A recent Law 360 story by Lauren Berg, “Tesla Stock for Fees? Attys Who Got Musk’s Pay Cut Say Yes”, reports that the lawyers who convinced the Delaware Chancery Court to scuttle Elon Musk's proposed $55 billion Tesla compensation package filed a request for legal fees that came with a twist — they want to be paid in Tesla stock that rounds out to about $5.6 billion.
The attorneys from Bernstein Litowitz Berger & Grossmann LLP, Friedman Oster & Tejtel PLLC and Andrews & Springer LLC, who represent the shareholders who in November 2018 challenged Musk's pay package as unfair, asked for more than 29 million Tesla shares and an additional $1 million to cover their litigation expenses, according to the motion.
They are seeking about 11% of the 267 million shares they say are now available for Tesla's use as a result of Chancellor Kathaleen St. J. McCormick's decision in January striking down Musk's 10-year compensation plan, the motion states. She found that disclosure failures, murky terms, conflicted director architects and Musk's own hand on the tiller warranted an order to roll back the award.
"Rather than debate the value conferred to Tesla by canceling the options or the value of the underlying stock returned to the Tesla treasury free of restriction, plaintiff's counsel instead seeks a fee award in kind — a percentage of the shares returned for unrestricted use by Tesla (rather than cash)," the lawyers said. "In other words, we are prepared to 'eat our cooking.'"
"This structure has the benefit of linking the award directly to the benefit created and avoids taking even one cent from the Tesla balance sheet to pay fees," they added. "It is also tax-deductible by Tesla." The plan went to a week-long trial in November 2022 after it was challenged by stockholders led by plaintiff Richard J. Tornetta. The compensation scheme included 12 tranches or performance milestones that Musk had to meet before qualifying for a portion of the total, once estimated at as much as $56 billion.
In her order squashing the plan, Chancellor McCormick found that "Musk dictated the timing of the process, making last-minute changes to the timeline or altering substantive terms immediately prior to six out of the ten board or compensation committee meetings during which the plan was discussed." Although the defendants argued that Musk was "uniquely motivated by ambitious goals," with Tesla desperately needing him to succeed, the opinion observed, "these facts do not justify the largest compensation plan in the history of public markets."
The price was no better than the process, the chancellor concluded, observing that "Musk owned 21.9% of Tesla when the board approved his compensation plan. This ownership stake gave him every incentive to push Tesla to levels of transformative growth — Musk stood to gain over $10 billion for every $50 billion in market capitalization increase."
In their motion for attorney fees, the shareholders' attorneys from the three firms said they collectively logged nearly 19,500 hours throughout the case, which came out to about $13.6 million in lodestar, as well as $1.1 million in out-of-pocket expenses. And although a typical attorney fee request seeks about one-third of a settlement or verdict won in favor of their client, in this case, the attorneys said they are asking for a conservative 11% of the recovery.
"We recognize that the requested fee is unprecedented in terms of absolute size," the attorneys said. "Of course, that is because our law rewards counsel's efforts undertaken on a fully contingent basis that, through full adjudication, produce enormous benefits to the company and subject the lawyers to significant risk."
"And here, the size of the requested award is great because the value of the benefit to Tesla that plaintiff's counsel achieved was massive," they added. And this isn't the first time a court has awarded plaintiffs a fee of recovered shares, according to the motion. The attorneys point to the 2000 case Sanders v. Wang, in which the Chancery Court granted plaintiffs judgment on the pleadings over the improper issuance of 4.5 million shares, approved a settlement and then awarded the plaintiffs a fee comprising 20%, or 900,000, of the 4.5 million recovered shares.
Overall, the attorneys said their fee request is supported by their history as experienced stockholder advocates, the substantial effort they put forth, the complexity of the case, and the "unprecedented result" they achieved in this case.