Musk, Tesla Directors Face More Delaware Legal Fees: Explained

A settlement over board pay at Tesla Inc. appears poised to stick the electric vehicle maker with another hefty legal bill from Delaware attorneys.

Chancellor Kathaleen St. Jude McCormick just handed a record-setting $345 million in legal fees to the attorneys for an investor who successfully challenged Elon Musk’s CEO compensation at Tesla. She’s expected to rule soon on a settlement over Tesla’s board pay, a proposal accompanied by a request for roughly $230 million for legal costs incurred by a pension fund’s attorneys.

1. Doesn’t Musk usually avoid settlements?

Musk is known for extensively litigating every lawsuit, but the boards of his companies have been more accepting of deals to avoid trial.

The lawsuit brought by the pension fund for Detroit’s police and firefighters claimed Tesla’s board members gave themselves excessive compensation packages. The board denied any wrongdoing but agreed to settle the case “to eliminate the uncertainty, risk, burden, and expense of further litigation,” according to a July 2023 filing in Delaware Chancery Court.

Taking the focus off Musk helped drive a settlement, said Jill Fisch, a University of Pennsylvania business law professor. The board targeted by the litigation included his brother Kimbal, Oracle Corp. co-founder Larry Ellison, Australian telecom executive Robyn Denholm, and James Murdoch, son of media mogul Rupert Murdoch.

“Apart from Kimbal Musk, these are outsiders to Tesla in important ways. Their primary affiliation and loyalty is to some other company,” she said, adding that individual directors on most boards share concerns about litigation dragging on and damaging their reputations.

The settlement isn’t the same kind of capitulation, she said, as Musk’s buying the social media platform formerly known as Twitter Inc., now X Corp., after he spent months trying to rescind his bid for it. He caved on the eve of a 2022 trial before McCormick.

“In some lawsuits, his view is, ‘I’m going to tough it out because somebody’s not going to tell me what to do,’” Fisch said. But in this challenge, “his actions and ego are not a big driver of the settlement, and I think that’s why the settlement occurred,” she said.

2. What’s in the settlement?

The pension fund’s attorneys valued the accord at $919 million, which would make it one of the biggest shareholder settlements in the court’s history. If approved, Musk and other directors would return stock options worth up to $735 million and forgo three years of pay worth $184 million, and Tesla would also change the way board-level compensation issues get reviewed. One Tesla investor, Michael Levin, objects, saying it gives Musk the option of just paying the full amount himself, eliminating the directors’ independence.

In January, McCormick said her approval would consider legal arguments similar to those raised over the payday for the attorneys who challenged Musk’s CEO pay. The parties have nudged the court in recent months with letters seeking a resolution.

The case involves shareholder derivative claims, which are filed on a corporation’s behalf against its leaders. The payments would go to Tesla, instead of directly to investors, as in a class action.

3. Why are the attorneys’ fees so high?

Nine-figure fee awards are rare in Delaware, though judges have justified them as incentives for attorneys to accept risky cases. Delaware’s multi-factor test to ensure fair legal fees includes considering a case’s complexity, the stage of litigation reached, the attorneys’ experience and ability, and any contingency arrangement that leaves them vulnerable to not ever being paid.

In last week’s opinion on Musk’s pay, McCormick said she followed guidance from the Delaware Supreme Court, which affirmed a $267 million payday for attorneys representing a pension fund that reached a $1 billion settlement with Dell Technologies Inc. over a 2018 stock conversion. The perception of a “windfall” in the CEO pay lawsuit stemmed not from the attorneys’ greed, McCormick said, but from “the sheer magnitude of the compensation plan” they successfully challenged.

Tesla wants to set a $63.5 million cap on the payday for the pension fund’s attorneys in the board pay case. It argues the company won’t benefit from the returned stock options, so they shouldn’t be included in the calculations for the legal fees. “The lean, efficient team in this case secured a result comparable to the recovery in Dell,” the pension fund’s attorneys said in a brief.

Tesla plans to appeal McCormick’s order over Musk’s pay. The Delaware Supreme Court could reduce the fee award, but it would still find a large number, said Brian Quinn, a Boston College law professor.

“Anything involving Elon Musk in the past few years will elicit eye-popping numbers,” he said. “The richest man in the world is going to elicit the richest payout in whatever you do.”

Tesla is represented by Bayard PA. Its board is represented by Richards, Layton & Finger PA and Cravath, Swaine & Moore LLP. The pension fund is represented by McCarter & English LLP, Fields Kupka & Shukurov LLP, and Bleichmar Fonti & Auld LLP. Levin is representing himself.

The case is Police & Fire Ret. Sys. of the City of Detroit v. Musk, Del. Ch., No. 2020-0477.