Musk’s $56 Billion Appeal Threatens ‘Dumpster Fire’ Consequences

After a year of threats, accusations, and novel legal maneuvers, the world’s richest man is back where he started 2024: stewing over the $56 billion that got away.

A Delaware judge handed out an unprecedented $345 million in legal fees while rejecting Elon Musk’s record pay package for the second time Dec. 2, refusing to restore the deal even after Tesla Inc. investors voted for it again. The 103-page decision sets up an appeal after a six-year saga that captivated the state’s legal community.

Musk, who responded to the initial ruling by moving Tesla to Texas, blasted the latest court decision as “absolute corruption” and “lawfare” on his social media network, X. “Shareholders should control company votes, not judges,” the billionaire wrote, unleashing his online legions on the judge, Chancellor Kathaleen St. J. McCormick.

That misses the point, said Tulane University law professor Ann Lipton. “We don’t really know if the revote means anything” in the first place without a whole new trial to air out allegations that Musk duped and coerced shareholders beforehand, according to Lipton. And there’s no actual mechanism for starting from scratch after years of complex legal proceedings.

“You can’t constantly have revotes to overturn trial decisions,” she said. “It would never end. You would be retrying the case over and over.”

That would be “kind of a dumpster fire,” said Columbia University law professor Eric Talley, warning of “a world in which an after-the-fact, possibly long after-the-fact stockholder vote can completely undo” a settled court ruling.

That means that—as the dispute heads to the Delaware Supreme Court against a backdrop of increasingly agitated attacks from Musk—the justices are unlikely to second-guess McCormick’s refusal to second-guess herself, according to Lipton.

“The main action on appeal is going to be about the original decision,” a 200-page opinion that included several close calls, she said.

Delaware or Texas

The idea that Delaware’s courts should defer to the will of Tesla’s investors—no matter the stage of the case, and regardless of the legal consequences—is intuitively appealing. Shareholder democracy, after all, is a pillar of Delaware’s robust corporate laws.

But it’s impossible to know if shareholders were misled by Musk’s statement that the revote would completely fix everything or intimidated by his threat to shift Tesla’s artificial intelligence assets to another business. Even if a court might ultimately dismiss those coercion claims, that could only happen after a new trial-like procedure that doesn’t actually exist, according to Lipton.

Still, “the headline keeps being: ‘Shareholders voted in favor, and Delaware says no,’” she said. “That can’t feel good.”

The tech tycoon has other options besides trusting the package’s fate to Delaware’s justices. Rather than trying to reinstate the 2018 equity grant, he could start from scratch in Texas, where any fight over a fresh deal would take place in a brand-new business court staffed by appointees of a Republican governor who’s openly wooing Musk.

“That’s the court he wants,” said Boston College law professor Brian Quinn.

Musk’s arguments echo a broader debate dividing Delaware’s legal community over the pendulum that swings between public shareholders and corporate leaders. But the billionaire and his superfans are aware they represent an extreme case.

“What happens with the other two million corporations there? That’s the larger existential question,” Talley said. “Maybe the unicorn CEOs of the world can go to Texas. But for the rest of the non-five-dimensional-chess-playing CEOs, Delaware offers a pretty good product that allows them to credibly commit not to pillage the company.”

Increasing Chorus

Musk’s barrage began after McCormick ruled in January that he’d exploited his “superstar CEO” status to set his own pay with minimal oversight. The business mogul launched most of his fusillade from X, the former Twitter, which he had to buy for $44 billion in 2022 after McCormick gave a chilly reception to his attempt at reneging on the deal.

Delaware’s tight-knit corporate bar has fretted for decades over its role as America’s corporate capital, but Musk’s megaphone renewed and amplified those perennial concerns, potentially upsetting the balance between competing constituencies.

“There has been an increasing chorus, not just from this case, that more protection and formality is being demanded than shareholders really want or need,” Lipton said.

Rejecting Musk’s compensation seems like myopic box-checking after Tesla’s investors—twice—made it abundantly clear what they want, according to University of Nebraska law professor Paul Weitzel. He said McCormick is elevating form over substance.

“She’s forgetting who it is that she’s supposed to be protecting,” Weitzel said.

Lipton stressed allegations that the revote was effectively held under duress. Reopening the case to determine if it was fair would be “too damaging to the court,” she said. “It would open up such a can of worms. I think they’re going to find that persuasive.”

If Delaware’s Supreme Court defies that prediction, some of the concerns about bespoke procedures in novel circumstances might become moot, according to Talley.

For instance, if the court were to rule that an after-the-fact vote can rectify fiduciary breaches, “then suddenly the proxy wasn’t materially misleading,” he said. “So there’s kind of an interesting logic puzzle game going on.”

‘Not An Exact Science’

Meanwhile, the $345 million in fees for Bernstein Litowitz Berger & Grossmann LLP—the firm that sued to kill the equity grant—is a Delaware record, topping $304 million handed out after a 2011 trial and the more recent $267 million award in a case involving Dell Technologies Inc.

The state supreme court upheld the Dell legal fees in August, stressing the important role of huge attorney paydays in the corporate litigation ecosystem. The ruling also warned against windfalls that could curdle public opinion.

McCormick relied heavily on that guidance when she slashed the “eye-popping” fee request from 29 million Tesla shares, currently worth over $10 billion. “In a case about excessive compensation, that was a bold ask,” she said.

The attorneys were “in a bit of a pickle” because applying the ordinary formulas to a $56 billion ruling yielded a fee orders of magnitude higher than the nearest precedents, Talley said.

It’s “not an exact science,” and “going that high sort of puts you into the neighborhood of public incredulity,” he said. “Chancellor McCormick felt somewhat bound by that.”

Weitzel criticized the fees, saying McCormick strayed from the basic principle that megafund paydays are meant to serve as incentives for attorneys who accept risky cases on a contingency basis.

“There are very few things that I would do for $380 million that I wouldn’t do for $300 million,” he said.