen St. J. McCormick voided Musk’s pay package in January. Soon after, the four law firms that represented Tornetta asked to be awarded 29 million shares of Tesla stock, which as of Friday was worth $7.3 billion. That would make it the largest fee in US litigation history and equate to roughly $370,000 for every hour worked by the 37 lawyers, associates, and paralegals.
In a letter to McCormick in March, Nathan Chiu, a Tesla shareholder from New Jersey, wrote “The legal fees appear exceedingly disproportionate and outlandish.” As reported by Reuters, it was one of around 1,500 letters sent by Chiu, the California Public Employees’ Retirement System, and more than 8,000 Tesla stockholders to the Delaware Chancery Court.
The hearing has been moved to the largest courthouse in the building to accommodate the 47 attorneys from 19 law firms appearing in the case.
The lawyers argue that Tesla is being asked to pay the massive fee because it will benefit from the return of Musk’s compensation, which they claim will result in hundreds of millions of shares being returned to the company.
“This structure has the benefit of linking the award directly to the benefit created and avoids taking even one cent from the Tesla balance sheet to pay fees,” the shareholder legal team said, adding that the fee was tax-deductible for Tesla.
McCormick will also be deciding whether to reinstate Musk’s pay package after more than 70% of Tesla shareholders voted in June to ratify it. The vote doesn’t require McCormick to undo her ruling, but she has said she will consider the vote at a separate hearing.
Musk’s package, which allows him to buy around 304 million shares, was worth almost $56 billion in January. Now, it’s closer to $69 billion. Tornetta’s attorneys say they should receive a fee equal to 11% of the judgment, a percentage that is arguably conservative by Delaware legal precedent. They added that they would have been justified in asking for up to 33% of the value of Musk’s pay package.
Tesla says that as Musk’s pay has been restored, Tornetta’s legal victory is now technically a loss that does not benefit the company or the shareholders. As such, the lawyers should receive as little as $13.6 million.
McCormick may take weeks or months to make her ruling. The decision will likely be influenced by the outcome of a $267 million fee request in a shareholder class action involving Dell Technologies, which is taking place at the Delaware Supreme Court.
