Musk Ruling Takes Aim at Lawyer Windfalls in Moonshot Pay Cases

The judge who killed Elon Musk’s $56 billion compensation deal handed his courtroom foes a fraction of the legal fees they sought for their success, underscoring a broader reckoning with “eye-popping” attorney paydays.

Facing a torrent of vitriol from the world’s richest man and his fans, the chief judge of Delaware’s elite business court rejected a request for billions, calling it a “bold ask” in a case about excessive pay. She slashed the fee amount to $345 million by an unusual method: pegging it to the package’s $2.3 billion value when it was awarded, in 2018, rather than when she struck it down in January.

Chancellor Kathaleen St. J. McCormick said she was looking to solve “the windfall problem.” As Delaware’s Chancery Court increasingly confronts blockbuster cases targeting tech titans, the decision reflects the tightrope its judges are walking to weigh ordinary litigation incentives against the destabilizing impact of astronomical legal payouts.

In the handful of previous cases to generate comparable fees, “you didn’t have the same cast of characters publicly bandying about the size of the award,” said University of Pennsylvania law professor Jill Fisch. “Musk, plus the amount of play this case has had on social media, heightens those concerns.”

Delaware’s bar association has positioned itself to parry the renewed barrage the judge has faced since rejecting Musk’s pay package a second time this month, in the same decision that set the fees. But there’s no completely ignoring the billionaire’s bullhorn.

She’s “certainly thinking about that in this case, because the plaintiff’s lawyers are getting paid and Elon Musk is not,” said Berkeley Law professor Adam Badawi.

‘A Lottery Ticket’

The ruling was in some respects unique, offering a tailored solution to a one-off problem: No other CEO has ever been paid nearly as much, and no other shareholder suit has recovered anything like $56 billion.

The dispute involved shareholder derivative claims, which are technically brought on a corporation’s behalf. Unlike class action recoveries that go directly to investors, damages in derivative cases are typically paid into a company’s coffers by its leaders or insurers.

That procedural quirk means Tesla itself is set to get the money back. It also means the company is on the hook to Musk’s legal adversaries, to the chagrin of its investor base.

McCormick’s decision laid out a road map for navigating a significant emerging issue. It was the first to confront the question of when to value a stock options grant—when it’s made or when it’s invalidated—in the context of Delaware shareholder litigation over a “moonshot” compensation package that’s worth little unless a company hits ambitious milestones.

Options in general present a valuation dilemma because of their potential to fluctuate, and Musk’s more than most thanks to the volatility and soaring trajectory of Tesla Inc. shares. But the litigation also “relates to a longstanding debate” about how to value “what’s basically a lottery ticket” given to a CEO, according to Columbia University law professor Eric Talley.

“Do you base the fees on the outcome once the lottery numbers are chosen?” he said. “Or on the fair market value of the ticket when it was bought?”

‘Exceptional Case’

McCormick said in her 103-page opinion Dec. 2 that the day of the ruling generally represents the better approach. Using “grant date fair value” to set fees, she said, would give lawyers no reason to challenge packages that were worth little when given—even if they later ballooned—while pushing them to sue over some that eventually turned out to be worthless.

Still, those concerns “are not dispositive in the exceptional case,” according to McCormick. “This is that case.” A denominator of $2.3 billion “provided ample incentive,” she said.

“It has a little bit of a flavor of, ‘Finger in the wind, here’s a convenient number that gets me to a place that’s kind of consistent with other cases,’” Talley said.

Although the judge eschewed a one-size-fits-all methodology, her reasoning may set the tone in similar disputes as the compensation structure grows in popularity, according to Badawi. “All these executives agree to these moonshots because they think they’re Elon Musk,” he said. “They’re not, and most of these grants result in nothing.”

The Right Incentives

McCormick’s balancing act—blazing a new trail instead of helplessly applying the usual fee factors—showcased the flexibility Delaware courts have to get creative when immodest attorney compensation threatens to “freak out the normies,” according to Talley.

“She drew heavily on precedents that say, ‘Look, there are these guiding factors, but there’s always a policy overlay,’” he said. “Would it shock the conscience for lawyers to be paid this richly?”

Unlike federal courts, which apply a percentage-of-the-damages formula—subject to adjustments in “megafund” cases—Delaware’s judges look to a looser range of criteria calibrated to reward productive work in risky cases that go all the way to trial.

The Musk litigation—involving several untested theories—went well past trial, ending with half a year of additional proceedings over his bid to restore the compensation by shareholder vote.

“These judges are repeat players who can take a much more engaged view,” Fisch said. “They have a pretty strong basis for distinguishing good cases from bad cases, and they see how their docket responds to the incentive effect.”

McCormick kept those principles in mind, compensating without overcompensating for the breathtaking magnitude of the recovery, according to Badawi.

Her cobbled-together methodology “may not be intellectually satisfying, in terms of creating an overarching framework,” he said. “But each case is unique, and this case was especially unique.”