Tesla investors urge judge to reject $7 billion legal fee in Musk case

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Tesla shareholders are set to appear in a Delaware court on Monday to call for the judge to reject the "outlandish" request for $7 billion in attorneys' fees to be paid by the company to the legal team that led the challenge to CEO Elon Musk's $56 billion pay package.

The record fee request was made by investor Richard Tornetta on behalf of the three law firms that represented him in the lawsuit against Musk's compensation plan, which is believed to be the largest among CEOs of publicly traded companies in the U.S. 

Tornetta owned nine shares of Tesla when he sued over the pay package that was originally approved by shareholders in 2018 before it was voided by Chancellor Kathaleen McCormick of the Delaware Court of Chancery this January. Last month, Tesla shareholders voted to reinstate the compensation plan, though it remains paused pending the resolution of the case.

The fee request amounts to roughly $7.2 billion based on Tesla's stock price on Friday and amounts to a rate of $370,000 for every hour worked by the team of 37 lawyers, associates and paralegals — some of whom typically bill as little as $275 an hour, according to documents submitted by Tornetta's legal team to the court.


Tesla shareholders are arguing that the request for $7 billion in legal fees is excessive. (Richard Bord/WireImage / Getty Images)

"The legal fees appear exceedingly disproportionate and outlandish," Nathan Chiu, a Tesla shareholder from New Jersey, wrote to Chancellor Kathaleen McCormick of the Delaware Court of Chancery in March, according to a court filing.

Chiu, the California Public Employees' Retirement System and more than 8,000 Tesla shareholders have sent the Delaware court 1,500 letters and objections related to the requested legal fee, according to court documents.

The court moved a hearing scheduled for Monday from McCormick's usual courtroom to the largest in the building to accommodate the 47 attorneys from 19 law firms appearing in the case, as well as potential stockholders.


Tesla’s stock turned positive for the year last week after it had been down by more than 20% year to date in recent months. (Joe Raedle/Getty Images / Getty Images)

Tornetta's legal team argues they deserve the fee as compensation for the benefit they say Tesla received when the court voided Musk's pay package — which would return around 266 million shares to Tesla that had been reserved for Musk's stock options. That stock would be worth about $67 billion at Friday's price of $251.82 per share, though it was valued at $56 billion when the judge voided the compensation package.

His attorneys say it's the largest judgment ever awarded by an American court, excluding punitive damages. They argue they should receive a fee of 11% of that judgment and receive that compensation in the form of 29 million Tesla shares — though they say they would've been justified in asking for up to 33% of the value of Musk's pay package.

The fee request would far exceed the current record fee in shareholder litigation of $688 million in an Enron class action suit, according to Stanford Law School.


Tesla CEO Elon Musk moved to change the EV maker’s incorporation state from Delaware to Texas in response to the court voiding his pay package. (Frederic J. Brown/AFP via Getty Images / Getty Images)

Tesla argues that because the company's shareholders voted in June to re-ratify Musk's pay package, Tornetta's initial legal victory has been transformed into a loss — so his lawsuit hasn't conveyed any benefit to Tesla or its shareholders and Tornetta's legal team should receive as little as $13.6 million.

Musk's pay package, which has no salary or bonuses and is based on stock options awarded in tranches as the electric vehicle-maker achieves performance-based milestones. 

The judge voided it in January after finding that the company's board of directors didn't adequately disclose some directors' close personal relationships with Musk or that the company was on pace to achieve many of its performance-based goals.


McCormick may take weeks or months to issue a ruling in the case. The Delaware Supreme Court is currently considering a $267 million fee request in a shareholder class action lawsuit involving Dell Technologies and a decision in that case could guide the Court of Chancery's decision on the Tesla fee request.

Reuters contributed to this report.