Tesla shareholders will be present in court on Monday to
assert that an unprecedented demand for legal fees exceeding $7 billion to be
borne by the company is “unreasonable,” marking a new development in the
ongoing legal dispute concerning Mr. Musk’s $56 billion compensation package.
The request for a record fee was submitted by investor
Richard Tornetta on behalf of the three law firms representing him, including
Bernstein Litowitz Berger & Grossmann. Tornetta held nine shares of Tesla
when he initiated legal proceedings against Musk’s compensation package of
stock options in 2018. This legal dispute concluded in January with the
successful invalidation of the compensation package..
The fee is approximately $7.2 billion based on Tesla’s stock
price on Friday. This equates to an hourly rate of approximately $370,000 for
the 37 lawyers, associates, and paralegals involved, some of whom typically
bill as low as $275 per hour, as per the court documents submitted by Tornetta’s
lawyers.
"The legal fees seem excessively disproportionate and
exorbitant,” Nathan Chiu, a Tesla shareholder from New Jersey, wrote to
Chancellor Kathaleen McCormick in March, as per a court filing.
The California Public Employees' Retirement System, Mr.
Chiu, and over 8,000 Tesla shareholders have submitted approximately 1,500
letters and objections to the Delaware Chancery Court regarding the fee, as
indicated in court documents.
A hearing originally scheduled for Monday has been relocated
from McCormick’s customary courtroom to the largest courtroom in the building.
This change was made to accommodate the substantial number of legal
professionals involved in the case, including 47 attorneys representing 19
different law firms, as well as potential stockholders.
Tornetta’s legal representatives assert their entitlement to
the fee as a portion of the advantage they claim to have bestowed upon Tesla
when a judicial authority nullified Musk’s compensation package, resulting in
the return of approximately 266 million shares designated for stock options to
Tesla. At the current market price of $251.82 per share on Friday, the value of
these shares would be approximately $67 billion.
Tornetta’s legal representatives asserted that the judgment
is the largest ever awarded by an American court, excluding punitive damages.
They contended that they should receive a fee equivalent to 11% of the
judgment, a percentage that is arguably conservative by Delaware legal
precedent. They requested payment in the form of 29 million Tesla shares.
RECORD FEE REQUEST
In contrast to the general trend in federal courts of
reducing attorney fees as a percentage of judgments or settlements as they
increase in size, Delaware courts have adopted a different approach. They award
a larger percentage as an incentive for attorneys to strive for a more
substantial recovery.
Tornetta’s legal counsel indicated that they would have been
within their rights to request up to 33% of the value of Musk’s compensation
package.
The fee request significantly exceeds the current record fee
of $688 million awarded in an Enron class action lawsuit, as reported by
Stanford Law School.
The Musk case underwent a significant development when Tesla
shareholders voted in June to approve Mr. Musk’s compensation package. Tesla
has maintained that this action rectified the shortcomings identified by Judge
McCormick in her 2018 ruling regarding the compensation process.
The organization asserts that Mr. Musk’s compensation
package has been reinstated, effectively reversing Mr. Tornetta’s legal
victory. Consequently, the lawsuit did not provide any tangible benefit to
Tesla, and the shareholder attorneys should be compensated accordingly, with a
proposed sum of $13.6 million, as per Tesla’s statement.
Several shareholders who disagree with the request sent form
letters to the judge, while a select few have retained legal counsel to file
formal objections to the fee. Among these individuals are Amy Steffens, a
professional aviator, and Kurt Panouses, an attorney specializing in
representing lottery winners.
McCormick may require several weeks or months to issue a
ruling. The Delaware Supreme Court is presently deliberating on a substantial
fee request of $267 million in a class action lawsuit involving shareholders of
Dell Technologies. The court’s decision in this matter could potentially serve
as a guiding precedent for future fee determinations.