Analysis-‘Windfall’ fees now less likely for lawyers who sued to cut Musk’s Tesla pay

By Tom Hals

WILMINGTON, Delaware (Reuters) – The lawyers who sued successfully to void Tesla (NASDAQ:) CEO Elon Musk’s $56 billion pay package are seeking a record $6 billion in fees, and the judge who will decide the amount got some unsolicited guidance this month from the state’s top court: Do not give windfalls.

Chancellor Kathaleen McCormick (NYSE:) of Delaware’s Court of Chancery is weighing two decisions that will have a multibillion-dollar impact on Tesla and its investors. One issue is the request for the huge fee for voiding Musk’s pay. The other is whether a June vote by Tesla shareholders actually restored the pay package, in which case a large fee may not be appropriate.

McCormick got a reminder on Aug. 14 from her bosses on the state’s high court in an unrelated case that big legal fees help motivate shareholder attorneys to get great results. In affirming a $267 million fee, one of the largest ever in shareholder litigation, the justices also cautioned that at some point those type of paydays can “turn into a windfall.”

Legal experts said the justices likely had the Musk case in mind.

“They are making it clear, to McCormick and anyone else, that certainly an extremely high fee, an eye-popping fee, a ‘wow’ fee, is appropriate, but there is a line where it’s simply past what is necessary to incentivize high-risk cases,” said Ann Lipton, a professor at Tulane Law School.

The case over Musk’s compensation began in 2018 when shareholder Richard Tornetta sued Tesla’s directors for approving Musk’s pay package, which granted the billionaire CEO stock options as the electric carmaker hit various goals. Musk did not get a guaranteed salary and the options soared in value as the stock rose 10 fold.

In January, McCormick sided with Tornetta, finding Musk controlled the pay negotiations. She called the $56 billion compensation “unfathomable” and decided it should be rescinded. 

The shareholder lawyers at Bernstein Litowitz Berger & Grossmann and Friedman Oster & Tejtel, both of New York, and Andrews & Springer of Wilmington, Delaware, have worked without pay since they filed the case, with the understanding they would get part of the recovery. The case was brought to benefit Tesla, so the company is going to pay the fee.

The firms asked McCormick in March to approve a “conservative” fee of 11% of the stock that Musk would have gotten if he had won the case. The request works out to 29 million shares, worth almost $6 billion at Wednesday’s closing price of $205.75. Alternatively, they said they would take a cash fee of $1 billion.

If the amount of the fee request was unprecedented, Tornetta’s attorneys said, it was because they won arguably the largest judgment in U.S. history. They noted that Delaware courts reward higher percentages of a judgment or settlement when attorneys battled deep into a case. They said precedent supported a fee request of as much as 33%.

Delaware judges also look at the time and effort of the lawyers as a way to spot a potential windfall. By this measure, the size of the fee request by Tornetta’s lawyers is stunning.

Their fee equals more than $280,000 an hour for each of the 19,500 hours worked on the case by every attorney, associate and paralegal.

The highest-paid attorneys on the case normally bill $1,150 an hour while on the low end some contract attorneys and paralegals charge $250 an hour, according to court filings.

The Delaware Supreme Court has approved huge hourly rates before.

In 2012, the court affirmed the largest fee in its history, around $304 million to attorneys who obtained a $2 billion judgment for Southern Copper (NYSE:) Corp. The fee worked out to about $35,000 an hour. 

By comparison, the highest-paid corporate attorneys, who bill by the hour and get paid regardless of outcome, can make around $2,500 an hour.

The Delaware Supreme Court did not specify when fees become windfalls, but did say $5,000 an hour was “at the high end.” 

That would suggest Tesla is on the hook for a fee of around $100 million, just 10% of the requested cash fee. Lipton noted there are several factors that suggest the Tornetta attorneys should expect more.

For example, they worked unpaid for six years, overcame challenging legal hurdles, risked taking the case to trial and won a complete victory.

However, if McCormick decides that Musk’s pay package was restored by the shareholder vote, Tesla should not be on the hook for a large legal fee, John Reed, an attorney for the company, told McCormick at a July hearing.

“You asked if Elon Musk was overpaid,” Reed said, referring to McCormick’s question at the start of her January ruling. “We want to ask if the plaintiff’s lawyers are being overpaid.”