A Delaware judge has reaffirmed her ruling that Tesla must cancel Elon Musk’s multibillion-dollar pay package.
Counsel Kathleen St. Jude McCormick on Monday rejected a request by lawyers for Musk and Tesla executives to overturn her ruling earlier this year requiring the company to cancel its unprecedented pay package.
McCormick also rejected a massive and unprecedented fee demand by the plaintiffs’ attorneys, who argued they were entitled to legal fees in the form of Tesla stock worth more than $5 billion. The judge said the lawyers were entitled to $345 million in compensation.
The rulings came in a lawsuit filed by a Tesla shareholder who challenged Musk’s 2018 compensation package.
McCormick concluded in January that Musk designed the historic pay package in sham negotiations with non-independent directors. The compensation package initially carried a maximum potential value of about $56 billion, but that amount has fluctuated over the years based on Tesla’s stock price.
After the original court ruling, Tesla shareholders met in June and approved Musk’s 2018 pay package for a second time, again by a wide margin.
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Defense lawyers then argued that the second vote shows that Tesla shareholders, with full knowledge of the flaws in the 2018 process pointed out by McCormick, were adamant that Musk deserved to receive the pay package. They asked the judge to vacate her order directing Tesla to cancel the pay package.
McCormick, who appeared skeptical of the defense’s arguments during the hearing in August, said in Monday’s ruling that those arguments were fatally flawed.
“The large and talented group of defense firms have created the certification argument, but their unprecedented theories run counter to multiple strains of settled law,” McCormick wrote in a 103-page opinion.
The judge noted, among other things, that a shareholder vote alone cannot ratify a conflicting transaction between observers.
“Even if a shareholder vote could have the effect of ratification, it cannot do so here because of multiple material errors in the proxy statement,” she added.
Musk expressed his disagreement with the ruling in a post on the social media platform X, which he owns. “Shareholders should control corporate votes, not judges,” he wrote.
Meanwhile, McCormick found that the $5.6 billion fee request by shareholder lawyers, which at one point approached $7 billion based on Tesla’s trading price, went too far.
“In an excessive damages case, this was a bold request,” McCormick wrote.
Tesla shareholder lawyers argue that their work resulted in the “tremendous” benefit of returning shares to Tesla that would otherwise have gone to Musk and diluting shares held by other Tesla investors. They estimate that benefit at $51.4 billion, using the difference between the stock price at the time of McCormick’s ruling in January and the strike price of about 304 million stock options granted to Musk.
While the judge found that the methodology used to calculate the fee request was sound, he noted that the Delaware Supreme Court noted that fee award guidelines “must take into account the larger political interest of preventing windfall gains for attorneys.”
“The charge here should be awarded that way, because $5.6 billion is a windfall regardless of the methodology used to justify it,” McCormick wrote. It said the $345 million fee award was “an appropriate amount for a full victory reward.”
The fees amount to roughly half the current record $688 million in legal fees awarded in 2008 in lawsuits stemming from Enron’s collapse.
& Edition 2024 The Canadian Press
