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Tesla on Monday urged a judge not to award billions of dollars in stock to lawyers who successfully challenged Elon Musk’s record pay package, painting them as opportunists trying to cash in on the CEO’s hard-won successes.
“It’s a real-life lawyer joke,” said John Reed, a partner at DLA Piper, who represents TeslaChancellor Kathaleen McCormick said during the daylong hearing in Delaware Chancery Court. A Tesla expert witness described the fee request as an “unjustifiable windfall.”
The hearing was the first meeting of the parties in court since a June vote in which 72 percent of Tesla shareholders, excluding Elon Musk and his brother Kimbal, overwhelmingly approved the same terms of the pay package that McCormick rejected in January. Tesla has said that vote is reason enough for McCormick to reverse his earlier decision.
The court is scheduled to hear arguments later this summer on how the June “ratification” vote affects the January ruling. Observers expect McCormick to decide on the implications of the rate and ratification in a single ruling later this year.
When the court struck it down in January, Musk’s pay was worth about $56 billion, but Tesla’s stock has since surged, making it worth more than $75 billion. The 29 million shares sought by plaintiffs’ lawyers have also increased in value, from more than $5 billion originally to more than $7 billion today.
Greg Varallo, the plaintiff’s lead attorney from the firm Bernstein Litowitz, described Musk’s efforts since the January ruling to reinstate the pay plan as a “clown show.” Varallo said his client, Richard Tornetta, a shareholder who owns fewer than 200 shares, has faced death threats from Tesla supporters.
The Wilmington courthouse was packed with dozens of lawyers on Monday. Tesla and its directors have collectively hired about 10 top-tier law firms from both Delaware and New York to argue their case. Lawyers representing some Tesla shareholders, including Calpers and Cathie Wood’s Ark Invest, also registered with the court.
McCormick occasionally asked questions, but mostly listened intently as the sides admitted that their arguments were diametrically opposed.
In 2018, Tesla’s board of directors granted Musk the opportunity to earn shares equal to more than one-tenth of the company’s equity if Tesla managed to hit a series of aggressive operational and stock price milestones. Tesla’s market value went from less than $100 billion when he was awarded the package to more than $1 trillion just a few years later. In 2021, after all the milestones were met, Musk received 304 million shares.
Tornetta, the Tesla shareholder who brought the suit, argued that the award was excessive, the result of a Tesla board too intertwined with Musk to represent common shareholders. McCormick agreed, and the plaintiff’s lawyers, led by Varallo, subsequently sought damages. Fee equivalent to approximately 29 million Tesla sharesas compensation for saving shareholders the 300 million shares of dilution from Musk’s rejected pay package.
Tesla and its board argued in court that the benefit to the electric vehicle maker from McCormick’s cancellation of the stock grant was “unquantifiable” and that instead of receiving several billion dollars in stock, the winning attorneys were entitled to less than $15 million.
“The plaintiff’s attorney [say] “They are entitled to a share of the economic miracle even though they had no role in it,” testified Daniel Fischel, a professor at the University of Chicago who was an expert witness for Tesla. “The termination of the subsidy did not save Tesla a single dollar.”
Varallo admitted the fee would be a record in absolute terms, but told the court that precedent cases allowed him to ask for a third of the profit for shareholders. He called his request of about 10 percent deliberately conservative.
Varallo said in court documents that he would also accept a cash fee of $1.4 billion, a figure he based on the implied hourly rate from another case similar to the Tesla lawsuit.
“We’re just getting a slice of the value pie,” he told McCormick, deflecting Tesla’s claims of a windfall.
Robert Jackson, a New York University law professor and former Securities and Exchange Commission commissioner who testified on Tornetta’s behalf, disputed Tesla’s claim that avoiding stock dilution did not benefit a company: “We don’t distinguish between stock and cash, none of that stuff.” [distinction] “it makes sense from an economic or governance perspective.”
While fighting for his fees, Bernstein Litowitz is also seeking to prevent the original ruling from being overturned after a Tesla shareholder vote.
Tesla, which had formed an independent committee to approve the latest pay package, wrote in court papers that the vote “may have been one of the most informed shareholder votes in Delaware history.” With the shareholders’ stamp of approval, “Delaware law should respect that vote because it reflects the will and sound ‘business judgment’ of Tesla’s shareholder-owners,” it argued.
Varello has argued that there was no basis in Delaware case law for a shareholder to vote to retroactively overturn a court ruling.
“To put it bluntly, litigating against Tesla is never easy,” he told the court during Monday’s hearing.