Tesla (NASDAQ:TSLA) shareholders are heading to a Delaware court on Monday to challenge a request for $7 billion in attorney fees related to a lawsuit against CEO Elon Musk‘s $56 billion compensation package. The fee request, considered excessive by many, has sparked significant opposition from thousands of Tesla shareholders who argue it is unreasonable and disproportionate to the work done.
Historically, the legal battle over Musk’s compensation has seen multiple twists and turns. The initial approval of Musk’s pay package by Tesla shareholders in 2018 was voided by Chancellor Kathaleen McCormick this January, leading to a new vote that reinstated the package, albeit temporarily. Other legal fee awards in shareholder litigation, such as the $688 million in the Enron class action suit, pale in comparison to the current request, underscoring the unique scale of this case.
Previous legal challenges against executive compensation have not typically seen such large fee requests. In contrast, the present case involves a demand for $7 billion, equating to $370,000 per hour for the legal team. This request has been met with over 1,500 letters of objection from Tesla shareholders, highlighting the unprecedented nature of this fee demand in corporate governance disputes.
Legal Fees Under Scrutiny
The $7 billion fee request was made by Richard Tornetta on behalf of the three law firms that represented him in his lawsuit contesting Musk’s compensation. Tornetta’s legal team argues that the voiding of Musk’s pay package benefited Tesla significantly, reclaiming approximately 266 million shares initially reserved for Musk’s stock options. These shares would be worth around $67 billion at current stock prices.
The legal fees requested are calculated based on the belief that the legal team’s efforts resulted in an enormous financial advantage for Tesla, justifying a fee amounting to 11% of the total judgment. Tornetta’s attorneys claim that they would have been justified in asking for up to 33% of the value of Musk’s compensation package.
Shareholders’ Opposition
Tesla shareholders, however, argue that the legal fees are excessive and unjustifiable. Nathan Chiu, a shareholder, described the fees as “exceedingly disproportionate” in a letter to Chancellor McCormick. The overwhelming shareholder response includes over 8,000 Tesla shareholders objecting to the fee request, prompting the court to move Monday’s hearing to the largest courtroom available.
Tesla’s legal team contends that because shareholders re-approved Musk’s pay package in June, Tornetta’s legal efforts have not produced any tangible benefit for the company or its investors. Therefore, they argue, Tornetta’s legal team should receive significantly lower compensation, suggesting a figure of $13.6 million.
Key Inferences
– The legal fee request is unprecedented in scale, far surpassing previous records in shareholder litigation.
– Tesla shareholders actively oppose the fee, citing its disproportionate nature.
– The case’s outcome may hinge on related decisions in similar high-profile litigation.
Elon Musk’s compensation package, which is performance-based and devoid of salary or bonuses, continues to be a contentious issue. The Delaware Court of Chancery’s decision to void the package in January highlighted governance concerns, particularly regarding undisclosed relationships between Musk and some board members. The upcoming ruling by Chancellor McCormick, influenced by pending decisions in related cases, will set a significant precedent in corporate legal fee structures.
