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A Delaware judge has reaffirmed his decision Tesla must be recalled Elon Musk‘s multi-billion dollar pay package.
Chancellor Kathleen St. Jude McCormick on Monday rejected a request by lawyers for Musk and Tesla’s corporate executives to overturn her decision earlier this year that required the company to scrap an unprecedented pay package.
McCormick also rejected an equally unprecedented and massive fee request filed by the plaintiffs’ attorneys, who argued they were due legal fees in the form of Tesla stock valued at more than $5 billion. The judge said the attorneys were entitled to $345 million in fees.
The decisions came in a lawsuit filed by a Tesla shareholder challenging Musk’s 2018 compensation package.
McCormick concluded in January that Musk worked out the substantial pay package in sham negotiations with directors who were not independent. The potential maximum value of the compensation package was originally around $56 billion, but that amount has fluctuated over the years based on Tesla’s stock price.
After the original court ruling, Tesla shareholders met in June and ratified Musk’s 2018 pay package a second time, again by a landslide.
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Defense attorneys then argued that the second vote made it clear that Tesla shareholders, fully aware of the flaws in the 2018 process that McCormick pointed out, were convinced that Musk was entitled to the pay package. They asked the judge to overturn her order forcing Tesla to cancel the pay package.
McCormick, who appeared skeptical of the defense’s arguments during a hearing in August, said in Monday’s ruling that those arguments were fatally flawed.
“A large and talented group of defense firms made the case for ratification, but their unprecedented theories run counter to several stretches of standing law,” McCormick wrote in the 103-page opinion.
The judge noted, among other things, that a shareholder vote, standing alone, cannot ratify a conflicting controller transaction.
“Even if a shareholder vote could have a ratifying effect, it could not do so here because of the many material inconsistencies in the proxy statement,” she added.
Musk expressed his disagreement with the ruling in a post on X, the social media platform he owns. “Shareholders should control the voices of the company, not the judges,” he wrote.
McCormick, meanwhile, found that the $5.6 billion in fees sought by the shareholder’s lawyers, which at one point approached $7 billion based on Tesla’s trading price, was too far.
“In the case of overcompensation, this was a bold plea,” McCormick wrote.
Lawyers for the Tesla shareholder say their work resulted in a “tremendous” benefit, returning Tesla shares that would otherwise have gone to Musk and diluting the shares held by other Tesla investors. They estimate that gain at $51.4 billion, using the difference between the stock price at the time of McCormick’s January decision and the exercise price of the roughly 304 million stock options granted to Musk.
In finding that the methodology used to calculate the fee request was correct, the judge noted that the Delaware Supreme Court has indicated that guidelines for awarding fees “must exercise the utmost political care to prevent unintended counsel.”
“The toll allocation here must go this way because $5.6 billion is a windfall regardless of the methodology used to justify it,” McCormick wrote. She said the $345 million fee was “an appropriate amount to reward overall victory.”
The amount of the fee awarded is almost exactly half of the current record $688 million in legal fees awarded in 2008 in litigation stemming from the collapse of Enron.
© 2024 The Canadian Press
