Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The lawyers who represented victorious Tesla shareholders may be in line for a record-breaking payout worth hundreds of millions, or even billions, of dollars after a Delaware court on Tuesday voided a $56bn pay package for Elon Musk.
Lawyers told the Financial Times that Bernstein Litowitz Berger & Grossmann, the law firm that led the representation of investors challenging the pay plan, could ask that the Delaware Court of Chancery pay them up to one-third of the “benefit conferred” by the ruling — in other words, how much value was restored to shareholders.
How much that is will be up to the court. When it was initially awarded to Musk, the stock-based incentive package at issue was valued at $2.6bn. But that ballooned to $55.8bn after the electric-car maker hit financial performance and share price targets set out in the deal. One lawyer said the court’s calculation of the benefit conferred to other shareholders could ultimately be based on a figure between those two book ends.
The decision on the pay package must also be sound enough to survive any appeal Tesla may take to the Delaware Supreme Court.
“There’s never been a judgment of this size so we are in somewhat uncharted territory,” said another prominent Delaware litigator not affiliated with the case. “And they will probably make a somewhat more modest ask for optics reasons. But I’d be stunned if they didn’t ask for a fee, in whatever form, worth multiple billions of dollars.”
Greg Varallo, the lead lawyer at Bernstein Litowitz representing the shareholders, said it could be a few weeks before his side submitted its fee request but declined to comment on what figure they will request.
In the US, plaintiffs’ lawyers often take most or all of their fees from a portion of a settlement or judgment, a so-called contingency arrangement.
Lawyer fee awards have become a hot topic in courts in Delaware, where more than 300 S&P 500 companies are incorporated. In 2023, a Delaware judge awarded $267mn to lawyers representing shareholders who agreed a $1bn settlement with Dell Technologies over its complex $24bn cash-and-stock merger with VMware. That fee has been appealed against to the Delaware Supreme Court by multiple investment funds owning VMware shares who claim the amount is excessive.
The highest fee ever awarded to plaintiffs’ lawyers in the Delaware chancery court was $285mn in 2012, which was equal to about 15 per cent of the damages in a lawsuit challenging the merger between two natural resource companies, Southern Peru and Minera Mining.
The fee award in this case will be more challenging, however, given that Musk is simply returning shares he had been granted and that no cash is changing hands between the sides. Bernstein and two other law firms working with it could end up taking fees in Tesla shares, some lawyers speculated.
Chancellor Kathaleen McCormick, who issued this week’s ruling on Musk’s pay, is set to rule shortly on a fee award to lawyers representing plaintiffs who separately sued the electric-car maker’s board members, alleging they were overpaid. Tesla and the shareholders settled that case at a value pegged at more than $900mn.
Tesla and the plaintiffs’ lawyers are disputing not just the fee amount but how much the settlement was worth — which the car company says is ambiguous due to the need to value the shares involved in the settlement.
In the past decade, Delaware courts have cracked down on the previous long-standing practice of awarding nominal fees in routine M&A litigation that followed many deals, resulting in little to no concrete benefit for the shareholders in question. Instead it has been willing to grant large lawyer payouts based on big judgments or settlements where lawyers involved could demonstrate how their work directly benefited plaintiffs.
Shortly after the decision on his stock grant, Musk on X criticised Delaware as an unfriendly place for companies to domicile.
But Bernstein’s Varallo vigorously defended Delaware as a fair venue for both shareholders and companies. “The decision demonstrates that Delaware’s historic role in overseeing the exercise of fiduciary duties is alive and well — perhaps better than it has been in some time”.
