Judge Revisits Musk’s Pay Package in Court Over Massive Lawyer Fee Request

A Delaware judge on Monday reviewed arguments regarding an enormous and unprecedented fee request by lawyers who successfully contested the legality of a massive compensation package for Tesla CEO Elon Musk. The lawyers are asking Chancellor Kathaleen St. Jude McCormick to grant them legal fees in the form of Tesla stock, valued at over $7 billion at current trading prices. The 2018 compensation package for Musk, which the judge ruled should be voided, was potentially worth more than $55 billion.

After a full day of expert testimony and legal arguments, McCormick did not indicate when she would decide on the fee request.

The amount sought by the plaintiffs’ attorneys surpasses the previous record of $688 million in legal fees awarded in 2008 related to the Enron collapse.

The lawyers representing the Tesla shareholder argue that their efforts brought substantial benefits by returning shares to Tesla that would have otherwise gone to Musk, thus diluting the stock held by other investors. They estimate this benefit to be $51.4 billion, based on the difference between the stock price at the time of McCormick’s January ruling and the strike price of around 304 million stock options granted to Musk.

Attorney Greg Varallo told McCormick that the plaintiff lawyers are merely asking for a portion of the value they created. “We fought against the best,” Varallo said. “Litigation against Tesla is never easy. Some companies follow the rules daily, but Tesla is different.”

The plaintiff attorneys claim their fee request is “conservative” under Delaware law. Instead of a typical 33% fee recovery, they are seeking only 11% of the shares made available to Tesla by the rescission of Musk’s options. The judge had agreed with their argument that Musk orchestrated the 2018 pay package through sham negotiations with non-independent directors.

Following the court’s decision, Tesla shareholders reaffirmed Musk’s 2018 pay package in June. However, McCormick stated that this vote would not influence the attorney fee request, which will be addressed in a separate hearing in early August.

Opponents of the fee request argue that the plaintiff attorneys do not deserve any fee because they did not provide any economic benefit to Tesla and may have even harmed the company. They claim that reversing the share dilution does not benefit Tesla itself and cannot justify the fee request. They also point out that the fee request does not account for potential negative consequences, such as the need to find new compensation for Musk’s six years of non-salaried service since 2018.

Defense attorney John Reed noted that Tesla’s market capitalization fell by $15 billion after the judge’s ruling, suggesting that the market did not view the rescission as beneficial.

Critics suggest that any fee award should be based on the number of hours the plaintiff attorneys worked and a reasonable hourly rate, potentially including a multiplier to incentivize contingency-based legal work. This could still result in tens of millions of dollars in fees. The current request equates to an hourly rate of about $288,000 for the plaintiff attorneys and is seen as an “unwholesome windfall.”

Acknowledging the criticism, the plaintiff attorneys recently proposed an alternative fee structure, accepting $1.44 billion in cash, which would equate to an hourly rate of about $74,000.