In a stunning development, lawyers representing Tesla shareholders have requested nearly $6 billion worth of the electric vehicle maker’s stock as compensation for their role in overturning Elon Musk’s massive pay package.
The request was made in a court filing on Friday by Bernstein Litowitz Berger & Grossmann, the lead counsel for shareholders who successfully challenged Musk’s controversial $56 billion compensation plan. Describing their ask as “unprecedented” in absolute dollar value but “conservative” in terms of percentage, the law firm proposed receiving approximately 29 million Tesla shares currently worth around $6 billion based on the company’s stock price.
Shareholder Lawyers Seek Unconventional Fee After Rare Court Victory
Contingency fee arrangements, where attorneys front costs in exchange for a cut of any eventual settlement or award, are common in shareholder lawsuits. However, the circumstances around Tesla’s pay package case are highly unusual. With no monetary damages awarded, Bernstein Litowitz has opted to seek compensation in the form of Tesla stock instead.
If approved, the nearly $6 billion in shares would represent around 11% of the estimated $56 billion value that shareholders regained control over as a result of voiding Musk’s pay plan. According to Bernstein Litowitz, this percentage aligns with contingency fees awarded in other prominent Delaware shareholder cases. The firm also argued that its request avoids impacting Tesla’s balance sheet.
Judge Rules Musk’s Pay Package Unfair to Shareholders in Landmark Decision
The proposed payout follows a landmark ruling in October by Delaware Chancery Court Judge Kathaleen McCormick. She found that Tesla’s board of directors was beholden to CEO Elon Musk and failed to properly oversee the highly lucrative 2018 compensation package.
Musk was set to receive stock option grants in 12 separate tranches as Tesla hit aggressive operational and financial targets. However, McCormick determined the performance benchmarks were not sufficiently challenging and canceled the pay plan, declaring it unfair to shareholders.
Her decision marked an extremely rare case of a court invalidating an executive compensation package. It also highlighted issues around ensuring adequate independence between boards and CEOs, especially at founder-led firms.
Tesla CEO Lambasts Decision, Vows to Exit Delaware Corporations
The outcome was a significant blow to Elon Musk, who aggressively defended his pay package that helped make him the world’s richest person. He bashed the ruling as a “miscarriage of justice” and ridiculed Delaware’s business-friendly Court of Chancery.
Musk pledged to move Tesla and his other companies out of Delaware, shifting incorporation to Texas and Nevada. The state is known for high volumes of business litigation and precedent-setting case law that influences corporations nationwide. While Musk has followed through on exiting Delaware for SpaceX and Neuralink, Tesla itself remains incorporated there for now.
Legal experts say Musk still has grounds to appeal the decision, extending the high-stakes showdown over his past compensation. Meanwhile, the proposed $6 billion legal fee could become another source of contention.
Tesla Shareholders’ Lawyers Emphasize Risks in Taking Case
In their filing, Bernstein Litowitz acknowledged the tremendous uncertainties involved in challenging Musk’s pay package. They described undertaking a “steep uphill climb” against elite defense counsel, pursuing the case despite “significant risk.”
To justify their proposed fee, the law firm underscored the results achieved for Tesla shareholders and the creativity involved in structuring compensation using the company’s stock. They also note that the percentage sought is in line with historical Delaware precedents.
Going forward, Elon Musk can formally object to the proposed payout as excessive. However, Bernstein Litowitz argues that their risky investment of time and resources in this novel case merits appropriate compensation. The final outcome could have wider implications for shareholder lawsuits targeting questionable executive pay.
