In a significant legal development, a Delaware judge has reiterated her decision mandating Tesla to withdraw Elon Musk’s extensive compensation package. This ruling, originally made earlier in the year, was upheld on Monday despite attempts by Musk’s legal team to have it overturned.
Chancellor Kathaleen St. Jude McCormick, presiding over the case, also turned down a substantial fee request from the plaintiff’s attorneys. These attorneys had sought legal fees in the form of Tesla stock, which at one point was valued at over $5 billion. However, McCormick awarded them $345 million instead.
The lawsuit in question was initiated by a Tesla shareholder who disputed the legitimacy of Musk’s compensation package introduced in 2018. The judge previously concluded that the package was a result of “sham negotiations” involving directors who lacked independence. The package’s value, initially set to potentially reach $56 billion, has since varied with Tesla’s fluctuating stock price.
In response to the initial ruling, Tesla shareholders held a meeting in June where they overwhelmingly reaffirmed Musk’s pay package. Defense lawyers argued that this vote demonstrated the shareholders’ support for Musk’s compensation despite the flaws highlighted by McCormick. They requested the judge to annul her directive for Tesla to rescind the package.
However, McCormick remained unconvinced by these arguments, labeling them as fundamentally flawed. She remarked, “The large and talented group of defense firms got creative with the ratification argument, but their unprecedented theories go against multiple strains of settled law.”
The judge further clarified that a shareholder vote alone does not suffice to ratify a conflicted-controller transaction. In her opinion, inaccuracies in the proxy statement undermined any potential ratifying effect of the shareholder vote.
Elon Musk voiced his disagreement with the decision on X, his social media platform, stating, “Shareholders should control company votes, not judges.”
Moreover, McCormick addressed the $5.6 billion fee request by the shareholder’s attorneys, which had previously approached $7 billion based on Tesla’s stock price. She deemed this request excessive, noting, “In a case about excessive compensation, that was a bold ask.”
The attorneys argued that their efforts had resulted in a “massive” benefit by returning shares to Tesla, preventing dilution of stock held by other investors. They estimated this benefit at $51.4 billion, calculated using the difference between the stock price at the time of McCormick’s ruling and the strike price of the stock options granted to Musk.
While acknowledging the soundness of the methodology for calculating the fee request, McCormick emphasized the need to prevent windfalls to counsel, stating, “The fee award here must yield in this way, because $5.6 billion is a windfall no matter the methodology used to justify it.” A $345 million fee award was deemed “an appropriate sum to reward a total victory.”
This fee award is nearly half of the current record $688 million in legal fees awarded in 2008 following the Enron collapse.
