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Elon Musk, CEO of Tesla. Picture: GONZALO FUENTES/REUTERS
Elon Musk, CEO of Tesla. Picture: GONZALO FUENTES/REUTERS

Wilmington, Delaware — Tesla shareholders were due to appear in court on Monday to argue that an unprecedented request for more than $7bn in attorneys’ fees to be paid by the company is “outlandish”, the latest twist in a legal showdown over Musk’s $56bn pay package.

The record fee request was made by investor Richard Tornetta on behalf of three law firms that represented him, including Bernstein Litowitz Berger & Grossmann. Tornetta owned nine shares of Tesla when he sued over Musk’s pay package of stock options in 2018, a legal battle he ultimately won in January when the package was voided.

The fee equals about $7.2bn at Tesla’s Friday's stock price and amounts to a rate of about $370,000 for every hour worked by the 37 lawyers, associates and paralegals, some of whom normally bill as little as $275 an hour, according to court documents submitted by Tornetta’s lawyers.

“The legal fees appear exceedingly disproportionate and outlandish,” Nathan Chiu, a Tesla shareholder from New Jersey, wrote to chancellor Kathaleen McCormick in March, according to a court filing.

Chiu, the California Public Employees’ Retirement System and more than 8,000 Tesla stockholders have flooded the Delaware Chancery Court with about 1,500 letters and objections over the fee, according to court documents.

A hearing scheduled for Monday was moved from McCormick’s usual courtroom to the largest in the building to accommodate the 47 attorneys from 19 law firms appearing in the case, as well potential stockholders.

Tornetta’s lawyers argue they deserve the fee as a cut of the benefit they say they conveyed to Tesla when a judge voided Musk’s pay package, which returned to Tesla about 266-million shares reserved for the stock options. That stock would be worth about $67bn at Friday’s price of $251.82 per share.

Attorney incentive

Tornetta’s attorneys said it was the largest judgment yet awarded by a US court, excluding punitive damages. They argued they should receive a fee equal to 11% of that judgment, a percentage that is arguably conservative by Delaware legal precedent. They asked to be paid in the form of 29-million Tesla shares.

While federal courts tend to lower the fee as a percentage of judgments or settlements as they get bigger, Delaware courts have gone the opposite way, awarding a larger percentage as an incentive for attorneys to push for a bigger recovery.

Tornetta’s legal team said they would have been justified asking for up to 33% of the value of Musk’s pay package.

The fee request vastly outstrips the current record fee in shareholder litigation of $688m in an Enron class action, according to Stanford Law School.

The Musk case took a dramatic turn when Tesla shareholders in June voted to ratify Musk’s pay, which Tesla has argued corrected the flaws in the 2018 process that McCormick identified in her ruling.

The company argues that Musk’s pay package has been restored and that Tornetta’s legal victory has been transformed into a loss. As a result, the case conveyed no benefit to Tesla and the shareholder lawyers should receive as little as $13.6m, Tesla said.

Some of the shareholders who have opposed the request wrote form letters to the judge, but a few have hired attorneys to file formal objections to the fee, including Amy Steffens, a pilot, and Kurt Panouses, an attorney who specialises in representing lottery winners.

McCormick may take weeks or months to rule. The Delaware Supreme Court is considering a $267m fee request in a shareholder class action involving Dell Technologies and that decision could provide fee guidance.


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