Tesla Awaits Dell Attorney Fee Appeal at Delaware High Court

Recent litigation involving Dell Technologies Inc. and Tesla Inc. has raised a hotly-debated question in Delaware—how much should plaintiffs’ attorneys get paid?

The Delaware Supreme Court hears arguments Wednesday in an appeal seeking to reverse last year’s $267 million award to lawyers who negotiated a historic $1 billion settlement over a contentious stock conversion at Dell. The argument follows sky-high fee applications in the state’s Court of Chancery in two lawsuits involving Tesla CEO Elon Musk’s pay package and compensation for the electric vehicle manufacturer’s directors.

Nine-figure fee awards are rare in Delaware, so there’s little incentive for the high court to disturb the Chancery Court’s Dell decision, said Paul Regan, a professor at the Widener University Delaware Law School.

“These are outlier, massive-outcome cases in which the stockholders have been delivered multi-billion-dollar recoveries because of the work of these lawyers,” he said.

A hedge fund challenged the payout for the attorneys representing the pension fund who brought the Dell case in Chancery Court. The settlement resolved claims that founder Michael Dell and private equity giant Silver Lake LLC coerced investors into the 2018 stock conversion.

The $1 billion deal, reached 19 days before trial, set a Chancery Court record for stockholder settlements. The attorneys’ fees are the second-highest in court history, after $304 million awarded in a 2011 case involving the takeover of a Mexican mining company.

Pentwater Capital Management LP argues the court abused its discretion in approving “a windfall” amounting to 27% of the settlement, according to an appeals brief.

Delaware precedents allow rewarding entrepreneurial counsel for holding major corporations accountable through complex litigation, Vice Chancellor J. Travis Laster wrote in an opinion approving those fees. The plaintiffs’ attorneys “obtained a real and unprecedented result” after investing $4 million in the case, he said, while awarding a smaller percentage given the higher settlement didn’t follow precedent.

Pending Paydays

The Dell appeal comes as the Chancery Court’s chief judge considers two huge fee award requests in the Tesla lawsuits.

In one case, lawyers want a $230 million payout for representing a pension fund that pushed Tesla to a pending $919 million settlement over board compensation. Tesla contends $63.5 million for attorneys’ fees would suffice.

Chancellor Kathaleen St. Jude McCormick has said whether she approves that settlement and fee award depends on how she decides what fees are reasonable for the lawyers representing an investor who successfully challenged Musk’s CEO pay.

McCormick rejected Musk’s $56 billion pay package in a post-trial opinion as an “unfair price” reached through a process rife with conflicts of interest.

The investor’s legal team asked to be paid in 29 million Tesla shares worth about $5 billion, which Musk called “criminal.” McCormick scheduled arguments on the matter in July.

“Ultra-mega award recoveries by lawyers” is new ground for Delaware, Regan said. It’s ground the state’s judges may have to explore more frequently as they encounter ever-larger tech companies.

The mining case’s $304 million fee award was surprising at the time, but over a decade later, big tech companies have “crazy amounts of market value that we’ve never seen before,” he said.

Considering that, Delaware courts may look at a fee application for stock worth about $5 billion and think, “maybe this fits and it’s not controversial,” he said.

Fee Award Debate

In the Dell case, Pentwater and seven other funds asked Laster to follow federal court methodology that constricts payouts in cases involving big settlements. Laster said the federal policy conflicts with Delaware’s multi-factor test to ensure legal fees are fair.

Those factors include a case’s complexity and the stage it reaches, the attorneys’ experience and ability, and any contingency arrangement that leaves them vulnerable to not being paid at all.

Laster is “very shareholder-oriented” and wouldn’t approve “a fee that was unrelated to services rendered,” said Charles Elson, a retired University of Delaware professor.

In the four decades since Delaware’s high court established the multi-factor test, it’s never reversed the Chancery Court’s “exercise of discretion in determining a reasonable fee award,” attorneys for the pension fund that led the Dell lawsuit said in a brief.

Two groups of law professors have debated in amicus briefs for Dell over how judges should set fee awards.

One camp of four professors said Laster should’ve used a declining-percentage method that shrinks the percentage awarded to plaintiffs’ attorneys as a settlement grows larger, a method often used in federal securities class actions.

They argue it’s consistent with the Delaware Supreme Court’s approval of fees in the 2011 mining case, where the plaintiffs’ attorneys took home 15% of the $2 billion in damages awarded after trial.

A group of three other professors who feel Laster got it right said judges should “follow what real clients do in the real world” when awarding fees, namely paying fixed or increasing percentages.

In the Dell case, the pension fund’s attorneys originally asked for $285 million, knowing Delaware judges don’t consider such requests lightly, Elson said.

“An ask is a starting point, not an ending point,” he said.

The case is In re Dell Tech. Inc. Class V S’holders Litig., Del., No. 349,2023, oral argument 5/15/24.