Lawyers who sued to void Musk’s Tesla pay plan unlikely to get ‘windfall’ fees

The team of lawyers who sued to void Tesla CEO Elon Musk’s $56 billion pay package have requested $6 billion in legal fees for their work, but their request may run afoul of a new court ruling that discourages judges from awarding “windfalls” in legal fees.

Chancellor Kathaleen McCormick of the Delaware Court of Chancery is currently weighing the legal team’s $6 billion fee request as well as whether Tesla shareholders’ vote to reinstate Musk’s pay package, which McCormick voided in January, was sufficient to reinstate the compensation plan.

The Delaware Supreme Court issued a ruling on Aug. 14 in an unrelated case that affirmed a $267 million fee for shareholders’ attorneys – though it warned that those types of paydays can “turn into a windfall.”

The justices’ warning was likely made in reference to the Musk case. Ann Lipton, a professor at Tulane Law School, told Reuters that the justices “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.”

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Lawyers for Tesla shareholder Richard Tornetta have worked on the case without pay since the suit challenging Musk’s compensation plan was filed in 2018 with the understanding that they would get part of the recovery. 

The fee would be paid by Tesla given that the shareholders brought the case for the company’s benefit, although Tesla’s board of directors urged shareholders to reinstate Musk’s pay package – which included no salary or bonus but awarded valuable stock options based on hitting performance targets. 

The compensation package was valued at $56 billion when the judge voided the plan, though it fluctuates based on the stock price. 

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The shareholders’ legal team in March asked McCormick to approve what they called a “conservative” fee of 11% of the stock Musk would’ve received if they had won the case and kept the stock options at the center of the debate. 

The request works out to 29 million shares, worth nearly $6 billion based on Wednesday’s closing price of $205.75. As an alternative, they offered to accept a cash fee of $1 billion. Tornetta’s attorneys argued that if the fee requested was unprecedented, it was because they won what was arguably the largest judgment in U.S. history, and they noted that based on precedent in Delaware, courts supported a fee request as high as 33%.

Tornetta’s lawyers’ fee request amounts to more than $280,000 an hour for each of the 19,500 hours worked on the case by every attorney, associate and paralegal at the firm. The highest-paid attorneys on the case normally bill $1,150 an hour, while some contract attorneys and paralegals charge $250 an hour at the lower end of the spectrum.

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In 2012, the Delaware Supreme Court approved a $304 million fee for attorneys who obtained a $2 billion judgment, which worked out to about $35,000. By comparison, the highest-paid corporate attorneys who bill hourly and are paid regardless of the outcome can make upwards of $2,500 an hour.

Though the Delaware Supreme Court’s ruling from this month didn’t specify when fees become windfalls, it said that $5,000 an hour was “at the high end.” 

That would suggest Tesla would owe a fee of around $100 million, which would be just 10% of the requested cash fee. Lipton noted that the attorneys could receive more than that given the six years they worked on the case without pay, overcoming legal hurdles, taking the case to trial and securing a favorable judgment.

If the judge determines that shareholders’ vote to restore Musk’s pay package was valid, Tesla may not face a large legal fee. John Reed, an attorney for the company, told McCormick at a hearing in July, “You asked if Elon Musk was overpaid. We want to ask if the plaintiff’s lawyers are being overpaid.”

Reuters contributed to this report.