Musk, Tesla Fire Back at $230 Million Fee Bid in Board Pay Case

Tesla Inc. filed court papers slamming a bid for $230 million in legal fees by the attorneys who negotiated a settlement worth up to $919 million with board members including CEO Elon Musk.

The world’s most valuable automaker said in a filing made public Monday that the “demonstrably unreasonable” fee request is roughly four times what the lawyers should earn for leading the investor lawsuit that yielded the accord, which requires the board to return hundreds of millions in stock options.

Musk and other board members, meanwhile, said in a separate legal brief that they support the settlement, which they agreed to. But they defended their compensation, assailing the “one-sided” narrative presented by the shareholder attorneys when they moved for court approval of the pact.

The board was paid for years “almost entirely with options that were worthless” until Tesla’s stock began its unprecedented surge, the court filing says. “Most Tesla stockholders celebrated their extraordinary returns. But plaintiff responded with a lawsuit against those who helped lead Tesla to success.”

The settlement is being considered by Chancellor Kathaleen St. J. McCormick, the chief judge of Delaware’s Chancery Court, the country’s leading forum for M&A disputes. McCormick is also expected to rule soon in a separate case challenging Musk’s $55 billion pay package, the largest ever for the CEO of a publicly traded company.

Complicated Math

The lawsuit against Tesla’s board, filed by a Detroit pension fund, said its members overpaid themselves from 2017 to 2020. The settlement calls for directors including Oracle Corp. founder Larry Ellison, Musk’s brother Kimbal, and a son of media mogul Rupert Murdoch to return options worth up to $735 million and forgo three years of pay worth $184 million.

Because the case involved shareholder derivative claims, which are technically filed on a corporation’s behalf against its leaders, the payment will go to Tesla—rather than directly to investors, as in a class action. That dynamic complicates the math around legal fees, the company said in its court filing.

The pension fund’s attorneys pegged the pact at $919 million in connection with their fee request, an amount that would make it one of the biggest shareholder settlements in the court’s history, after only a recent agreement involving Dell Technologies Inc. The $230 million they’re seeking represents 25% of that total.

But the proper way to value the accord, at least for the purpose of setting legal fees, is to consider what was gained for the business, not what was given up by the board, Tesla said. Regardless of what it costs the directors, the agreement is worth only about $295 million to Tesla, according to its court filing.

There’s also no legal basis for including the foregone compensation when calculating the fees, considering the $184 million figure is only a “hypothetical” gain, according to Tesla. “Nothing was paid by Tesla to the director defendants for those years, and nothing is being returned,” the company said.

Other Objections

McCormick will weigh those arguments at an Oct. 13 hearing. She’ll also hear from a settlement objector, Tesla shareholder Michael Levin, who writes “The Activist Investor” newsletter. Levin challenged the accord in a Sept. 21 court filing, saying its lack of specificity about how much each director owes leaves Musk an opening to curry favor with the board by paying the whole amount.

It’s rare for objections to derail a shareholder settlement in Delaware, particularly when the pact involves a major plaintiff like a pension fund and a significant monetary component, rather than noncash reforms that judges sometimes view as cosmetic.

But it does happen. Vice Chancellor Morgan T. Zurn stunned the market in July when she rejected a closely watched settlement involving AMC Entertainment Holdings Inc., only to approve a revised version of the agreement three weeks later.

The legal briefs on behalf of Tesla and its board were originally filed under seal Sept. 22 before being made public Monday.

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, answering brief filed 10/2/23.