The judge who nixed Musk’s pay package heard arguments on the massive fee request from the plaintiff’s attorney

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WILMINGTON, Del. (AP) – A Delaware judge heard arguments on Monday over a massive and unprecedented fee request by a lawyer who successfully argued that the massive and unprecedented pay package for Tesla CEO Elon Musk was illegal and should be voided.

Lawyers for Tesla shareholders who challenged Musk’s 2018 compensation package asked Chancellor Kathaleen St. Jude McCormick to award legal fees in the form of shares in the electric vehicle company worth more than $7 billion at current trading prices. The 2018 compensation package for Musk that was overturned by the judge was potentially more than $55 billion.

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After a day full of expert witness testimony and arguments by attorneys, McCormick gave no indication when he would rule on the fee request.

The amount of fees requested by the plaintiffs’ lawyers dwarfs the current record $688 million in legal fees awarded in 2008 in litigation over the collapse of Enron.

Lawyers for Tesla shareholders argue that their work results in a “massive” benefit to return shares to Tesla that would otherwise go to Musk and dilute the shares held by other Tesla investors. He estimated the benefit at $51.4 billion, using the difference in the stock price at the time of McCormick’s January decision and the strike price of some of the 304 million stock options granted by Musk.

Attorney Greg Varallo told McCormick that he and his fellow plaintiffs’ attorneys were only asking for “a slice of the value pie they created.”

“We are fighting with the best,” added Varallo. “Litigation against Tesla is not easy. There are companies that play by the rules every day, and then there are companies like Tesla.

The plaintiff’s attorney argued that the fee request was “conservative” under Delaware law. Instead of the typical 33% cost recovery, he noted that he was only looking for 11% of the shares currently available to Tesla as a result of Musk’s option being canceled by the McCormick decision. The judge agreed with the shareholder attorney’s argument that Musk engineered the landmark 2018 pay package in sham negotiations with non-independent directors.

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After the court ruling, Tesla shareholders met in June and ratified Musk’s 2018 pay package for the second time. McCormick made it clear, however, that the June vote will not be considered in determining the request for attorney’s fees. But it will be the subject of a separate hearing in early August.

Meanwhile, some opponents of the fee request argue that the plaintiffs’ attorneys should not get any fees because they do not provide an economic benefit to Tesla and could even harm the company. Opponents argue that the reversal of stock dilution among Tesla shareholders does not benefit the Austin, Texas company itself and cannot be used to justify the fee request. He also noted that the fee request failed to quantify or minimize the negative consequences of the decision, including the need to find a new way to compensate Musk for six years of non-salaried service to Tesla starting in 2018.

“The market is not reacting as if this rescission remedy provides any benefit,” defense attorney John Reed told McCormick, noting that Tesla’s market capitalization dropped by $15 billion after the decision.

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Some critics argue that any fee award should be based on the number of hours the plaintiff’s attorney works, and a reasonable hourly rate. Adding a multiplier to the incentives of lawyers working on a contingency basis in corporate disputes might be appropriate, they suggested. That approach can still result in tens of millions of dollars in fee awards. The current fee request equates to an hourly rate of about $288,000 for plaintiffs’ attorneys and would result in an “adverse windfall,” according to opponents.

Acknowledging criticism that the fee request has been accepted, the plaintiff’s attorney in a new court filing proposed an alternative fee structure. In that scenario, he would be willing to accept $1.44 billion in cash, equivalent to an hourly fee of about $74,000.

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