Tesla's market capitalization drops by US$15bn after court voids Musk's 2018 compensation package
On Monday, a Delaware judge heard arguments regarding an unprecedented fee request from lawyers who argued successfully that Elon Musk’s 2018 compensation package as Tesla CEO was illegal and should be voided, reports The Canadian Press.
Chancellor Kathaleen St. Jude McCormick is being asked by attorneys representing a Tesla stockholder to award them legal fees in the form of Tesla stock, valued at over US$7bn at current trading prices.
This request follows the judge’s decision to rescind Musk’s 2018 compensation package, which was potentially worth more than US$55bn.
After a full day of testimony and legal arguments, McCormick did not indicate when she would rule on the fee request. The sought amount far exceeds the previous record of US$688m in legal fees awarded in 2008 from the Enron litigation.
The stockholder’s attorneys argue their efforts provided Tesla with a “massive” benefit by returning shares that would have otherwise gone to Musk, diluting the stock held by other investors.
They estimate this benefit at US$51.4bn, based on the difference between Tesla’s stock price at the time of McCormick’s ruling in January and the strike price of approximately 304 million stock options granted to Musk.
Attorney Greg Varallo, representing the plaintiffs, stated that they are merely seeking “a slice of the value pie we created.” He noted the challenges of litigating against Tesla, saying, “There are companies who play by the rules every day, and then there are companies like Tesla.”
The plaintiffs’ attorneys describe their fee request as “conservative” under Delaware law, seeking only 11 percent of the shares now available to Tesla due to the rescinded options, instead of the typical 33 percent fee recovery.
McCormick had agreed with their argument that Musk engineered the 2018 pay package through sham negotiations with non-independent directors.
Despite the court’s decision, Tesla shareholders ratified Musk’s 2018 pay package again in June. However, McCormick clarified that the June vote would not affect the attorney fee determination and will be addressed in a separate hearing in early August.
Opponents of the fee request argue that the plaintiffs’ attorneys do not deserve any fee, claiming they did not provide an economic benefit to Tesla and may have even harmed the company.
They assert that the reversal of share dilution among Tesla stockholders does not benefit the company and cannot justify the fee request.
Additionally, they argue the request does not account for potential negative consequences, such as the need to compensate Musk for six years of non-salaried service since 2018.
Defense attorney John Reed pointed out that Tesla’s market capitalization dropped by US$15bn after McCormick’s ruling, suggesting the market did not see the rescission as beneficial.
Critics suggest any fee award should be based on the actual hours worked by the plaintiff attorneys and a reasonable hourly rate, possibly with a multiplier for contingency-based work in corporate disputes. This approach could still result in a fee award of tens of millions of dollars.
The current fee request, amounting to about $288,000 per hour for the plaintiffs’ attorneys, would result in an “unwholesome windfall,” according to the opponents.
In response to the criticism, the plaintiffs’ attorneys proposed an alternative fee structure, offering to accept US$1.44bn in cash, equating to an hourly fee of about $74,000.
