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Tesla on Monday urged a judge not to award billions of dollars in shares to the lawyers who successfully challenged Elon Musk’s record pay package, painting them as freeriding opportunists attempting to cash in on the CEO’s hard-fought successes.
“It’s a real-life lawyer joke,” John Reed, a partner at DLA Piper, who represents Tesla, told Chancellor Kathaleen McCormick during the day-long hearing in the Delaware Court of Chancery. An expert witness for Tesla described the fee request as an “unjustifiable windfall”.
The hearing was the first in-court gathering of the parties since a June vote in which 72 per cent of Tesla’s shareholders, excluding Elon Musk and his brother Kimbal, overwhelmingly approved the same pay package terms that McCormick rejected in January. Tesla has said that vote is grounds for McCormick to reverse her previous decision.
The court is set to hear arguments later this summer on how the June “ratification” vote affects the January ruling. Observers expect that McCormick will decide on the fee and ratification consequences in a single ruling later this year.
When it was cancelled by the court in January, Musk’s pay package was worth about $56bn, but since then Tesla shares have risen, giving it a value of more than $75bn. The 29mn shares requested by plaintiffs’ lawyers has similarly risen in value, from more than $5bn originally to more than $7bn now.
Greg Varallo, the lead plaintiff’s lawyer from the Bernstein Litowitz firm, described Musk’s efforts since the January ruling to reinstate the pay plan as a “clown show”. Varallo claimed that his client, Richard Tornetta, a shareholder holding fewer than 200 shares, has faced death threats from Tesla partisans.
The Wilmington courtroom was packed with dozens of lawyers on Monday. Tesla and its directors have collectively hired around 10 top law firms, both from Delaware and New York, to plead their case. Lawyers representing some Tesla shareholders, including Calpers and Cathie Wood’s Ark Invest, also registered appearances with the court.
McCormick occasionally asked questions but mostly listened intently as the sides conceded their arguments were diametrically opposed.
In 2018, Tesla’s board granted Musk that chance to earn shares equal to more than a tenth of the company’s equity if Tesla was able to hit a series of aggressive stock price and operational milestones. Tesla’s market value went from less than $100bn when the package was granted to top $1tn just a few years later. By 2021, with each of the targets met, Musk was awarded 304mn shares.
Tornetta, the Tesla shareholder who sued, argued that the award was excessive, resulting from a Tesla board too intertwined with Musk to represent ordinary shareholders. McCormick agreed, and the plaintiff’s lawyers, led by Varallo, subsequently requested a fee equivalent to roughly 29mn Tesla shares, as remuneration for saving shareholders the 300mn shares of dilution from the rejected Musk pay package.
Tesla and its board argued to the court that the benefit to the electric vehicle maker stemming from McCormick’s cancellation of the share grant was “unquantifiable” and that, rather receiving several billion dollars of shares, the winning lawyers were entitled to less than $15mn.
“Plaintiff’s counsel [say] that they are entitled to part of the economic miracle even though they didn’t have any role in it,” testified Daniel Fischel, a University of Chicago professor who was an expert witness for Tesla. “The rescission of the grant didn’t save Tesla $1.”
Varallo conceded that the fee would be record-shattering in absolute terms, but told the court that precedent cases allowed him to ask for one-third of the benefit to shareholders. He characterised his request of roughly 10 per cent as deliberately conservative.
Varallo said in court papers that he would also agree to a cash fee of $1.4bn, a figure he based on the implied hourly rate from another case similar to the Tesla lawsuit.
“We are just receiving a slice of the value pie,” he told McCormick, deflecting Tesla’s claims of a windfall.
Robert Jackson, a NYU law professor and former commissioner at the Securities and Exchange Commission who testified on behalf of Tornetta, challenged Tesla’s contention that avoiding share dilution did not benefit a company: “We don’t distinguish between shares and cash, none of this [distinction] makes economics or governance sense.”
As it fights for its fee, Bernstein Litowitz is also seeking to keep the original ruling from being set aside after the 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 well-informed stockholder votes in Delaware history”. With shareholders’ stamp of approval, “Delaware law should respect that vote because it reflects the will and sound ‘business judgment’ of Tesla’s stockholder-owners”, it argued.
Varello has maintained that there was no basis in Delaware case law for a shareholder vote to retroactively upend a court ruling.
“To put it bluntly, litigating against Tesla is never easy,” he said to the court during Monday’s hearing.