Is the $6 Billion Legal Fee in Elon Musk's Tesla Pay Package Lawsuit Justified?

Lawyers who successfully challenged Elon Musk's $56 billion Tesla pay package as excessive acknowledged that their request for a $6 billion fee is "unprecedented." Yet, from certain perspectives, it might be deemed economical.

The fee's assessment, much like Musk's contested compensation, defies simple comparison. A Delaware judge will soon deliberate on its reasonableness and compliance with various legal standards.

According to documents filed in the Court of Chancery in Delaware, the fee translates to an hourly rate of $288,888 for the efforts expended by each of the 37 lawyers, associates and paralegals involved in the case. In contrast, premier corporate attorneys bill $2,000 per hour, while seasoned associates at major law firms earn approximately $288,000 annually.

At the $2,000 per hour rate, the aggregate time invested by the shareholders' legal team—roughly 19,500 hours—would tally around $39 million, significantly less than $6 billion.

In addition to its magnitude, the fee stands out for its unconventional nature. The legal team seeks compensation by obtaining a portion of what Musk is relinquishing—Tesla stock from his pay package. Specifically, they aim for 29 million of the 266 million shares Tesla is receiving as a result of the ruling, asserting that the fee incurs no cost for Tesla.

The shareholders' legal representation comprises three law firms: Bernstein Litowitz Berger & Grossmann and Friedman Oster & Tejtel, both headquartered in New York, and Andrews & Springer of Wilmington. The legal team declined further comment beyond their court filing, as per an email from Greg Varallo of Bernstein, according to Reuters.

Ordinarily, in shareholder lawsuits like Richard Tornetta's 2018 case concerning Musk's compensation, legal teams operate pro bono, anticipating a share of any eventual settlement or judgment.

The highest fee awarded in a shareholder lawsuit to date is the $688 million granted in 2008 to the attorneys representing Enron shareholders, according to Stanford Law School. This securities fraud case stemmed from the commodities trader's concealed debts, leading to its bankruptcy.

Judges do not evaluate fees solely based on their sheer size. However, even by other metrics, the fee in the Musk case surpasses that of Enron. The Enron fee amounted to 9.5 per cent of the $7.2 billion settlement, also a record. In contrast, the lawyers in the Musk case stated that their fee request equates to 11 per cent of the stock Musk would be returning to Tesla.

Federal judges typically award lower percentages as settlements increase in size, particularly in cases surpassing $1 billion.

Exceptions

But there are exceptions, and they resemble cases akin to the Musk lawsuit. In 2016, a federal judge granted an unusually high fee of 25 per cent, equivalent to $422 million, from a $1.6 billion settlement in a securities lawsuit against Household International, a consumer finance company, for concealing its unsound lending practices. This protracted case, spanning 14 years, resembled the Musk case as it involved a rare occurrence in shareholder litigation—a trial. The court deemed the extensive duration and associated risks justified the fee.

Fortunately for the legal team representing shareholders in the Musk case, it was adjudicated in Delaware state court, where factors like the efforts of the legal team and case complexity are considered when assessing fees.

Delaware's approach was underscored in a 2011 ruling approving a fee of $304 million for a legal team contesting a deal by Southern Copper Corp that was found to favour its controlling shareholder, Grupo Mexico. Delaware judge Leo Strine faced a request for an unprecedented fee of $35,000 per hour, which defendants argued could disrupt the legal system. Strine deemed it a healthy incentive and sanctioned the fee, amounting to 15 per cent of the $2 billion judgment.

However, Delaware's approach might undergo changes. The Delaware Supreme Court is reviewing an appeal concerning a fee representing 27 per cent of a $1 billion settlement in 2022 involving Dell Technologies. This class-action lawsuit against the company stemmed from a 2018 stock conversion related to Dell's stake in VMware.

Oral arguments are scheduled for May, and two groups of law professors have submitted opposing amicus briefs—one positing that Delaware incentivises shareholder lawyers to pursue the largest settlements, and the other suggesting that fee percentages should decrease as recoveries increase.

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