A Delaware judge is set to decide if lawyers who successfully sued to stop Tesla CEO Elon Musk from claiming a $55 billion bonus from the company are entitled to $7.3 billion in legal fees.
If the judge, Chancellor Kathaleen McCormick, agrees to the proposed fee structure, it would be by far the largest legal payout in history. The nearest contender is the Enron case in 2008, in which attorneys’ fees amounted to $688 million.
At a hearing on July 8, attorneys for a Tesla shareholder contended that they should be paid in the form of 29 million Tesla shares valued at more than $7 billion at current trading prices. The attorneys argued that this represents 11 percent of the money that they allegedly saved Tesla.
Tesla’s legal team argued that the proposed fee would be an “enormous, unjustified windfall” for the attorneys. They said the sum would equate to paying the attorneys between $288,000 and $370,000 per billing hour.
Chancellor McCormick in January rescinded a 2018 pay package for Mr. Musk that would have potentially been worth $55 billion.
Under the compensation deal, Mr. Musk was to work as CEO with no salary but be paid in stock options if he hit a series of growth metrics for the company, potentially pushing his stake in the company to as much as 28.3 percent.
Mr. Musk grew Tesla’s market value by $600 billion from 2018 to 2024.
One shareholder, Richard Tornetto, who owned nine shares of Tesla stock, sued to halt the deal, arguing it would have “diluted” the shareholders’ stock price by about 8 percent. Chancellor McCormick found for Mr. Tornetto, ruling that Mr. Musk’s compensation package was unfairly negotiated because he exercised too much influence over the board of Tesla and that it was therefore a conflict of interest.
Arguments in the fee hearing centered around how much Tesla benefited financially from Mr. Tornetto’s suit. His attorneys argued that the compensation package, minus fees, resulted in a benefit of at least $51.5 billion to the company and that revoking Mr. Musk’s compensation package freed up about 300 million shares of stock for the company to sell.
They said that normally, attorneys would be entitled to 33 percent of that benefit, but the firm felt that was too high to pass scrutiny. After a series of reconsiderations, they said, they adjusted their proposal to 29 million shares of Tesla, which would equal about $5.6 billion on Jan. 30, the day of the court’s ruling.
Mr. Tornetto’s attorneys said they would not dump the stock immediately but that they did not intend to hold onto it long-term and had no interest in using its voting power to influence the company.
Lawyers for Tesla countered that not only did the halting of Mr. Musk’s payout provide no actual benefit to the company, but also, the stock price fell sharply in the first half of this year around rumors of Mr. Musk’s displeasure over the suit.
“The market did not react like this rescission remedy bestowed any benefit,” defense attorney John Reed told the judge, noting that Tesla’s market capitalization dropped by $15 billion after her ruling.
Following the January court ruling, Tesla shareholders met in June and ratified Mr. Musk’s 2018 pay package for a second time. Chancellor 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.
