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Tesla on Monday asked a judge not to award billions of dollars in stock to lawyers who successfully challenged Elon Musk’s record pay package, portraying them as cheap opportunists trying to cash in on the CEO’s hard-fought successes.
“It’s a real lawyer’s joke,” John Reed, a partner at DLA Piper who represents Tesla, told Chancellor Kathaleen McCormick during the day-long hearing in Delaware’s Court of Chancery. An expert witness for Tesla described the fee request as an “unjustifiable windfall.”
The hearing was the first court meeting of the parties 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 takeover package. wages that McCormick rejected in January. Tesla has said the vote is grounds for McCormick to reverse its earlier decision.
The court will hear arguments later this summer on how the June “ratification” vote affects the January ruling. Observers expect McCormick to decide on the tariff and the ramifications of ratification in a single decision later this year.
When it was overturned by the court in January, Musk’s pay package was worth about $56 billion, but since then Tesla’s stock has risen, giving it a value of more than $75 billion. The 29 million shares sought by the plaintiffs’ lawyers have similarly increased in value, from more than $5 billion initially to more than $7 billion now.
Greg Varallo, the plaintiffs’ lead attorney from the firm Bernstein Litowitz, described Musk’s efforts since the January decision to restore the pay plan as a “clown show.” Varallo claimed that his client, Richard Tornetta, a shareholder who holds less than 200 shares, has faced death threats from Tesla partisans.
The courtroom in Wilmington was packed with dozens of lawyers Monday. Tesla and its directors have collectively hired about 10 top law firms, both from Delaware and New York, to defend their case. Attorneys representing several Tesla shareholders, including Calpers and Cathie Wood’s Ark Invest, also filed court filings.
McCormick occasionally asked questions, but mostly listened intently as the parties acknowledged that their arguments were diametrically opposed.
In 2018, Tesla’s board gave Musk the chance to acquire shares equal to more than one-tenth of the company’s equity if Tesla was able to hit a series of aggressive stock price and operating milestones . Tesla’s market value went from less than $100 billion when the package was awarded to $1 trillion just a few years later. By 2021, upon meeting each of the targets, Musk was awarded 304 million shares.
Tornetta, the Tesla shareholder who sued, argued that the price was excessive, a result of a Tesla board too intertwined with Musk to represent common shareholders. McCormick agreed, and the plaintiffs’ attorneys, led by Varallo, then sought a fee equivalent to roughly 29 million Tesla shares in return for saving shareholders the 300 million shares in a cut 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 “immeasurable” and that, instead of receiving several billion dollars in stock, the winning lawyers were entitled to more just under $15 million.
“The plaintiff’s lawyer [say] that they are entitled to a share of the economic miracle even though they had no role in it,” testified Daniel Fischel, a University of Chicago professor who was an expert witness for Tesla. “Eliminating the grant didn’t save Tesla $1.”
Varallo acknowledged that the fee would be a record in absolute terms, but told the court that precedents allowed him to seek a third of the benefit for shareholders. He characterized his request of about 10 percent as deliberately conservative.
Varallo said in court documents that he would also settle for a cash fee of $1.4 billion, a figure he based on the implied hourly fee from another case similar to the Tesla lawsuit.
“We’re only getting a piece of the value pie,” he told McCormick, shrugging off Tesla’s claims of a windfall.
Robert Jackson, an NYU law professor and former commissioner at the Securities and Exchange Commission who testified on Tornetta’s behalf, disputed Tesla’s claim that avoiding dilution does not benefit a company : “We don’t differentiate between stocks and cash, none of that [distinction] does economics or governance make sense.”
While fighting for her fee, Bernstein Litowitz is also seeking to avoid overriding the initial decision after Tesla’s shareholder vote.
Tesla, which had formed an independent committee to approve the latest pay package, wrote in court documents that the vote “may have been one of the most well-informed shareholder votes in Delaware’s history.” With the shareholders’ seal of approval, “Delaware law must respect that vote because it reflects the will and ‘sound business judgment’ of Tesla’s shareholder-owners,” he argued.
Varello has asserted that there was no basis in Delaware case law for a shareholder vote to retroactively change a court decision.
“To put it bluntly, litigation against Tesla is never easy,” he told the court during Monday’s hearing.